Purpose of Revised conceptual framework

- Assist the IASB to develop IFRS based consistent concepts

- To assist preparers of Financial statements to develop consistent accounting policy
- To assist preparers of financial statements to develop accounting policy when a standard allows
a choice of an accounting police
- To assist all parties to understand and interpret the IFRS standards

Authoritative status

- It is not an ACCOUNTING STANDARD

- If there is a standard or interpretation that specifically applies to a transaction, the standard
overrides the conceptual framework. Meaning ang standard ang masusunod.
- In the absence of a standard or interpretation that specifically applies to a transaction,
management shall consider the applicability of the CONCEPTUAL FRAMEWORK in developing
and applying an accounting policy that results in information that is relevant and reliable. This
means that in the absence of a standard that is applicable in a transaction, the conceptual
framework shall be used.
- Nothing in the conceptual framework overrides any specific ACCOUNTING STANDARDS.

Users of the financial information

- Preliminary users including existing and potential investors, lenders and other creditors.
- Secondary users also called as other users including employees, customers, government
agencies, public

Scope of the revised conceptual framework

- Objective of financial reporting

- Qualitative characteristics of useful financial information
- Financial statements and reporting entity
- Elements of financial statements
- Recognition and derecognition
- Measurement
- Presentation and disclosure
- Concepts of capital and capital maintenance

Specific objectives of financial reporting

- Provide information useful in making decisions about providing resources to the entity
- Provide information useful in assessing the cash flow prospects of the entity
- Provide information about entity resources, claims and changes in resources and claims

Limitations of financial reporting

- General purpose financial report do not and cannot provide all of the information that existing
and potential investors, lenders and other creditors need.
- Not designed to show the value of an entity but the reports provide information to help the
primary users estimate the value of the entity
 - Intended to provide common information to users and cannot accommodate every request for
information
- To a large extend, reports are based on estimate and judgement rather than exact depiction

Underlying assumptions and basic accounting principles

- Accounting assumptions are the basic notion or fundamental premises on which the accounting
process is based
- Also known as postulates
- Serves as the foundation or bedrock of accounting to avoid misunderstanding but rather
enhance the understanding and usefulness of the financial statements

- Going Concern also known as the continuity principle this state that an entity shall continue its
operations indefinitely without any proof of bankruptcy.

- Accounting entity states that the entity is separate from the owners, transactions of the entity
shall not be merged with the transactions of the owners

- Time period states that the indefinite life of an entity is subdivided into accounting periods that
are of the same length.

- Monetary unit has 2 aspects quantifiability means that the currency presented in the FS shall be
of the same currency. Stability of the peso means that the purchasing power of the peso is
stable… meaning that the purchasing power of the peso in the past is the same in the present.

Basic principles

- Objectivity principle states that all business transaction that will be entered in the accounting
records must be supported by verifiable evidence
- Historical cost means that all properties and services acquired by the business must be recorded
at its original acquisition cost
- Revenue recognition principle states that income is recognize as it is performed or made/earned
- Expense recognition states that expenses should be recognized as it is incurred
- Adequate disclosure states that all relevant information shall be disclosed in the FS if this info
would affect the user’s decision
- Materiality means that it is only concerned with information that can affect the user’s decisions
- Consistency principle is the use of the same accounting method from period to period to
achieve comparability.
- Accrual basis states that the revenue is recognize as it is earned and expenses when they are
incurred.
Qualitative Characteristics of FS

Fundamental (content)

- Relevance – information influences the economic decisions of users by helping them evaluate
past, present or future events, or confirming/correcting their past evaluations
 Predictive value – use to make predictions for future cashflows or income
 Feedback value – used to confirm or correct the decision maker’s earlier expectations
 Materiality – concerned only with information that is significant enough to affect
decisions
- Faithful representation – information must represent faithfully the transactions and other
events
 Completeness – must be complete in the bounds of materiality and cost. An omission
can cause false or misleading information (adequate disclosure)
 Neutrality – depiction without bias (fairness)
 Free from error – no errors or omission in the description of the phenomenon or
transaction
 Prudence/conservatism – “to anticipate no profits and provide for all probable loses”
 Adequate disclosure – all significant and relevant info shall be clearly reported
 Substance over form – it is necessary that transactions and other events are accounted
for and presented in accordance with their substance and economic reality and note
merely their legal form

