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Conceptual Framework and Accounting Standards

1.1 Overview of Accounting

 

Introduction: The History and Definition of Accounting

 

Definition of Accounting
 Accounting is “the process of identifying, measuring, and
communicating economic information to permit informed judgment and decisions
by users of information.” (American Association of Accountants-AAA)

 
Three (3)  Important Activities

1. Identifying - the process of analyzing events and transactions to determine

whether or not they will be recognized. Only accountable events are recognized.
2. Measuring - involves assigning numbers, normally in monetary terms, to the
economic transactions and events.
3. Communicating - the process of transforming economic data into useful
accounting information, such as financial statements and other accounting
reports, for dissemination to users.

 
Types of Events or Transactions

1. External Events – events that involve an external party

Three Types of External events:

1. Exchange (reciprocal transfer) – reciprocal giving and

receiving
2. Non-reciprocal transfer – “one-way” transaction
3. External event other than transfer – an event that involves
changes in the economic resources or obligations of an
entity caused by an external party or external source but
does not involve transfers of resources or obligations.
2. Internal Events – events that do not involve an external party

Two Types of Internal Events:

1.
1.
1. Production – the process by which resources are
transformed into finished goods.  
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Conceptual Framework and Accounting Standards

2. Casualty –  unanticipated loss from disasters or other

similar events.

 
Measurement Bases

 The several measurement bases used in accounting include, but not limited to, the
following:

1. Historical Cost (Links to an external site.),

2. Fair Value (Links to an external site.),
3. Present Value (Links to an external site.),
4. Realizable Value (Links to an external site.),
5. Current Cost (Links to an external site.), and
6. sometimesInflation-Adjusted Costs. (Links to an external site.)

 The most commonly used is historical cost. This is usually combined with the
other measurement bases. Accordingly, financial statements are said to be
prepared using a mixture of costs and values.

 
Valuation by Fact or Opinion

 When the measurement is affected by estimates, the items measured are said to
be valued by Opinion. 
 When the measurement is unaffected by estimates, the items measured are said
to be valued by Fact.

 
Basic Purpose of Accounting

 The basic purpose of accounting is to provide information about economic

activities intended to be useful in making economic decisions.

 
Types of Accounting Information Classified as to Users’ Needs

 General-purpose accounting information - designed to meet the common needs

of most statement users. This information is governed by the Philippine Financial
Reporting Standards (PFRSs).
 Special purpose accounting information - designed to meet the specific needs of
particular statement users. This information is provided by other types of
accounting, e.g., managerial accounting, tax basis accounting, etc.
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The Basic Accounting Concepts

The Basic Accounting Concepts -principles upon which the process of
accounting is based.Used interchangeably with accounting assumptions and
accounting theory.

 some are derived from the Conceptual Framework and the PFRSs but some are
implicit or generally accepted because of their long-time use.
o Double-Entry System – each accountable event is recorded in two
parts, the  Debit and Credit.
o Going Concern - the entity is assumed to carry on its operations for an
indefinite period of time.
o Separate Entity – the entity is treated separately from its owners.
o Stable Monetary Unit - amounts in the financial statements are stated
in terms of a common unit of measure; changes in purchasing power
are ignored.
o Time Period – the life of the business is divided into series of reporting
periods.
o Materiality concept – information is material if its omission or
misstatement could influence economic decisions.
o Cost-benefit – the cost of processing and communicating information
should not exceed the benefits to be derived from it. 
o Accrual Basis of Accounting – effects of transactions are recognized
when they occur (and not as cash is received or paid) and they are
recognized in the accounting periods to which they relate.
o Historical Cost Concept – the value of an asset is determined on the
basis of acquisition cost.
o Concept of Articulation – all of the components of a complete set of
financial statements are interrelated.
o Full Disclosure Principle – financial statements provide sufficient
detail to disclose matters that make a difference to users, yet sufficient
condensation to make the information understandable, keeping in
mind the costs of preparing and using it.
o Consistency Concept – financial statements are prepared on the basis
of accounting policies which are applied consistently from one period
to the next.
o Matching Principle– costs are recognized as expenses when the
related revenue is recognized.
o Residual Equity Theory – this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is
“Assets – Liabilities – Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”
o Entity Theory- the objective is proper income determination (matching
of cost and revenues in the income statement). Exemplified by the
equation "Assets=Liabilities + Capital"
o Proprietary Theory - the objective is the proper valuation of assets in
the balance sheet. Exemplified by the equation "Assets- Liabilities =
Capital"
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o Fund Theory – the accounting objective is the custody and

administration of funds.
o Realization – the process of converting non-cash assets into cash or
claims for cash.
o Prudence (Conservatism) – the inclusion of a degree of caution in the
exercise of the judgments needed in making the estimates required
under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated.
o Systematic and rational Allocation - costs that are not directly related
to income generation are initially recognized as an asset and
recognized as expenses over the period where their economic benefits
are consumed.
o Immediate recognition -costs that do not/ceases to meet the
definition of assets are expensed immediately.

