CHAPTER 1 – THE ENVIRONMENT OF FINANCIAL ACCOUNTING AND REPORTING them in carrying out its powers and functions provided

out its powers and functions provided under R.A. 9298 (Philippine
Accountancy Act of 2004).
The Need to Develop Standards  FRSC approved the issuance and revised PAS and the new PFRS which directly
 To satisfy the stewardship reporting responsibility of management. correspond to IASB’s IAS and IFRS and took effect on Jan. 1, 2005 which was the
 To develop a set of standards that are generally accepted and universally practiced. date set by FRSC for the Philippines’ full adoption of IFRSs.
 To improve the comparability of financial reports among different companies.  In 1981, PICPA created Accounting Standards Council (ASC) to formalize the
accounting standard-setting function in the Philippines.
Accounting Variations among Countries  The approved statement of ASC were called “Statement of Financial Accounting
 The reality of the world is that environments have not evolved uniformly or
Standards” (SFAS) (US-based)
simultaneously.
 Different economic factors are not the only influence of differences in accounting  Between 19974 and 2004, Philippines started adopting the IFRS promulgated by
standards. (Educational systems, legal systems, political systems and sociocultural IASB.
characteristics)
 Due to increasingly internationalized world of business, it becomes important to FRSC Members
understand the different national accounting systems. Compose of a Chairman and 14 members;
1 – Board of Accountancy
Implications of Differences in Accounting among Nations 1 – Securities and Exchange Commission
 The language and the currency are different. 1 – Bangko Sentral ng Pilipinas
 Terminology is different. 1 – Bureau of Internal Revenues
 The types and amount of information disclosed are likely to be different. 1 – Financial Executives Institute of the Philippines
 Financial statements become meaningless due to differences in procedures that 1 – Commission on Audit
were followed to arrive at final figures. 2 – Public Practice
2 – Commerce and Industry
Development of Standards 2 – Academe/Education
 International Accounting Standard Board (IASB) was formed in 1973. 2 – Government
 The IASB’s objective is to raise the quality and consistency of financial reporting and
to have a platform of high quality and improved standards. It aims to bring about The Decision to Move Totally to IFRS/IAS
greater transparency and a higher degree of comparability in financial reporting.  Support of the Philippine Regulatory Agencies such as the BOA, SEC, BSP and PICPA.
 The International Accounting Standards Committee (IASC) was formed in 1973, and  Increasing internalization of business which heightened the interest in a common
it developed a body of accounting standards suitable for use around the world. language for financial reporting.
(IFRS/IAS)  Increasing recognition of IAS by the World Bank, Asian Development Bank and
 In 2001 IASC was reorganized into IASB. World Trade Organization.
 In 2002, EU adopted to use IFRSs, starting in 2005.
 As of 2006, there were already 102 countries which have fully adopted the IFRSs. Sources of Accounting Standards
 As of 2011, IASB projected that 150 countries would be IFRS compliant.  International Accounting Standards Board (IASB)
 Financial Reporting Standards Council (FRSC)
Accounting Standard-Setting in the Philippines  Other organizations influencing financial and reporting accounting standards;
 Financial Reporting Standard Council (FRSC) – the accounting standard setting body o Securities and Exchange Commission
in the Philippine created by PRC under the recommendation of the BOA to assist o Philippine Institute of Certified Public Accountants
o Bureau of Internal Revenue
  Other professional associations;
o Financial Executives Institute
o Institute of Management Accountants
Major Challenges in Financial Reporting Environment
 IFRS/PFRS in a Political Environment – various user groups often target the IASB to
pressure it to influence changes in the existing rules and the development of new
ones.
 The Expectation Gap – in spite of increase in policy efforts, approving new rules and
materiality guidelines for financial reporting, accounting scandals and poor reporting
practices still occur.
Financial Reporting Issues
 Nonfinancial measurement – financial reports fail to provide some key performance
measures widely used by management.
 Forward-looking information
 Soft assets (intangibles)
 Timeliness – companies only prepare financial statements quarterly and provide
audited financial annually.
Constraints on Useful Financial Reporting
 Cost-benefit Balancing – the cost of providing financial information fall initially on
the preparer and then are passed on to consumers.
 Balance between Qualitative Characteristics – the relative importance of the
characteristics in different cases is a matter of professional judgement.
 True and Fair View Presentation
Enhancing the Existing System of Financial Reporting
 One-size-fits-all financial reports do not meet the needs of the spectrum of
investors.
 When preparing financial reports, it is difficult to ensure compliance with the
voluminous and complex requirements contained in SEC reporting rules.
 Consider a more comprehensive business reporting model including both financial
and nonfinancial key performance indicators.
 Deliver all information in a timelier manner.
Ethics in Accounting Environment
 The Code of Ethics promulgated by the Board of Accountancy provides guidelines
for practicing accountants. However, the code does not present a structured
approach to resolving ethical dilemmas and conflicts.
 CPAs are expected to make unswerving commitment to honorable behavior, even at
the sacrifice of personal advantage
CHAPTER 2 – CONCEPTUAL FRAMEWORK, PART 1
Conceptual Framework
 Conceptual Framework is not a standard.