Enhancing qualitative characteristics

- Verifiability – implies consensus can be direct or indirect (objectivity principle)

- Comparability – users must be able to compare FS of enterprise overtime in order to identify
trends in its financial position and performance
 Consistency – uniform application of accounting method from period to period
- Understandability –
- Timeliness – financial info must be available or communicated early enough when decisions is to
be made

Elements of Financial statements

Financial statement

 Final/main product of accounting

 Pportray the financial effects of transactions & other events by grouping them into broad classes
 Identifies the effects of the transactions into the elements of the FS
 Elements of the FS are quantitative information recorded into the Balance sheet & income
statement

Elements of the Financial Statements – building blocks from which the Fs are constructed

 Financial performance/income statement- Income – expenses = profit/loss (net income)

Elements directly related to financial performance: income and expense
Elements directly related to financial position: assets, liablities, equity
  Financial position/balance sheet- Assets – Liabilities = equity

Financial position

- Assets
 Present economic resource controlled by the entity as a result of past events
3 essential characteristics
 It should be present economic resource
 Control over the economic resource
 If it has the present ability to direct the use of the assets and obtain
the economic benefits that flow from it.
 Control includes:
o Ability to prevent others from using such asset
o Arise if the entity enforces legal rights
 An economic resource is a right that has the potential to produce economic
benefits
 Right that respond to an obligation of another entity (to receive
cash/non cash assets) (right to exchange resources)
 Rights that do not correspond to an obligation of another entity (right
over the physical object)
 Right established by contract or laws/legislations such as owning a
debt instrument or investment (right that has the potential to produce
economic benefits)
- Liabilities
 Present obligation of an entity to transfer an economic resource as a result of past
events
3 essential characteristics
 It has an obligation
 Entity liable must be identified. Not necessary the payee/company
owed
 Sino ba ang may obligation
 Obligation to transfer an economic resource
 Result in the settlement of the obligation will have a transfer of
asset/render services
 The obligation is a present obligation that exist as a result of past events
 A liability is not recognized until it is incurred
 The obligation already exist because of past transactions
- Equity
 A residual interest in the assets of an entity after deducting all the liabilities

Financial Performance

- Income
 Increases in assets or decreases in liabilities.
  Any increase in assets or decrease in liabilities that result in increases in equity other
than those relating to contributions from equity holders
 Any increase of the income will result to increase in equity
 The effect in the elements of the financial position
 Because the transaction (income) there is an increase in the asset or decrease
in liability/increase in equity
 Income encompasses the terms:
o Revenue – arises in the course of ordinary, regular activity of
an entity. May be referred to as sales, service revenue, fees,
interest income, rent income
o Gains – represent other items that meet the definition of the
definition of income and do not arise in the course of ordinary,
regular activities. Gains in the sale in PPE. Gain in selling the
investment
- Expenses
 Deceases in assets or increases in liabilities that result in decreases in equity in equity
other than those relating to distributions to equity holders
 Encompasses the terms:
 Loses – does not arise in the ordinary course of business
o Example: loses from flood, loses in the disposal of PPE
 Expenses – arise in course of the ordinary regular activities
o Examples: cost of goods sold, depreciation, salaries expense

Recognition

 Synonymous with recording

 Process of incorporating an item that meets the definition of an element and satisfies the
recognition criteria, into the statement of financial position/ statement of profit or loss and
other comprehensive income
 Process of capturing or inclusion in the FS an item that meets the definition of an asset, liability,
equity, income or expense
 Recognition Criteria
 It should meet the definition of the Elements
 The degree of uncertainty is probable
 It can be measured reliably

Asset Measurement

 Cash transaction = cash payment

 The measurement is only at face amount – pag nakita mo na an pera, aram mo na kaagad ang
value
 Noncash or exchange transaction
 Fair value of the asset given
 Fair value of asset received
 Carrying amount of asset given
(very important ang application san cost principle)
Income recognition principle

 Income shall be recognized when earned

 Can be earned in certain situations
 Point of production
 During production
 At the point of collection
 Exemptions:
 Installment method
 Cost recovery/sank cost
 Percentage of completion – ex. Construction
 Production method