Note:
Some accounting concepts are implicit, or they are not expressly stated in the
framework but are generally accepted because of their long-time use in the
profession.

The Common Branches of

Accounting
The Common Branches of Accounting
 Financial Accounting - focuses on general-purpose financial statements.
 Management Accounting – focuses on special purpose financial reports for use
by an entity’s management.
 Cost Accounting - the systematic recording and analysis of the costs of materials,
labor, and overhead incident to production.
 Auditing - the process of evaluating the correspondence of certain assertions
with established criteria and expressing an opinion thereon.
 Tax Accounting - the preparation of tax returns and rendering of tax advice, such
as the determination of tax consequences of certain proposed business
endeavors.
 Government Accounting - refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes
for which those funds are committed, and the responsibility and accountability of
the individuals entrusted with those funds.
 Fiduciary Accounting -refers to the handling of accounts managed by a person
entrusted with the custody and management of property for the benefit of
another.
 Estate Accounting-refers to the handling of accounts for fiduciaries who wind up
the affairs of deceased persons.
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 Social Accounting - the process of communicating the social and environmental

effects of an entity's economic actions to society.
 Institutional Accounting -the accounting for non-profit entities other than the
government
 Accounting System- the installation of accounting procedures for the
accumulation of financial data and designing of accounting forms to be used in
data gathering.
 Accounting research- pertains to the careful analysis of economic events and
other variables to understand their impact on decisions.

The Four (4 ) Sectors of

Accountancy
Four Sectors in the Practice of Accountancy

 Under R.A. 9298 also known as the “Philippine Accountancy Act of 2004” the
practice of accounting is sub-classified into the following:

1. Practice of Public Accountancy - involves the rendering of audit or accounting-

related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in the private sector
in a position that involves decision making requiring professional knowledge in
the science of accounting and such position requires that the holder thereof must
be a CPA.
3. Practice in Education/Academe – employment in an educational institution that
involves the teaching of accounting, auditing, management advisory services,
finance, business law, taxation, and other technically related subjects.
4. Practice in the Government – employment or appointment to a position in an
accounting professional group in the government or in a government-owned
and/or controlled corporation where decision-making requires professional
knowledge in the science of accounting, or where civil service eligibility as a CPA
is a prerequisite.

 
Services offered by Professional Accountants in Public Practice

 audit - the expression of an opinion on the fairness of the financial statements of

a client for an accounting period.
 review- limited examination of the client's financial statements
 compilation services - classifying and summarizing the client's financial
information to present a financial statement in conformance with the financial
accounting and reporting standards.
 tax services - preparation of the annual income tax returns, representation of
clients in tax cases, tax planning etc.
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The Accounting Standards in the

Philippines
Accounting Standards in the Philippines
 Philippine Financial Reporting Standards (PFRSs) are Standards and
Interpretations adopted by the Financial Reporting Standards Council (FRSC)
based on the IFRSs. They comprise:
1. Philippine Accounting Standards (PASs)*; 
2. Philippine Financial Reporting Standards (PFRSs)**; and
3. Interpretations

 
The Need for Reporting Standards

 Entities should follow a uniform set of generally accepted reporting standards

when preparing and presenting financial statements; otherwise, financial
statements would be misleading.
 The term “generally acceptable” means that either:
o the standard has been established by an authoritative accounting rule-
making body, or
o the principle has gained general acceptance due to practice over time
and has been proven to be most useful.
 The process of establishing financial accounting standards is a democratic process
in that a majority of practicing accountants must agree with a standard before it
becomes implemented.

 
Prior to the full adoption of IFRSs (2005)

 The accounting standards used in the Philippines were based on the US GAAP,
o includes the Statement of Financial Accounting Standards
(SFAS) issued by the Federal Accounting Standards Board (FASB), the
US national standard-setting body.
 The move to IFRSs was primarily brought about by:
o increasing acceptance of IFRSs worldwide;
o increasing internationalization of businesses thereby increasing the
need for a common financial reporting standards that minimize, if not
eliminate inconsistencies of financial reporting of nations.

