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FINANCIAL ACCOUNTING AND REPORTING

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

 The IASB’s Conceptual Framework for Financial Reporting describes the objectives of, and the concepts for, general purpose financial reporting.
 The Framework is not a Philippine Financial Reporting Standard (PFRS).
 Nothing in the Conceptual Framework overrides any Standard or any requirement of a Standard.
 The Conceptual Framework provides the foundations for Standards.

 The Purpose of the Framework is to:

o Assist the Board to develop IFRS Standards based on consistent concepts.
o Assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or other event, or
when a Standard allows a choice in accounting policy, and
o Assist all parties to understand and interpret the Standards.

 Scope of the Framework

o The Objective of General Purpose Financial Reporting
o The Qualitative Characteristics of Useful Financial Information
o Financial Statements and the Reporting Entity
o The Elements of the Financial Statements
o Recognition and Derecognition
o Measurement
o Presentation and Disclosure
o The Concepts of Capital and Capital Maintenance
Objective of Financial Reporting
 To provide financial information that is useful to users in making decisions relating to providing resource to the entity based on
o Economic resources and claims
o Changes in economic resources and claims
o Financial performance reflected on accrual accounting
o Financial performance reflected by past cash flows
o Changes in economic resources and claims not resulting from financial performance
Types of User’s Decisions
o Buying, selling or holding equity or debt instruments.
o Providing or settling loans and other forms of credit.
o Voting or otherwise influencing management decisions.
Users Need To Assess The Following:
o Prospects for future net cash inflows to the entity.
o Management’s stewardship of the entity’s economic resources.

Information Needed By Users to Make Assessments

o The entity’s resources, claims against the entity and changes in those resources and claims.
o How efficiently and effectively management has discharged its responsibilities to use the entity’s economic resources.
Qualitative Characteristics of Useful Financial Information
Fundamental Enhancing
1. Relevance 1. Comparability
2. Faithful Representation 2. Verifiability
3. Timeliness
4. Understandability
 Information is relevant if it is capable of making a difference in the decision of informed users and at the same time the information must faithfully
represent the substance of what it purports to represent.
 The enhancing qualitative characteristics enhance the usefulness of information but they cannot make non-useful information useful to users.
 Elements of Relevant Information:
1. Confirmatory value
2. Predictive value
3. Materiality

 Information is Faithfully Represented if:

1. Complete
2. Neutral which is supported by prudence
3. Free from Error

COST CONSTRAINT
 The benefit of providing information needs to exceed the cost of providing and using the information.

REPORTING ENTITY
o An entity that is required, or chooses to prepare financial statements.
o Not necessarily a legal entity, that could be a portion of an entity or comprise of more than one entity.

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FINANCIAL STATEMENTS
o A particular form of financial reports that provide information about the reporting entity’s assets, liabilities, equity, income and
expenses.
o Types of Financial statements
1. Consolidated financial statements - a parent and its subsidiaries as a single reporting entity.
2. Unconsolidated financial statements – parent only.
3. Combined financial statements – Two or more entities that are not all linked by a parent-subsidiary relationship.
ELEMENTS OF FINANCIAL STATEMENTS
A. Elements of Financial Position
1. Assets
2. Liabilities
3. Equity
B. Elements of Financial Performance
4. Income
5. Expenses
 Definition of an Asset
1. Economic resource controlled by the entity as a result of a past event.
2. An economic resource is a right that has the potential to produce economic benefits
 Definition of a Liability
1. Present obligation of the entity to transfer an economic resource as a result of a past event
2. An obligation is a duty or responsibility that an entity has no practical ability to avoid
 Equity is the residual interest in the assets of an entity after deducting all its liabilities
Unit of Account
o The right(s) or obligation(s), or group of rights and obligations, to which recognition criteria and measurement concepts are applied
 Definition of Income
1. Increases in assets or decreases in liabilities that result in increases in equity.
2. Other than those relating to contributions from holders of equity claims
 Expenses
1. Decreases in assets or increases in liabilities that result in decreases in equity.
2. Other than those relating to contributions from holders of equity claims
RECOGNITION AND DERECOGNITION
 Recognition is the process of capturing for inclusion in the statement of financial position or the statement of performance an item that meets the
definition of an asset, a liability, equity, income or expense.
 Recognition is appropriate if it results in both relevant and information about elements and a faithful representation of those items, because the
aim is to provide information that is useful to investors, lenders and other creditors.
 Derecognition is the removal of all or part of a recognized asset or liability from an entity’s statement of financial position. An asset is
derecognized when an entity loses control of all or part of the recognized asset. A liability is derecognized when the entity no longer has a
present obligation for all or part of the recognized liability.
MEASUREMENT OF FINANCIAL STATEMENT ELEMENTS
 Monetary terms used to present elements recognized in the financial statements.
 Measurement bases used are:
1. Historical cost – Price of the transaction or other event that gave rise to the item being measured.
2. Current value – Provides information updated to reflect conditions at measurement date. Current value measurement bases include:
a) Fair value
b) Value in use for assets and fulfillment value for liabilities
c) Current Cost

THE CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

CONCEPTS OF CAPITAL
1. Financial Capital – Capital is the net assets or equity of the entity, measured in nominal monetary units or units of constant purchasing
power.
2. Physical Capital – Capital is the operating capability of the entity, regarded as the productive capacity of the entity. The concept of
physical capital requires the adoption of the current cost basis of measurement.
CONCEPTS OF CAPITAL MAINTENANCE
1. Financial Capital Maintenance – A profit is earned only if the financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of the net assets at the beginning of the period, after excluding the effects of transactions with
owners.
2. Physical Capital Maintenance – 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 the effects of transactions with owners.

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