Polytechnic University of the Philippines

Sta. Mesa Manila

STANDARD SETTING PROCESS AND CONCEPTUAL FRAMEWORK

NAME: _______________________________________________ SECTION: ________________

A. Identification - Write the word(s) best described by the statements below:

1. The standard-setting body who issues the International Financial Reporting Standards
2. The standard-setting organization who issues the U.S. GAAP
3. The process of identifying, measuring and communicating economic information to permit informed judgment
and decision by users of the information.
4. This was created to issue implementing guidelines on PFRS.
5. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash
6. The financial report that shows the reporting entity’s economic resources and claims
7. The financial report that shows the changes due to events and transactions other than financial performance such
as the issue of equity instruments and distributions of cash or other assets to shareholders
8. This is used when assets are recorded at the amount of cash or cash equivalents or the fair value of the
consideration given to acquire them at the time of their acquisition.
9. Refers to the ability of the business to raise cash to meet unexpected cash requirements.
10. Those responsible for the preparation and presentation of financial statements.
11. The standard that sets out the requirements for the presentation of the cash flow statement and related
disclosures.
12. Portray the financial effects of transactions and other events by grouping them into broad classes according to
their economic characteristics.
13. Result if an asset is sold more than book value.
14. One of its recognition criteria is that it is probable that the future economic events will flow to the enterprise.
15. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity
(or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical
productive capacity at the beginning of the period, after excluding any distributions to, and contributions from,
owners during the period.

B. Fill in the Blanks - Write the word(s) to make the statements complete and correct.

1. _______________ provide financial reporting information to a wide variety of users.

2. As part of the objective of general-purpose financial reporting, an _______________ is adopted. This means that
companies are viewed as separate and distinct from their owners.
3. Accounting standards set out the recognition, _______________, presentation and _______________
requirements of transactions and events that are important in financial statements.
4. The creation of FRSC in 2006 replaced the _______________.
5. The objective of the _______________ is to establish generally accepted accounting principles in the Philippines.
6. _______________ sets out the concepts that underlie the preparation and presentation of financial statements for
external users.
7. If there are any conflict in the framework and IFRS, the _______________ prevails.
8. _______________ is a resource controlled by the enterprise as a result of past events and from which future
economic events are expected to flow to the enterprise.
9. _______________ 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 relating to
distributions to equity participants.
10. The conceptual framework specifically mentions one underlying assumption, namely, _______________.
11. The four sectors of accountancy under PICPA are: _______________, _______________, _______________,
_______________.
12. One constraint on useful financial reporting is that costs should be justified by the _______________ of the
reported financial information.
13. Assets that are carried at the amount of cash or cash equivalents that would have to be paid if the same or an
equivalent asset was acquired currently is measured using the _______________.
14. Under the _______________ approach, investment must be recovered before a company can have income.
15. The objective of PAS 1 is to prescribe the basis for presentation of general-purpose financial statements in order
to ensure _______________.

C. Matching – Write the letter of the term under List B that corresponds to the statement indicated under List A.

LIST A LIST B
1 Concerns the relative size of an item and its effect on decisions. a. Predictive value
2 Information confirms expectations. b. Relevance
3 Important for making inter-firm comparisons. c. Timeliness
4 Applying the same accounting practices over time. d. Accrual basis of accounting
5 Implies consensus among different measures. e. Feedback value
A complete set of financial statements (including comparative
6 f. Frequency of reporting
information) should be presented at least annually.
7 Information is available prior to the decisions. g. Faithful representation
8 Pertinent to the decision at hand. h. Understandability
9 Along with relevance, a fundamental qualitative characteristic. i. Materiality
10 Requires consideration of the cost and value of information. j. Comparability
11 The process of admitting information into financial statements. k. Offsetting
An entity reports separately both assets and liabilities, and
12 l. Recognition
income and expenses.
13 Information is useful in determining the future m. Consistency
Effects of transactions on an entity’s economic resources and
claims are recognized in the periods in which those effects
14 n. Cost effectiveness
occur, even if the resulting cash receipts and payments occur in
a different period.
It requires that users have some knowledge of the complex
15 economic activities of enterprises, the accounting process and o. Verifiability
the technical terminology in the statements.
p. Prudence
q. Substance over form

D. Sequencing - Arrange the following according to the correct sequence.

A. IASB Due Process

1. An exposure draft, which is IASB’s main vehicle for consulting the public, is published for public comment.
2. All comments received on discussion document and exposure draft are considered.
3. Topics are identified and placed on IASB’s agenda.
4. After the due process is completed, all outstanding issues are resolved, and the IASB members have balloted in
favour of publication, the IFRS is issued.
5. After comments on the first exposure draft have been effected, the IASB considers whether to publish its revised
proposals for another round of comments.