 
Norwalk Agreement (October 2002)
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 FASB and the International Accounting Standards Board (IASB) agreed to

converge the U.S. GAAP and the IFRSs ;
 work together with the common goal of producing a single set of global
accounting standards and,
 enhance the quality and comparability of financial reporting.

 
Changes in Financial reporting standards

 Financial reporting standards are continuously reviewed, revised, and

superseded primarily to respond to users' needs influenced by legal, political,
business, and social environment.
 Regulatory bodies, lobbyists, laws, regulations, and changes in the economic
environment affect the choice of accounting treatment provided under the
reporting standards.

 
*issuance by the ASC
**issuance by the FRSC

The Accounting Standard-Setting

Bodies and other Relevant
Organizations
Accounting Standard-Setting Bodies and other Relevant Organizations
1. Financial Reporting Standards Council (FRSC)

  is the official accounting standard-setting body in the Phils.

  created under the Phil. Accountancy Act of 2004 (RA 9298).
  It is composed of a chairman and 14 representative members.
 replaced the Accounting Standards Council(ASC)

2. Philippine Interpretations Committee (PIC)

 it has the role of reviewing the interpretations of the International Financial

Reporting Interpretations Committee (IFRIC) for approval and adoption of the
FRSC.

3. Board of Accountancy (BOA)

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  the professional regulatory board created under RA 9298 to supervise the

registration, licensure, and practice of accountancy in the Philippines.
 It consists of a chairperson and 6 members with a tenure of one (1) year.

4.International Accounting Standards Board (IASB)

 the standard-setting body of the IFRS Foundation with the main objective of
developing and promoting global accounting standards.

5. International Financial Reporting Interpretations Committee (IFRIC)

  the committee that prepares interpretations of how specific issues should be

accounted for under the application of the IFRS.

6. IFRS Advisory Council (IFRSAC)

 group of organizations and individuals with an interest in international financial

reporting.

7. International Federation of Accountants (IFAC)

  it is a non-profit, non-governmental, non-political organization of accountancy

bodies that represents the worldwide accountancy profession.

8. Philippine Institute of Certified Public Accountant (PICPA)

 The national professional organization of Certified Public Accountants in the

Philippines having the basic authority of setting-up and implementing rules vital to
the accounting profession.
 Accounting Associations under the wing of PICPA
o National Association of Certified Public Accountants in
Education (nACPAE) –for accounting professors
o Government Association Certified Public Accountants (GACPA) –for
government accountants
o Association of Certified Public Accountants in Public
Practice (ACPAPP)
o Association of CPAs in Commerce and Industry (ACPACI) -for all
private and public accountants

9. Auditing and Assurance Standards Council (AASC)- is the body authorized to

establish and promulgate generally accepted auditing standards (GAAS) in the
Philippines.  Replaced the Auditing Standards and Practices Council (ASPC)
10. Professional Regulations Commission (PRC)- the body in charge of regulating and
licensing the practice of accountancy and other specialized professions.
11. International Organizations of Securities Commissions (IOSCO)- an international
body of securities commissions.
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12. Securities and Exchange Commission (SEC)- the government agency tasked with
regulating corporations and partnerships, capital and investment markets, and the
investing public.
13. Bureau of Internal Revenue (BIR) - administers the provisions of the National
Internal Revenue Code.
14. Bangko Sentral ng Pilipinas (BSP) - influences the selection and application of
accounting policies by banks and other entities performing banking functions.
15. Cooperative and development Authority (CDA) - influences the selection and
application of accounting policies by cooperatives.
 
Note:
Regulatory accounting principles - accounting policies prescribed by a regulatory
body.

The Accountancy Profession in

the Philippines (pursuant to RA
9298)
The Accountancy Profession in the Philippines (pursuant to RA 9298)
The three (3) requirements to qualify to practice the accountancy profession, a
person must:

 be a holder of a Bachelor’s Degree in Accountancy

 pass the difficult CPA Licensure Examination (CPALE) administered by the Board
of Accountancy.
o The examination is given every May and November of each year.
o with an average of 75%, with no grade lower than 65% in any subject.
 be accredited by the Board of Accountancy to practice accounting upon showing
that such registrant has:
o acquired a minimum of 3 years of meaningful experience in any of the
areas of public practice including taxation
o completed the required 120 Continuing Professional Development
(CPD) credit units as mandated by RA 10912, the law strengthening
the CPD program for all regulated professions to enhance the
technical skills and competence of the CPA.

