CONCEPTUAL FRAMEWORK (Part 1)

UNDERLYING ASSUMPTIONS
Accounting assumptions are the basic notions of fundamental premises on which the accounting process
is based

 Basic Accounting Assumptions

1. Going Concern – absence of the evidence to the contrary, the accounting entity is viewed as
continuing in operation indefinitely.
2. Accounting entity – the entity is separate from the owners, manager, and employees who
constitute the entity.
3. Time period – requires that the indefinite life of an entity is subdivided into time periods or
accounting periods which are usually of equal length fir the purpose of preparing financial reports
position, performance and cash flows.
 Calendar year
 Fiscal year
4. Monetary unit – Two aspect is as follows:
 Quantifiability
 Stability of peso
CONCEPTUAL FRAMEWORK

Purpose

a. To assist the FRSC in developing, accounting standards that will represent Philippine GAAP
b. To assist preparer of financial statement in applying accounting standards and in dealing with
issues not yet covered by GAAP
c. To assist the FRSC in its review and adaption of IFRS
d. To assist users of financial statements in interpreting the information contained in the financial
statements.
e. To assist auditors in forming an opinion as to whether financial statements conform with
Philippine GAAP.
f. To provide information to those interests in the work of the FRSC in the formulation of PFRS.

User of financial information

a. Primary users – general purpose financial reports are primarily directed.

b. Other users – the parties may find the general-purpose financial reports useful but the reports are
not directed to them primarily.

Scope

a. Objective of the financial reporting

b. Qualitative characteristics of useful financial information
c. Definition, recognition and measurement of the elements form which financial statement are
constructed
d. Concepts of capital and capital maintenance

Financial Reporting

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CONCEPTUAL FRAMEWORK (Part 1)
- 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 entity’s management.

OBJECTIVE of Financial reporting

Overall
- To provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decision about providing resources to the entity.

Specific
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.

Accrual accounting – depicts the effect of transactions and other events and circumstances on an
entity’s 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.

QUALITATIVE CHARACTERISTICS
- Are qualities or attributes that make financial accounting information useful to the users.
 Fundamental Qualitative Characteristics (Content)
a. Relevance
b. Faithful representation
 Enhancing Qualitative Characteristics (Presentation or Form)
a. Verifiability
b. Comparability
c. Understandability
d. Timeliness

FUNDAMETALS

A. Relevance – capacity of the information to influence a decision.

Ingredients:
 Predictive value
 Confirmatory value

*Materiality
– is a subquality of relevance based on the nature or magnitude of both of the items to which the
information relates.
Factors:
1. Size
2. Nature

B. Faithful representation – means that the financial reports represent economic phenomena or
transactions in words and number.
Ingredients:
 Completeness
 Neutrality

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CONCEPTUAL FRAMEWORK (Part 1)
 Free from error

*Substance over form

- Faithful representation inherently represents the substance of an economic phenomenon of
transaction could not result in a faithful representation.

*Conservatism
- when alternative exist, the alternative which gas the least on equity should be chosen.
- “in case of doubt record any loss and do not record any gain”

*Prudence
- is 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 expense are not
understated.

ENHANCING

A. Verifiability – means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.

B. Comparability – mean the ability to bring together for the purpose of noting points of likeness and
difference.

* Principle of Consistency
- the accounting methods and practices should be applied on a uniform basis from period to period.

C. Understandability – requires that financial information mist comprehensible or intelligible if it is to be

most useful.

D. Timeliness – means that financial information must be available or communicated early enough when
decision is to be made.

 Cost constraint on useful information

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