B. FRSC Due Process

1. Approval of a standard or an interpretation by a majority of the FRSC members.
2. Consideration of pronouncement of IASB;
3. Consideration of all comments received within the comment period and, when appropriate, preparing a
comment letter to the IASB;
4. An exposure draft approved by a majority of the FRSC members for comments (comment period 60 – 30 days)

E. True or False: Write A if the statement is correct or B if incorrect.

1. The principal difference between two concepts of capital maintenance is the treatment of the effects of changes in
the prices of assets and liability of the entity.
2. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its
financial statements.
3. The concept of capital maintenance chosen by an entity shall determine the accounting model used in the
preparation of its financial statements.
4. The Conceptual Framework serves as a guide in developing future financial reporting standards and in reviewing
existing ones.
5. The Conceptual Framework is a source of guidance for determining an accounting treatment where a standard
does not provide specific guidance.
6. The Conceptual Framework does not in any was assist prepares of financial statements in applying PFRS and in
dealing with topics that have yet to form the subject of PFRS.
7. The Conceptual Framework is not a PFRS, and nothing in it overrides any specific PFRS, including PFRS that is
in some respect in conflict with the Conceptual Framework.
8. The GPFS show the results of the stewardship of the management for the resources entrusted to it by the capital
providers.
9. The GPFS are prepared at least annually and are directed to both the common and specific information needs of
a wide range of statement users.
10. The GPFS provide information about the financial position, performance and cash flows of an enterprise that is
useful to a wide range of users in making economic decisions.

F. Multiple Choices: Select the best answer for each of the following.

1. According to the Preface to International Financial Reporting Standards, which of the following are objectives of
the IASB?
I. To harmonize financial reporting between IFRS and US GAAP and European
II. To work actively with national standard setters
III. To promote the use and strict application of financial accounting standards
A. I and II C. II and III
B. I and III D. I, II and III

2. Which of the following are parts of the “due process” of the IASB in issuing a new International Financial Reporting
Standard?
I. Establishing an advisory committee to give advice
II. Developing and publishing a discussion document for public comment
III. Issuance of an interpretation as authoritative guidance
IV. Reviewing compliance and enforcement procedures
V. Issuance of the final standard with number and title
A. I, II and III only C. I, II, III & IV only
B. I, II and V only D. I, II, III, IV & V

3. Which of the following bodies is responsible for reviewing accounting issues that are likely to receive divergent or
unacceptable treatment in the absence of authoritative guidance, whit a view to reaching consensus as to the
appropriate accounting treatment?
 A. Standards Advisory Council (SAC)
B. International Accounting Standards Board (IASB)
C. International Financial Reporting Interpretations Committee (IFRIC)
D. International Accounting Standards Committee Foundation (IASC Foundation)

4. Which of the following statements about international accounting standards is true?

A. Accounting professionals in the USA consider US GAAP superior to IAS and has no intention to adopt
International Accounting Standards.
B. The IASB is able to enforce its standards by prohibiting the listing of companies which do not comply on
stock exchanges which sell internationally.
C. The International Accounting Standards Board (IASB) was established with the purpose of narrowing the
range of divergence in accounting standards throughout the world.
D. Legal and psychological hurdles to achieving common reporting standards will be fully overcome by the year
2012, the time frame set for convergence between IAS and US GAAP.

5. Which of the following bodies report to the IFRS Foundation?

A. The IASB and AASB.
B. The IASB and the FASB.
C. The IASB and the IFRS Advisory Council.
D. The IASB, AASB, and the IFRS Advisory Council.

6. Which body appoints the members of International Accounting Standards Board (IASB) that make the present
IFRS?
A. IFRS Foundation.
B. IFRS Advisory Council.
C. International Accounting Standards Committee.
D. International Financial Reporting Interpretations Committee.

7. Financial accounting standard-setting

A. is based solely on research and empirical findings.
B. is a legalistic process based on rules promulgated by governmental agencies.
C. is democratic in the sense that a majority of accountants must agree with a standard before it becomes
enforceable.
D. can be described as a social process which reflects political actions of various interested user groups as well as
a product of research and logic.

8. The “due process” system in developing financial reporting standards

A. is an efficient system for collecting dues from members.
B. identifies the accounting issues that are the most important.
C. enables interested parties to express their views on issues under consideration.
D. requires that all accountants must receive a copy of financial accounting standards.