 
Note:
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CPAs 65 years old and above shall be permanently exempted from the CPD requirement for renewal
of CPA license but not for the accreditation to practice the accountancy profession.

The Code of Ethics for CPAs

1. Integrity
 A professional accountant should be straightforward and honest in all professional
and business relationships.

2. Objectivity
 A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments.

3. Professional Competence and Due Care

 A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in
practice, legislation, and techniques.
 Professional accountants should act diligently and by applicable technical and
professional standards when providing professional services.

4. Confidentiality
 A professional accountant should respect the confidentiality of information
acquired as a result of professional and business relationships and
 should not disclose any such information to third parties without proper and
specific authority unless there is a legal or professional right or duty to disclose.
 Confidential information acquired as a result of professional and business
relationships should not be used for the personal advantage of the professional
accountant or third parties.

5. Professional Behavior
 A professional accountant should comply with relevant laws and regulations and
should avoid any action that discredits the profession.

 
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1.2 The Conceptual Framework

for Financial Reporting
The Conceptual Framework for Financial Reporting
 (or the “Framework”) is a basic document that sets objectives and the concepts
for general purpose financial reporting.
 Its predecessor, Framework for the preparation and presentation of the financial
statements was issued back in1989.
 Then in 2010, IASB published the new document, however, it was a bit unfinished
as a few concepts and chapters were missing.
 The newest and completed Framework Published in 2018 is comprised of 8
Chapters.

Definition 
 The Conceptual Framework sets out the concepts that underlie the
presentation and preparation of financial statements for external users.

 
The Purpose of the Conceptual Framework

1. Assist the FRSC in developing accounting standards and in reviewing and

adopting existing IFRSs;
2. Assists preparers of financial statements in applying the Standards and in dealing
with topics that have yet to form the subject of an FRSC standard;
3. Assists auditors in forming an opinion as to whether financial statements conform
with the Standards;
4. Assist the users' financial statements in interpreting the information contained in
financial statements; and
5. Provide those who are interested in the work of the FRSC with information
about its approach to the formulation of the Standards.

 
Authoritative Status of the Conceptual Framework

 The Conceptual Framework is not a PFRS.

 The Conceptual Framework does not define any standard for any particular
measurement or disclosure requirement.
 If there is a conflict between the Conceptual Framework and the PFRS, the PFRS
will prevail.
 In the absence of a PFRS, management shall consider the application of the
Conceptual Framework.

 
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1.2.1 The Eight (8) Chapters of

the CFWFR
The Eight (8) Chapters of the Conceptual Framework for
Financial Reporting

  CFWFR Chapter 1
The Objective of General Purpose Financial Reporting
 

 The main objective of general purpose financial reports is to :

o provide the financial information about the reporting entity that is
useful to existing and potential investors, lenders, and other creditors
and ;
o to help them make various decisions (e.g. about trading with debt or
equity instruments of a reporting entity).

 The Conceptual Framework describes more general-purpose reports that should

contain the following information about the reporting entity:
o The economic resources and claims (this refers to the financial
position);
o The changes in economic resources and claims resulting from the
entity’s financial performance and from other events.
o It puts an emphasis on accrual accounting to reflect the financial
performance of an entity.
 events should be reflected in the reports in the periods
when the effects of transactions occur, regardless of the
related cash flows.
 However, the information about past cash flows is very
important to assess management’s ability to generate
future cash flows.

CFWFR Chapter 2
Qualitative Characteristics of Useful Financial Information
Fundamental Qualitative Characteristics
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 Relevance - capable of making a difference in the users’ decisions. The financial

information is relevant when it has a :
o predictive value - information can be used to make predictions
o confirmatory value - information confirms previous predictions
o Materiality - omitting or misstating information will affect the decision
of the primary user.
 Faithful representation -The information is faithfully represented when it is
complete, neutral, and free from error.

  CFWFR Chapter 3
Financial Statements and the Reporting Entity

Enhancing Qualitative Characteristics

 Comparability- Information should be comparable between different entities or

time periods;
 Verifiability- Independent and knowledgeable observers are able to verify the
information;
 Timeliness- Information is available in time to influence the decisions of users;
 Understandability-Information shall be classified, presented clearly, and concisely.

