Far Eastern University – Manila ACT 1111 – Lec No.

Conceptual Framework

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The Conceptual Framework for Financial Reporting

The FRSC Framework for the Preparation and Presentation of Financial Statements describes the basic concepts by which financial statements are
prepared. The Framework serves as a guide to the Board in developing accounting standards and as a guide to resolving accounting issues that are
not addressed directly in Philippine Accounting Standards or Philippine Financial Reporting Standards or Interpretations. The purpose of the
framework as outlined is to:
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 Accounting Standards;
c. Assist preparers of the financial statements in applying FRSC Statements of Financial Accounting Standards and in dealing with topics
that have yet to form the subject of an FRSC statement;
d. Assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP;
e. Assist users of financial statements in interpreting information contained in the financial statements prepared in conformity with
Philippine GAAP;
f. Provide those who are interested in the work of the FRSC with information about its approach to the formulation of Statements of
Financial Accounting Standards

General Purpose Financial Statements

The Framework addresses general purpose financial statements including consolidated financial statements that a business enterprise prepares and
presents at least annually to meet the common information needs of a wide range of users external to the enterprise. Therefore, the Framework
does not necessarily apply to 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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Users and their Information Needs

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.

While financial statements cannot meet all the information needs of these user groups, there are information needs that are common to all users,
and general-purpose financial statements focus on meeting these needs.

Responsibility for Financial Statements

The management of an enterprise has the primary responsibility for preparing and presenting the enterprise's financial statements.

The Objective of Financial Statements

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of
an enterprise that is useful to a wide range of users in making economic decisions.

Financial Position

The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its
capacity to adapt to changes in the environment in which it operates. The balance sheet presents this kind of information.

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 helps in forecasting future cash flows from the enterprise's existing resources and in forecasting potential additional cash
flows from additional resources that might be invested in the enterprise. The Framework states that information about performance is primarily
provided in an income statement.

Changes in Financial Position or Cash Flows

Users of financial statements seek information about the investing, financing and operating activities that an enterprise has undertaken during
the reporting period. This information helps in assessing how well the enterprise is able to generate cash and cash equivalents and how it uses
those cash flows. The cash flow statement provides this kind of information.

Key Accounting Principles

The Framework sets out the key accounting Principles of financial statements:
• Accrual Basis. The effects of transactions and other events are recognized 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 which they relate.
• Going Concern. The financial statements presume that an enterprise will continue in operation indefinitely or, if that presumption is not
valid, disclosure and a different basis of reporting are required.
• Economic Entity. The business is separate from the owners, managers, and employees who constitute the business. Therefore,
transactions of the said individuals should not be included as transactions of the business.
• Specific Time Period. The financial results reported by a business should cover a uniform and consistent period of time. If this is not
the case, financial statements will not be comparable across reporting periods
• 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 Philippine Peso. Second is the stability of the peso, means
that there is still an assumption that the purchasing power of the peso is stable or constant and that instability is insignificant and therefore
ignored.
• Full disclosure. Businesses are required to disclose all information that relates to the function of its financial statements in notes
accompanying the statements.
• Matching principle. The principle that requires that the expenses incurred during a period be recorded in the same period in which the
related revenues are earned.
• Materiality. 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 entity’s financial reporting, there is no uniform qualitative threshold for materiality or
predetermined material in a particular situation.
• Conservatism. There is more than one acceptable way to record a transaction, this principle instruct the accountant to choose the option
that is best for the business they’re working with.

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Qualitative Characteristics of Useful Information

A. Fundamental Characteristics

Relevance - Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by (a)
helping them evaluate past, present, or future events relating to an enterprise and by (b) confirming or correcting past evaluations they have
made.

• Predictive Value – Information can help users increase the likelihood of correctly predicting or forecasting the outcome of certain
events.

• Feedback Value – Information can help users confirm or correct earlier expectations. Note that the predictive and confirmatory
roles of information are interrelated.

Faithful Representation – Information must represent faithfully the transactions and events it either purports to represent or could
reasonably purport to represent.

• Free from error – There are no errors or omissions in the description of the phenomenon, and the process used to produce the
reporting information has been selected and applied with no errors.
• Neutrality - Information contained in the financial statements must be free from bias and error.
• Completeness – to be reliable, the information in the financial statements must be complete within the bounds of materiality and
cost.

B. Enhancing Characteristics

These characteristics are the attributes that make the information in financial statements useful to investors, creditors, and others. The
Framework identifies four enhancing qualitative characteristics:

a. 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.

b. Timeliness - Undue delay in reporting of information may lead to the loss of relevance even though enhancing it reliability. While
providing information before all aspects of a transaction or other events are known may increase the relevance of information, thus
impairing its reliability.

c. Verifiability – This help assure users that information faithfully represents the economic phenomena it purports to represent.
Verifiability means that different knowledgeable and independent observers could reach a consensus.

d. 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 accounting policies

Constraints to Relevant and Reliable Information

• Balance between Benefit and Cost - The benefits derived from relevant and reliable information should exceed the cost of providing
it.

Measurement of the Elements of Financial Statements

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 degrees and in varying combinations in financial
statements, including:

• Historical cost
• Fair value
• Current cost
• Value in use and fulfillment value

Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The Framework
does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in
particular circumstances. The qualitative characteristics do provide some guidance in this matter.

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