9. What is due process in the context of standard-setting at the IASB?

A. IASB operates in full view of the public.
B. Interested parties can make their views known.
C. Public hearings are held on proposed accounting standards.
D. All of these.

10. What is the chronological order in the evaluation of a typical standard?

A. Discussion paper, Exposure draft and Standard.
B. Exposure draft, Discussion paper and Standard.
C. Exposure draft, Standard and Discussion paper.
D. Standard, Discussion paper, and Exposure draft.

11. The IASB declared that the merits of proposed standards are assessed
 A. from a position of neutrality.
B. from a position of materiality.
C. based on arguments of lobbyist.
D. based on possible impact on behavior.

12. Under Philippine Financial Reporting Standards

A. the cash basis of accounting is accepted.
B. events are recorded in the period in which the event occurs.
C. net income will be lower under the cash basis than accrual basis accounting.
D. all of the choices are correct.

13. RA 9298 is officially known as

A. The Revised Accountancy Act.
B. The Revised Accountancy Law.
C. The Philippine Accountancy Act of 2004.
D. The Accountancy Law of the Philippines, 2007.

14. Under Section 5 of RA 9298, who shall appoint the members of the Professional Regulatory Board of
Accountancy?
A. The chairman of the Board of Accountancy.
B. The president of the Republic of the Philippines.
C. The chairperson of Professional Regulations Commission.
D. The president of Philippine Institute of Certified Public Accountants.

15. The following statements relate to the Board of Accountancy. Select the incorrect statement:
A. The Board consists of a Chairman and six members.
B. The chairman and members of the Board are appointed by the President of the Philippines upon
recommendation of the Professional Regulation Commission.
C. The Professional Regulation Commission may remove from the Board of Accountancy, any member
whose certificate to practice has been revoked or suspended.
D. All sectors of accountancy practice shall as much as possible be equitably represented in the Board.

16. Which of the following is not an economic entity?

A. SM Group of Companies.
B. Lions Club International, a civic organization.
C. ABS-CBN Foundation, a charitable institution.
D. Chris James, a Quezon City resident who owns a chain of beauty salons.
17. This accounting objective emphasizes the importance of the Income Statement as it is geared toward proper income
or performance determination of the enterprise.
A. Entity theory. C. Proprietary theory.
B. Fund theory D. Residual equity theory.

18. Which of the following is not a description or a function of the Financial Reporting Standards Council (FRSC)?
A. It establishes generally accepted accounting principles in the Philippines.
B. It receives financial support principally from the Professional Regulations Commission (PRC).
C. It is the successor of Accounting Standards Council (ASC) and the creator of Philippine Interpretations
Committee (PIC).
D. It assists the Professional Regulatory Board of Accountancy (BOA) in carrying out its power and function to
promulgate accounting standards in the Philippines.

19. Which of the following situations violates the concept of reliability?

A. Data on segments having the same expected risks and growth rates are reported to analysts estimating future
profits.
B. Financial statements are issued nine months late.
 C. Management reports to stockholders new projects undertaken, but the financial statements never report the
projected results.
D. Financial statements include a property with a carrying amount increased to management’s estimate of market
value.

20. Which of the following statements about financial statements is incorrect?

A. They are the primary responsibility of the management of the enterprise.
B. They show the results of the stewardship of the management for the resources entrusted to it by the capital
providers.
C. They are prepared at least annually and are directed to both the common and specific information needs of a
wide range of statement users.
D. The provide information about the financial position, performance and cash flows of an enterprise that is
useful to a wide range of users in making economic decisions.

21. Under the Conceptual Framework for Financial Reporting which of the following statements is not a feature of
financial information’s “comparability” characteristics?
A. Comparability is uniformity.
B. A comparison requires at least two items.
C. Consistency, although related to comparability, is not the same.
D. Comparability is the goal; consistency helps to achieve that goal.

22. When fair value is used in measuring assets in the financial statements, current GAAP provides following references
as basis of fair value, except
A. Price in active market.
B. Price in recent transaction.
C. Price taken from industry or sector benchmarks.
D. Price based on assessed value of government bodies.

23. The objectives of financial reporting for business enterprises are based on
A. the need for conservative information
B. the needs of the users of the information
C. the need to report on management’s stewardship
D. the need to comply with financial accounting standards

24. Which of the following statements regarding users of financial information is correct?
A. Managers of an entity are considered to be internal decision makers.
B. Accounting information is prepared for and useful to only outside decision makers.
C. External decision makers can obtain whatever financial data they need and whenever they need it.
D. The members of the Board of Directors are not internal rather than external users of financial information.