The financial statements should provide useful information about the reporting entity
in the:

 Statement of Financial Position, by recognizing

o Assets,
o Liabilities,
o Equity

 Statements of financial performance, by recognizing


o Income, and
o Expenses
 Other Statements, by presenting and disclosing information about


o recognized and unrecognized assets, liabilities, equity, income and
expenses, their nature and associated risks;
o Cash flows;
o Contributions from and distributions to equity holders, and
o Methods, assumptions, judgments used, and their changes.

 
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Financial statements are always prepared for a specified period of time or

the reporting period.

 It means that an entity will continue to operate for the foreseeable future (usually
12 months after the reporting date).
 A Reporting entity is an entity that must or chooses to prepare the financial
statements. It can be :
o A Single entity – one company;
o A portion of an entity – a division of one company;
o More than one entity – a parent and its subsidiaries reporting as a
group.

 
Types of Financial Statements:

 Consolidated -a parent and subsidiaries report as a single reporting entity;

 Unconsolidated - a parent alone provides reports, or
 Combined - reporting entity comprises two or more entities not linked by parent-
subsidiary relationship.

CFWFR Chapter 4
Elements of the Financial Statements
The five basic elements:

1. Asset = a present economic resource controlled by the entity as a result of past

events;
2. Liability = a present obligation of the entity to transfer an economic resource as a
result of past events;
3. Equity = the residual interest in the assets of the entity after deducting all its
liabilities;
4. Income = increases in assets or decreases in liabilities resulting in increases in
equity, other than contributions from equity holders;
5. Expenses = decreases in assets or increases in liabilities resulting in decreases in
equity, other than distributions to equity holders;

CFWFR Chapter 5
Recognition and Derecognition
 Not all items that meet the definition of one of the elements are recognized in the
financial statements.
 The Framework requires recognizing the elements only when the recognition
provides useful information – relevant with faithful representation.
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Recognition

 Recognition means including an element of financial statements in the financial

statements. If you decide on recognition, you decide on WHETHER to show this
item in the financial statements.

The recognition process links the elements in the financial statements according to
the following formula:

Derecognition

 Derecognition means the removal of an asset or liability from the statement of

financial position and normally it happens when the item no longer meets the
definition of an asset or a liability.
 Again, the Framework discusses the derecognition in greater detail.

CFWFR Chapter 6
Measurement
 selection of the measurement basis or the method of quantifying monetary
amount for the elements in the financial statements.
 IN WHAT AMOUNT to recognize assets, liabilities, equity, income, or expense in
your financial statements.

 
Two basic measurement bases:

1. Historical cost – this measurement is based on the transaction price at the time of
recognition of the element;
2. Current value – it measures the element updated to reflect the conditions at the
measurement date. Here, several methods are included:


o Fair value;
o Value in use;
o Current cost.

 
The Framework gives guidance on how to select the appropriate measurement basis
and what factors to consider (especially relevance and faithful representation).
The Guidance on Measurement of Equity states that:

 Equity is the “residual after deducting liabilities from assets”

 Measured by the Formula:
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Total Carrying amount of All Assets                       

 less: Total Carrying amount of All Liabilities
It is not possible to measure the total equity directly.

CFWFR Chapter 7
Presentation and Disclosure
The main objective of the presentation and disclosures is to provide an effective
communication tool in the financial statements.

 Effective communication of information in the financial statements requires:

o Focus on objectives and principles of presentation and disclosure, not
on the rules.


o Group similar items and separate dissimilar items;
o Aggregate information, but do not provide unnecessary detail or the
opposite – excessive aggregation to obscure the information.

 
The Framework discusses the classification of assets, liabilities, equity, income, and
expenses in greater detail with describing

 offsetting,
 aggregation,
 distinguishing between profit or loss and other comprehensive income and other
related areas.
 

CFWFR Chapter 8
Concepts of Capital and Capital Maintenance
Two concepts of Capital
1. Financial capital – this is synonymous with the net assets or equity of the entity.

 Under the financial maintenance concept, the profit is earned only when the

amount of net assets at the end of the period is greater than the amount of net
assets in the beginning, after excluding contributions from and distributions to
equity holders.

                                Net Assets, End > Net Assets, Beg = Profit

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 The financial capital maintenance can be measured either in


o Nominal monetary units, or
o Units of constant purchasing power.

 
2. Physical capital – this is the productive capacity of the entity based on, for
example, units of output per day.

 The profit is earned if physical productive capacity increases during the period,

after excluding the movements with equity holders.