Expense recognition

 Application of expense recognition principle

 Recognized only when incurred
 The expense recognition is an application of the matching principle
 States that the generation of income is not without any cost
 It requires that those cost and expense incurred in earning a revenue shall be reported
in the same period
 Matching principle has 3 recognitions
 Direct association also known as Cause and effect association
 Expense is recognized when revenue is already recognized.
 Example: Cost of Goods Sold
 Systematic and rational allocation
 Some cost are expensed simply by allocating them over the periods benefited
 Example: depreciation
 Depreciation is a result of cost incurred of an asset which will benefit
you in more than one period
 The reason for this allocation is the cost incurred will benefit future
periods and that there is an absence of a direct or clear association of
expense for the specific revenue
 Immediate recognition
 Cost incurred is expensed outright because of the uncertainty of future
economic benefits
 Difficulty reliably associating certain cost with future revenue
 Expense is recognized immediately
 Examples: loss from typhoon, salaries expense

Derecognition

 Defined as the removal of all or part of a recognized asset or liability from the statement
of financial position
 It occurs normally when an item NO LONGER meets the definition of an asset or a
liability
Measurement

 The process of determining the monetary amounts at which the elements of the financial
statements are to be recognized and carried in the statement of financial position and
statement of comprehensive income
 (conceptual framework) quantifying monetary terms the elements in the FS
2 categories
 Historical cost
 Historical cost of an ASSET – is incurred in acquiring or creating the
asset comprising the consideration paid plus transaction cost
 Historical cost of a LIABILITY – is the consideration received to incur
liability minus transaction cost
 Current value
 Fair value
 The price that would be received to sell an asset in an ordinary
transaction between market participant at measurement date
 Value in use for ASSET
 Present value of the cash flows that an entity expects to derive
from the use of an asset and from ultimate disposal
 Fulfillment for LIABILITY
 The present value of cash that an entity expect to transfer in
paying or settling the liability
 Present value applicable in paying liability
 Current cost (Realizable value)
 Cost of an equivalent asset at the measurement date
comprising the consideration paid and transaction cost
 Ginagamit nalang ngayon based on the elements that can be
measured at estimates
Basic principle that is governed in the measurement
 Historical cost principle

Presentation and disclosure

- An effective communication tool about the information in financial statements

- Makes the information more relevant and contributes to a faithful representation of an entity’s
assets, liabilities, income and expenses

Classification

- Sorting of an asset, liabilities, equity, income and expenses on the basis of shared or similar
characteristics

Classification of income and expenses

 Components of profit or loss

All income and expenses should be appropriately classified in the statement of profit
and loss
  Components of other comprehensive income
Other items and expenses that are presented outside of profit or loss

Aggregation

 Adding together of assets, liabilities, equity, income and expenses that have similar or shared
characteristics and re included in the same classification.

Capital Maintenance

 Financial Capital
The monetary amount of the net assets contributes by shareholders and the amount of
the increase in net assets resulting from earnings retained by the entity
Net income occurs when the nominal amount of the assets at the end of the year
exceeds the nominal amount of the net assets at the beginning of the period, after
excluding distributions to and contributions by owners during the period
 Physical Capital
The quantitative measurement of the physical productive capacity to produce goods
and services. It requires that productive assets to be measured at Current Cost rather
than historical cost
Net income occurs when the physical productive capital of the entity at the end of the
years exceeds the physical productive capital at the beginning of the period, also after
excluding distributions to and contributions from owners during the period

*transaction approach is the traditional preparation of an income statement

Statement of Financial Positions

Financial Statements – the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users

Components of Financial Statements

- Statement of financial Position

 A formal statement showing the three elements comprising financial position,
namely; assets, liabilities and equity
- Income statement
- Statement of comprehensive income
- Statement of changes in equity
- Statement of cash flows
- Nots, comprising a summary of significant accounting policies and other explanatory notes

Objective of financial position – is for the users to evaluate factors such as Liquidity, Solvency, and the
need for Additional Financing.