25. Which of the following statements is (are) true, concerning the Going Concern assumption?
I. When preparing financial statements, management is required to make an assessment of an enterprise’s ability
to continue as a going concern which should be at least twelve months from balance sheet date.
II. When an enterprise has a history of profitable operations and ready access to financial resources it is not a
detailed analysis as to is ability to operate as a going concern is not necessary.
III. When the financial statements are not prepared on a going-concern basis, this fact should disclosed
A. I and II only C. II and III
B. II and III only D. I, II, and III

26. If accounting information is timely, and has predictive as well as feedback value, then it is considered to be
A. relevant C. understandable
B. reliable D. verifiable
27. In the first week of December, 2016, Elisa Company signs a major contract to develop an accounting information
system for Edward Inc. No work is begun the current year, yet the notes to the financial statements discuss the
nature and peso amount of the contract. This is an example of:
A. completeness or full disclosure C. historical cost
B. conservatism D. relevance

28. Which of the following statements best describes the term “going concern”
A. The expenses of an entity exceed its income
B. When current liabilities of an entity exceeds current assets
C. The ability of the entity to continue in operation for the foreseeable future
D. The potential to contribute to the flow of cash and cash equivalents to the entity

29. Which TWO of the following are listed in the IASB Framework as ‘underlying assumptions’ regarding financial
statements?
A. The financial statements are prepared under the accrual basis
B. The entity can be viewed as a going concern
C. The financial statements are reliable
D. Accounting policies are consistently applied
A. A and B C. B and D
B. B and C D. C and D

30. Which of the following situations violates the concept of reliability?

I. Relevance is the capacity of information to make difference in decision by helping users from predictions
about outcome of past, present and future events or confirm/correct prior expectations
II. The quality of reliability assures readers that the financial information is free from bias and faithfully represents
what it purports to show, including adequate disclosure of significant information
III. Under the IASB Framework for the Preparation and presentation of financial statements, conservatism is not
a concept that is recognized as a qualitative objective.
A. I and II only C. II and III only
B. I and III only D. I, II and III

31. Which of the following is the best description of reliability in relation to information in financial statements?
A. Comprehensibility to users C. Influence on the economic decisions
B. Freedom from material error and bias D. Inclusion of degree of caution of users

32. According to the IASB Framework for the preparation and presentation of financial statements, which TWO of
the following are examples of expenses?
I. A loss on the disposal of a non-current asset
II. A decrease in equity arising from a distribution to equity participants
III. A decrease in economic benefits during the accounting period
IV. A reduction in income for the accounting period
A. I and II C. II and III
B. I and III D. III and IV

33. An expiration of cost which is incurred without compensation or return and is not absorbed as cost of revenue is
called
A. Deferred charge C. Indirect cost
B. Deferred credit D. Loss

34. Which of the following best describes the distinction between expenses and losses?
A. Losses are material items whereas expenses are immaterial items
B. Losses are extraordinary charges whereas expenses are ordinary charges
C. Losses are reported net-of-related-tax effect whereas expenses are not reported not-of-tax
D. Losses results from peripheral or incidental transactions whereas expenses result from ongoing major or
central operations of the entity
35. Which of the following statements about accounting recognition is (are) true?
I. In accounting, there are instances when a gain/loss would arise upon initial recognition of an asset.
II. No asset can simultaneously be an asset of more than one entity
III. At times, two or more entities may share the benefits that an asset provides
IV. An appropriate basis for recognizing an asset is when a particular enterprise acquires the right to utilize and
control access to the asset’s benefits
A. I and II only C. I, II and III only
B. I and IV only D. I, II, III and IV

36. Which one of the following term best describes the amount of cash or cash equivalents that could currently be
obtained by selling an asset in an orderly disposal?
A. Fair value C. Residual value
B. Realizable value D. Value in use

37. Which of the following assets are initially and subsequently measured at Fair Value?
I. Biological assets IV. Property and Equipment
II. Available for sale securities V. Held for trading securities
III. Inventories VI. Intangible assets

A. I and II only C. I, II, III and V only

B. I, II and III only D. I, II, IV, and V only

38. The capital maintenance concept followed under present GAAP is

A. Economic capital C. Physical capital
B. Financial and physical capital D. Real capital

39. What concept is critical in distinguishing an enterprise’s return on investment from return of its investment?
A. Capital maintenance concept C. Current operating performance concept
B. Comprehensive income concept D. Return on investment concept