 
The main difference between the 2 concepts is how the entity treats the effects of
changes in prices in assets and liabilities.
 

1.3 The Accounting Standards

Generally Accepted Accounting Principles (GAAP)
 Represents the rules, procedures, practice, and standards followed in the
preparation and presentation of financial statements.
 Are like laws that must be followed in financial reporting

 
The Purpose of Accounting Standards

1. Identify the proper accounting practices for the preparation and presentation of

financial statements.
2. To create a common understanding between preparers and users of financial
statements particularly the measurement of assets and liabilities.
3. To ensure comparability and uniformity in financial statements based on the
same financial information.

 
The Financial Reporting Standards Council (FRSC)

 replaced the Accounting Standards Council (ASC) which initially developed the

GAAP in the Philippines.
 is the accounting standard-setting body created by the PRC upon
recommendation of the BOA to assist BOA in carrying out its powers and
functions under RA 9298.
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o The Accounting Standards promulgated by the FRSC constitutes

the “highest hierarchy” of GAAP in the Philippines.
o The approved statement of the FRSC is known as :
1. The Philippine Accounting Standards (PAS)
2. The Philippine Financial Reporting Standards (PFRS)

 is composed of 15 members including a Chairman who is a senior accounting

practitioner and 14 representatives as follows:
o 1 member - Board of Accountancy (BOA)-
o 1 member - Securities and Exchange Commission (SEC)
o 1 member- Bangko Sentral ng Pilipinas (BSP)
o 1 member - Commission on Audit (COA)
o 1 member - Financial Executives Institute of the Philippines (FINEX)
o 2 members - ACPAPP (Public Practice)
o 2 members - ACPACI  (Commerce and Industry)
o 2 members - NaCPAE  (Education)
o 2 members - GACPA (Government)

(Term: 3 years renewable for another term)

 
Difference between PAS and the PFRS

 PAS represents the old accounting standard issued by the ASC, while the
 PFRS represents the new accounting standard, issued by the FRSC.

1.3.1 The Philippine Accounting

Standards
No. Topic Issue Date

PAS 1 Presentation of Financial Statements* 2007

PAS 2 Inventories 2005

PAS 7 Statement of Cash Flows* 1992

Accounting Policies, Changes in Accounting Estimates and

PAS 8 2003
Errors*
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PAS 10 Events After the Reporting Period* 2003

PAS 12 Income Taxes 1996

PAS 16 Property, Plant, and Equipment 2003

PAS 19 Employee Benefits (2011) 2011

Accounting for Government Grants and Disclosure of Gov-

PAS 20 1983
ernment Assistance

PAS 21 The Effects of Changes in Foreign Exchange Rates 2003

PAS 23 Borrowing Costs 2007

PAS 24 Related Party Disclosures 2009

PAS 26 Accounting and Reporting by Retirement Benefit Plans 1987

PAS 27 Separate Financial Statements (2011) 2011

PAS 28 Investments in Associates and Joint Ventures (2011) 2011

PAS 29 Financial Reporting in Hyperinflationary Economies 1989

PAS 32 Financial Instruments: Presentation 2003

PAS 33 Earnings Per Share 2003

PAS 34  Interim Financial Reporting* 1998

PAS 36 Impairment of Assets 2004

PAS 37 Provisions, Contingent Liabilities, and Contingent Assets 1998

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Conceptual Framework and Accounting Standards

PAS 38 Intangible Assets 2004

PAS 40 Investment Property 2003

PAS 41 Agriculture 2001

*Emphasis of ACCTG 016

(Other Standards are taken up in detail in Intermediate 1- 3 and Advanced Financial
Accounting and Reporting; You may click on the standard to view the summary)

1.3.2 The Philippine Financial

Reporting Standards
Date Effective
Title 
Issued  Date 

PFRS 1 — First-time Adoption of International Financial 01 Jul

24 Nov 2008
Reporting Standards 2009

01 Jan
PFRS 2 — Share-based Payment 19 Feb 2004
2005

01 Jul
PFRS 3 — Business Combinations 10 Jan 2008
2009

PFRS 5 — Non-current Assets Held for Sale and Discon- 01 Jan

31 Mar 2004
tinued Operations 2005

PFRS 6 — Exploration for and Evaluation of Mineral 01 Jan

09 Dec 2004
Resources 2006
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01 Jan
PFRS 7 — Financial Instruments: Disclosures 18 Aug 2005
2007