 The conceptual framework outlines the objectives of financial reporting and the
qualities of good accounting information, precisely defines commonly used terms
such as assets and revenues, and provides guidance about appropriate recognition,
measurement and reporting.
 It is a coherent system of interrelated objectives and fundamentals that can lead to
consistent standards that prescribe the nature, functions and limits of financial
accounting and reporting.
 The fundamentals are the underlying concepts of accounting, concepts that guide
the selection of events to be accounted for, the measurement of those events, and
the means of summarizing and communicating them.
Purpose of Conceptual Framework
 To assist the Board in the development of future IFRSs and in its review of existing
IFRSs.
 To assist the Board in promoting harmonization of regulations, accounting standards
and procedures.
 To assist national standard-setting bodies in developing national standards.
 To assist preparers of financial statements in applying IFRSs and in dealing with
topics that have yet to form the subject of an IFRSs.
 To assist auditors in forming an opinion on whether financial statements comply
IFRSs.
 To assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs.
 To provide those who are interested in the work of IASB with information about its
approach to the formulation of IFRSs.
Scope of the Conceptual Framework
 The objective of financial reporting.
 The qualitative characteristics of useful financial information.
 The definition, recognition and measurement of the elements from which financial
statements are constructed.
 Concepts of capital and capital maintenance.
Overview of the Conceptual Framework
 Why? Objective of financial reporting
 The Bridge - Qualitative characteristics of accounting information and elements of
financial statements
 How? Recognition, measurement and disclosure concepts
Objective of Financial Reporting
 The objective of general purpose financial reporting is to provide financial
information that is useful to users in making decisions relating to providing
resources to the entity.
 To make these decisions, users asses prospects for future net cash to the entity and
management’s stewardship of the entity’s economic resources.
 To make both these assessment, users need information about both the entity’s
economic resources, claims against the entity and changes in those resources and
claims and how efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources.
Types of Useful Information
 Financial Flexibility – ability of a company to use its financial resources to adapt to
change.
 Liquidity and Solvency – Liquidity refers to the availability of cash in the near future
after taking account of financial commitments over this period. Solvency refers to
the availability of cash over the longer term to meet financial commitments as they
fall due.
 Operating Capability – ability of a company to maintain a given physical level of
operations.
 Investing, Financing and Operating Activities – this information is useful in providing
the user with a basis to assess the ability of the enterprise to generate cash and cash
equivalents and the needs of an enterprise to utilize those cash flows.
Limitations of General Purpose Financial Reporting
 They do not and cannot provide all the information that existing and potential user’s
need such as economic, political, and industrial conditions and expectations.
 They are not designed to show the value of reporting entity but they provide
information to the users to estimate the value of such entity.
 General purpose reports may not meet the needs of individual primary users
because of the difference and sometimes conflicting information needs and desires
of such users.
 Financial reports are based on estimates, judgments and models rather than exact
depictions.
Fundamental Qualitative Characteristics of Financial Information
 Relevant financial information is capable of making a difference in the decisions
made by users. Financial information is capable of making a difference in decisions if
it has;
o Predictive Value – financial information has a predictive value if it can be
used as an input to processes employed by users to predict future
outcomes.
o Confirmatory Value - financial information has a predictive value if it
provides feedback about previous evaluations.
 Materiality – information is material if omitting it or misstating it could
influence decisions that users make on the basis of financial information
about a specific reporting entity.
 Faithful representation means that the numbers and descriptions match what really
existed or happened.
o Completeness – means that all information necessary for a user to
understand the economic activity or a phenomenon must be depicted,
including all necessary descriptions and explanations.
o Neutrality – means that an enterprise cannot select information to favor
one set of interested parties over another. (Prudence)
o Free from Errors – no errors have been made in selecting and applying an
appropriate process for developing the estimate.
Enhancing Qualitative Characteristics
 Comparability – enables uses to identify and understand similarities in and
differences among items. (Not the same as consistency)
  Verifiability – different knowledgeable and independent observers or users could  Liabilities – present obligation of the entity to transfer an economic resource as a
reach consensus that a particular depiction is a faithful representation. result of past events. An obligation is a duty or responsibility that the entity has no
o Direct Verification – verifying through direct observation. practical ability to avoid.
o Indirect Verification – checking the inputs to a model, formula or other o Require transfer of economic benefits.
technique and recalculating the output using the same methodology.
o Specify to whom the assets must be transferred.
 Timeliness – having information available to decision makers in time to be capable
o Result from past transaction.
of influencing their decisions.
o Represent a duty or responsibility that the entity has no practical ability to
 Understandability – serves a link between decision-makers and the accounting
information. avoid.
 Equity – the residual interest in the assets of the entity after deducting all its
Underlying Assumption: Going Concern liabilities.