40. Under the Conceptual Framework of Financial Reporting, users of financial information may be classified into
A. Heavy users (management) and slight users (public, government).
B. Primary users (existing and potential investors and creditors) and other users.
C. Internal users (employees, customers) and external users (investors, creditors).
D. Main users (existing investors, creditors) and incidental users (potential investors, creditors)

41. Which of the following situations violates the concept of reliability?

A. Data on segments having the same expected risks and growth rates are reported to analysts estimating future
profits.
B. Financial statements are issued nine months late.
C. Management reports to stockholders new projects undertaken, but the financial statements never report the
projected results.
D. Financial statements include a property with a carrying amount increased to management’s estimate of market
value.

42. What is the authoritative status of the Conceptual Framework?

A. The Framework applies when FRSC develops new or revised Standards. An enterprise is never required to
consider the framework.
B. It has the highest level of authority. In case of a conflict between the Framework and s Standard or
Interpretation, the Framework overrides the Standard or Interpretation.
C. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the Framework.
In the absence of a Standard or an Interpretation that specifically applies, the Framework should be followed.
 D. If there is a Standard or Interpretation that specifically applies to a transaction, management should consider
the applicability of the Framework in developing and applying an accounting policy which results in
information that is relevant and reliable.

43. Which of the following is the first step within hierarchy of guidance to which management refers, and whose
applicability at considers, when selecting accounting policies?
A. Apply the requirements in PFRS dealing with similar and related issues.
B. Apply a standard from PFRS if it specifically relates to the transaction, event, or condition.
C. Consider the applicability of the definitions, recognition criteria, and measurement concepts in the Conceptual
Framework.
D. Consider the most recent pronouncements of other standard-setting bodies to the extent they do not conflict
with PFRS or the Conceptual Framework?

44. Under the Conceptual Framework for Financial Reporting 2010, which of the following is a new item added in its
scope but is still a work-in-progress?
A. Consolidated financial statements. C. The government entity.
B. Mergers and acquisitions. D. The reporting entity.

45. What are the qualitative characteristic of financial statements according to the Framework?
A. Qualitative characteristics are broad classes of financial effects of transactions and other events.
B. Qualitative characteristics are the attributes that make the information provided in financial statements useful
to others.
C. Qualitative characteristics measure the extent to which an entity has complied with all relevant Standards and
Interpretations.
D. Qualitative characteristics are non-quantitative aspects of an entity’s position and performance and changes in
financial position.

G. Using the concepts of the conceptual framework, identify or compute the required for each of the following
problems presented.

PROBLEM 1
Using the information given below, classify the elements, identify the measurement bases, and compute the following
using the measurement principles of the conceptual framework:

Measurement – Measurement –
Account Title Amount Classification A B
Cash P120,000
Accounts receivable – gross 80,000
Allowance for bad debts 5,000
Notes receivable 90,000
Inventories 50,000
Investment in equity (trading) 75,000
Non-current asset held for sale 32,000
Equipment (10 years life) 100,000
Machinery (10 years life) 130,000
Accumulated depreciation - equipment 30,000
Accumulated depreciation - machinery 39,000
Bonds payable 50,000
Notes payable 60,000
Accounts payable 45,000
Assumption A:
1. The notes receivable is due after three years with nominal interest of 5%. The note was received on January 1,
2018 to yield 3%. Interest is to be collected annually.
2. Inventories are expected to be sold at P61,000 with cost to be incurred to sell of P12,000.
3. The non-current asset held for sale original carrying value was P40,000. At the end of 2018, the fair value was at
P36,000 with cost to sell of P2,000.
4. The bonds payable is held primarily for trading purposes.

Assumption B:
1. The notes receivable is to be collected in three equal annual installment with nominal interest of 5% at the end of
each year. The note was received on January 1, 2018 to yield 3%.
2. Inventories are expected to be sold at P60,000 with cost to be incurred to sell of P7,000.
3. The non-current asset held for sale original carrying value was P40,000. At the end of 2018, the fair value was at
P46,000 with cost to sell of P4,000.
4. The equipment and machinery are revalued at its replacement cost of P150,000 and P180,000, respectively.
5. The bonds payable is held for collection until maturity.

Using assumption A and B, answer the following questions:

1. How much is the total resources owned and control by the business?
2. How much is the total obligations of the business?
3. How much the equity of the owners?
4. How much is the total amount reported at historical cost?
5. How much is the total amount reported at fair value?
6. How much is the total amount reported at current cost?
7. How much is the total amount reported at present value?

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