01 Jan
PFRS 8 — Operating Segments 30 Nov 2006
2009

01 Jan
PFRS 9 — Financial Instruments 24 Jul 2014
2018

01 Jan
PFRS 10— Consolidated Financial Statements 12 May 2011
2013

01 Jan
PFRS 11 — Joint Arrangements 12 May 2011
2013

01 Jan
PFRS 12 — Disclosure of Interests in Other Entities 12 May 2011
2013

01 Jan
PFRS 13 — Fair Value Measurement 12 May 2011
2013

01 Jan
PFRS 14 — Regulatory Deferral Accounts 30 Jan 2014
2016

01 Jan
PFRS 15 — Revenue from Contracts with Customers 28 May 2014
2018

01 Jan
PFRS 16 — Leases 13 Jan 2016
2019

01 Jan
PFRS 17 — Insurance Contracts 18 May 2017
2021

 *Emphasis of ACCTG 016

(Other Standards are taken up in detail in Intermediate 1- 3 and Advanced Financial
Accounting and Reporting; You may click on the standard to view the summary)
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Conceptual Framework and Accounting Standards

Summary Module 1
Development of the Financial Reporting Framework

Overview of Accounting

 Accounting is “the process of identifying, measuring, and communicating

economic information to permit informed judgment and decisions by users of
information.” (American Association of Accountants)
 Recognition refers to the process of incorporating the effects of an accountable
event in the financial statements through a journal entry.
 External Events – events that involve an external party which includes:
o Exchange (reciprocal transfer) – reciprocal giving and receiving
o Non-reciprocal transfer – “one-way” transaction
o External event other than transfer – an event that involves changes in
the economic resources or obligations of an entity caused by an
external party or external source but does not involve transfers of
resources or obligations.
 Internal Events – events that do not involve an external party
 Measuring - involves assigning numbers, normally in monetary terms, to economic
transactions and events.
 Financial Accounting - the branch of accounting that focuses on general-purpose
financial statements.
 General-purpose financial statements- are those that cater to the common needs
of a wider range of external users.
 External users - are those who do not have the authority to demand financial
reports tailored to their specific needs.
 The  four(4) sectors in the practice of accountancy are a) public practice  b)
commerce and industry  c) academe and government
 The accounting standards used in the Philippines are PFRS which are based on
the IFRS  which are comprised of the following: a) PFRSs  b)PASs 
c)Interpretations
 The Financial Reporting Standards Council (FRSC) is the official accounting
standard-setting body in the Philippines.

Conceptual Framework and Accounting Standards

 The Conceptual Framework

o sets out the concepts that underlie the presentation and preparation
of financial statements for external users.
o  is not a standard. in case of a conflict between these two, the
standards prevail.
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o is concerned with general-purpose financial reporting which involves

the preparation of general-purpose financial statements.
 The objective of general purpose financial reporting is to provide information
that is useful to primary users in making decisions about providing resources to
the entity.
 The primary users are the a) existing and potential investors and b) lenders and
other creditors.
 The fundamental qualitative characteristics are 1) relevance  2) faithful
representation
 The enhancing qualitative characteristics are 1) comparability 2) verifiability 3)
timeliness and 4) understandability
 Relevant information has predictive value and feedback value.
 Materiality - omitting or misstating information will affect the decision of the
primary user.
 Faithful representation include a)  completeness b) neutrality c) free from error
 The objective of general purpose financial statements- to provide financial
information about the reporting entity's assets, liabilities, equity, income, and
expenses that is useful in assessing the entity's ability to generate future net cash
inflows and management stewardship over economic resources.
 The elements of the financial position are the assets, liabilities, and equity.
 The elements of financial performance are income and expenses.
 An item is recognized if it meets the definition of an element and recognizing it
would provide useful information.
 An item is unrecognized if it ceases to meet the definition of an asset or liability.
 The measurement bases used in financial reporting are broadly classified into
historical cost and current value.
 Financial information is communicated to users through presentation and
disclosure in the financial statements.
 The two (2) concepts of capital are financial and physical capital.

2.1 PAS 1 Overview: Presentation of the Financial Statements

Overview of PAS 1: The Financial Statements
 Issued: in 1975; re-issued in 2007, followed by amendments
 Effective date: 1 January 2009

 
PAS 1 Presentation of Financial Statements

 represents a basis of the whole PFRS reporting,

 it sets the overall requirements for the preparation and presentation of general
purpose financial statements,
 guidelines for their structure, and
 minimum requirements for their content to ensure comparability.
o intra-comparability ( horizontal or inter period) -f/s of the entity from
one period to another
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o inter-comparability (dimensional) -  f/s of different entities for the

same period

Financial Statements
 structured representation of the entity's financial position and results of
operation.