The financial statement are normally prepared on the assumption that an enterprise is going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that Measurement of Financial Performance
the enterprise has neither the intention nor the need to liquidate or curtail materiality the  Income – increases in assets, or decreases in liabilities, that result in increases in
scale of its operations. equity, other than those relating to contributions from holders of equity claims.
o Revenue – arises in the course of ordinary activities of an entity.
CHAPTER 3 – CONCEPTUAL FRAMEWORK, PART 2 o Gains – may or may not arise in the course of the ordinary activities of the
entity.
Financial Statements  Expenses – decreases in assets, or increases in liabilities, that result in decreases in
1. Statement of Financial Position equity, other than those relating to distributions to holders of equity claims.
2. Statement of Financial Performance o Expenses – arises in the course of ordinary activities of an entity.
3. Statement of Cash Flow o Losses – may or may not arise in the course of the ordinary activities of the
4. Statement of Changes in Equity entity.
5. Notes to the Financial Statements  Capital Maintenance Adjustments – The revaluation or restatement of
assets and liabilities gives rise to increases or decreases in equity. While
Objectives of Financial Statements
these changes meet the definition of income and expenses, they are not
The objective of financial statements is to provide information about the financial position,
included in the income statement instead these items are included in equity
performance and changes in financial position of an entity that is useful to a wide range of
as capital maintenance adjustments.
users in making economic decisions.

Measurement of Financial Position Recognition – the process of capturing for inclusion in the financial statement as an item
 Assets – present economic resources controlled by the entity as a result of past that meets the definition of an asset, a liability, equity, income or expenses. The amounts
events. An economic resource is a right that has the potential to produce economic recognized in a statement are included in the total and, if applicable, subtotals, in the
statement. The recognition criteria include:
benefits.
 Relevance – whether recognition of an item results in relevant information may be
o Have the potential to produce economic benefits. affected by low probability of a flow of economic benefits and existence uncertainty.
o Be under management’s control.  Faithful Representation – whether recognition of an item results in a faithful
o Result from past transactions. representation may be affected by measurement uncertainty, recognition
inconsistency, and presentation and disclosure.
Derecognition – the removal of all part of recognized asset or liability from an entity’s
financial statement. This normally occurs:
 For an asset, when the entity loses control of all part of the recognized asset.
 For a liability, when the entity no longer has a present obligation to all or part of the
recognized liability.
*Derecognition should aim to faithfully represent those assets and liabilities retained after
the transfer, if any, and any change in assets and liabilities as a result of the transaction that
led to derecognition.
Measurement – process of determining the monetary amounts at which the elements of
financial statements are to be recognized and carried in statement of financial position and
performance.
 Historical Cost measurement basis – provide information derived, at least in part,
from the price of transaction or other event that gave rise to the item being
measured. Assets are reduced if they become impaired and liabilities increased if
they become onerous. To apply, assets and liabilities are measured at amortized
cost.
 Current Value measurement basis – provide information updated to reflect
conditions at the measurement data. It includes:
o Fair Value – the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants at
the measurement date. Reflects market participant’s current expectations
about the amount, timing and uncertainty of future cash flows.
o Value in use / Fulfillment Value – reflect entity-specific current expectations
about the amount, timing and uncertainty of future cash flows.
o Current Cost – reflects the current amount that would be paid to acquire an
equivalent asset and received to take an equivalent liability.
Factors to Consider in Selecting a Measurement Basis
 Relevance of information
o Characteristics of the asset or liability
 the variability of cash flow
 sensitivity of the value to market factors or other risks
 amortized cost cannot provide relevant information about a
derivative
o Contribution to future cash flow
 whether cash flows are produced directly or indirectly in
contribution with other economic resources
 the nature of entity’s business activities
 if assets are used in combination to produce goods or services,
historical cost can provide relevant information about margins
achieved in a period.
 Faithful Representation
o Measurement inconsistency
 if financial statements contain measurement inconsistencies, those
financial statements may not faithfully represent some aspects of
the entity’s financial position and financial performance.
o Measurement uncertainty
 does not necessarily prevent the use of a measurement basis that
provides relevant information.
 but if too high might make it necessary to consider selecting a
different measurement basis.
Presentation and Disclosure
The Revised Conceptual Framework:
 introduces concepts how information should be presented and disclosed in financial
statements.
 introduces the term “Statement of Financial Performance” to refer to the statement
of profit and loss together with the statement presenting Other Comprehensive
Income.
Concepts of Capital
 Financial Capital – invested money or invested purchasing power, capital is
synonymous with the net assets or equity of the enterprise. It should be adopted if
the users of financial statements are primarily concerned with the maintenance of
nominal invested capital or the purchasing power of invested capital.
 Physical Capital – capital is regarded as the productive capacity of the enterprise
based on output per day.
Concepts of Capital Maintenance
 Financial capital maintenance – profit is earned only if the financial amount of the
net assets at the end of the period exceeds financial amount of net assets at the
beginning of the period after excluding any distributions or contributions of owners
during the period.
 Physical capital maintenance – a profit is earned only if the physical productive
capacity of the enterprise at the end of the period exceeds the physical productive
capacity at the beginning of the period after excluding any distributions or
contributions of owners during the period.