Classification of assets

Current Assets
1. It is cash or cash equivalent unless the asset is restricted to settle a liability for more than 12
months
 2. Hold primarily for the purpose of TRADING
3. Entity expects to realize the asset within 12 MONTHS after the reporting period
4. Expects to realize the asset or intends to sell or consume it within the entity’s NORMAL
OPERATING CYCLE
 Presented as
 Cash and Cash equivalents
 Financial assets at fair value (trading securities)
 Trade and other receivables
 Inventories
 Prepaid expenses
Noncurrent assets – an entity shall classify all other assets not classified as current as
NONCURRENT
May include the following
1. Property, plant and equipment
2. Long-term investments
3. Intangible assets
4. Deferred tax assets
5. Other noncurrent assets

Classification of Liabilities

Current liabilities
Shall be current when:
1. The entity expects to settle the liability within the entity’s Normal Operating Cyle
2. Hold primarily for the purpose of Trading
3. Due to be settled within 12 MONTHS after the reporting period
4. The entity DOES NOT have an unconditional right to defer the settlement of the liability for
at least 12 months after the reporting period
 Presented as
 Trade and other payables
 Current provisions
 Short-term borrowing
 Current portion of long-term debt
 Current tax liability
Noncurrent liabilities – PAS 1, par. 69, provides that all liabilities not classified as current are
classified as NONCURRENT
May include the following:
1. Noncurrent portion of ling-term debt
2. Finance lease liability
3. Deferred tax liability
4. Long-term obligations to company officers
5. Long-term deferred revenue

Shareholders’ equity
 EQUITY – residual interest in the assets of the entity after deducting all its liabilities
SHAREHOLDERS’ EQUITY – the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities
May include the ff accounts
1. Share capital
2. Subscribed share capital
3. Share premium
4. Accumulated profits(losses)/ Retained earnings
5. Revaluation reserve/ surplus
6. Treasury share

Statement of comprehensive income

 It is a formal statement showing the financial performance of an entity for a given period of time
 The statement of comprehensive income illustrates the financial performance and results od
operations of a particular company or entity for a period of time

Comprehensive income

 The term comprehensive income is the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances, other than changes
resulting from transactions with the owners in their capacity as owners.
 In other words, comprehensive income includes the following:
Profit or loss
 It is the total of income less expenses, excluding the components of other
comprehensive income
 This is the “bottom line” in the traditional statement
 An entity may use “net income” or “net loss” to describe profit/loss
 Sources of income:
 Sales of merchandise to customer
 Rendering of services
 Use of entity resources
 Disposal of resources other than products
 Components of expense:
 Cost of goods sold or Cost of sales
 Distribution costs or selling expenses
 Administrative expenses
 Other expenses
 Income tax expense
Components of other comprehensive income
 It comprises items of income and expenses including reclassification
adjustments that are NOT recognized in profit or loss as required or permitted
by PFRS.
 Components of OCI may include the ff:
  Unrealized gain or loss on equity investment measured at Fair
Value through OCI
- stocks
 Unrealized gain or loss on debt investment measured at Fair
value through OCI
- Example: investment in bonds
 Gain or loss from translation of FS of a foreign operation
- If halimbawa foreign currency an ginamit tas in-
translate into php, then pwedeng kulang or sobra ang
pagka translate kay di man everyday parehas ang
exchange value.
 Revaluation surplus during the year
- Occurs when there is a revaluation on long-term asset
- Fair market value
 Unrealized gain or loss from derivative contracts designated as
cash flow hedge
- Fluctuation in the prevailing interest rate
 Remeasurements of defined benefit plan, including actuarial
gain or loss
- Pension of employees
- Retirement fund
 Change in Fair Value attribute to credit risk of financial liability
designated at fair value through profit or loss.
- Same sa 1 & 2
- More on financial liab
- Gain or loss from change in fair value

Presentation of comprehensive income

 An entity has 2 options of presenting the comprehensive income

Two statements:
a. An income statement showing the components of profit and loss (applicable if the
entity has no OCI)
b. A statement of comprehensive income beginning with profit or loss as shown in the
income statement plus or minus the components of OCI (applicable if the entity has
OCI)
Single statement of comprehensive income (applicable if the entity has both OCI and
Profit and loss statement)
 This is the combined statement showing the components of profit or loss and
components of OCI in a single statement.
 It is also known as the statement of financial performance (under the revised
conceptual framework)
CHAP 12

EVENTS AFTER THE REPORTING PERIOD

Types of events after the reporting period