 The objective of the General Purpose of the Financial Statements

o is to provide information about the financial position, financial
performance, and cash flows of an entity that is useful to a wide range
of users in making economic decisions.
o to show the managements stewardship over the entity's resources

 The financial statements provide the following information about the

entity(presentation) :
o assets, liabilities, and equity
o income and expenses, including gains and losses
o contributions by and  distributions to owners
o cash flows

 The Complete Set (Links to an external site.) of Financial Statements compliant

with PFRS
o a Statement of Financial Position as at the end of the period
o a Statement of Comprehensive Income for the period
o a Statement of Changes in Equity for the period
o a Statement of Cash flows for the period (discussed in the next
module)
o Notes containing a summary of significant accounting policies and
other explanatory information.
o additional statement of financial position (as at the beginning of the
earliest comparative period) shall be presented for certain instances:
 If some accounting policy is applied retrospectively, or
some retrospective restatements or reclassifications were
made, 
 has a material effect on the information in the statement of
financial position at the beginning of the preceding period.

 General Features of Financial Statements, such as

o Fair presentation and compliance with IFRS
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Conceptual Framework and Accounting Standards

 all transactions, events, and conditions are reflected in

accordance with the definition ad recognition criteria of
the elements set out in the Framework.
o Going Concern
 financial statements shall be prepared on a going concern
basis* unless the management plans to liquidate the
enterprise
o Accrual Basis of Accounting
 transactions and events are recognized when they occur
and not when cash is received or paid.
o Materiality and Aggregation
 each material item of the same class should be presented
separately in the financial statements and immaterial
amounts of similar nature should be grouped together as
one line item (details of which is presented in the notes)
o Offsetting
  assets and liabilities or income and expenses are presented
separately and are not offset unless permitted by the PFRS
(e.g. assets net of valuation allowances, gains or losses
from the sale of assets or loss from a provision net of
reimbursement from a 3rd party)
o Frequency of Reporting
 financial statements should be presented at least annually,
(exceptional cases should be disclosed in the notes)
o Comparative Information
 presenting the financial statements for the current year
and the prior year (as a minimum)for all financial
information except when the PFRSs require otherwise (also
in the notes)
o Consistency of Presentation
 presentation and classification of items should be the same
from period to period (unless required by the PFRS or  the
changed presentation will be more useful to the users and
provide more relevant and reliable information)

 
Structure and Content

 PAS 1 requires the identification of the financial statements and distinguish them

from other information in the same published document.
 Each of the financial statements shall contain the:
o name of the reporting entity,
o information whether the financial statements are of an individual or of
a group,
o date of the reporting entity and period covered,
o presentation currency, and
o level of rounding (thousands, millions…).
 PAS 1 lists the minimum content to be presented in the financial
statements, except for the statement of cash flows (subject to PAS 7).
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Management's Responsibility for Financial Statements

 preparation and presentation of the F/S in accordance with the PFRSs  -Chief
Financial Officer (CFO) and the Chief Executive Officer (CEO)
 oversight of the financial reporting process and review and approval of the FS -
Board of Directors (Chairman)
 responsibilities are clearly stated in the "Statement of Management
Responsibility for Financial Statements" attached as a cover letter to the audited
Financial Statements.

 
Legend:

*the ability of the entity to continue its operations for a period at least, but not limited to twelve (12)
months.

2.2 The Statement of Financial

Position
The Statement of Financial Position
 Before significant amendments of PAS 1, this statement was simply
called “Balance Sheet”, however, it was renamed.
 PAS 1 requires the presentation of a classified statement of financial
position where the line items are further classified as:
o current assets 
o current liabilities 
o non-current assets
o non-current liabilities
 Basically, the asset or liability is current when it is expected to be recovered or
settled within 12 months after the reporting period.

 With regard to a minimum content, the following line items shall be presented:

ASSETS - control over the resource, arising from past actions and providing the
enterprise probable future economic benefits

 Cash and cash equivalents

 Trade and other receivables
 Inventories
 Prepaid Expenses
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 Property, plant, and equipment

 Investment property
 Intangible assets
 Investments accounted for using the equity method
 Biological assets
  IFRS 5 Non-current assets Held for Sale and Discontinued Operations
 Current tax assets and deferred tax assets

LIABILITIES - the present obligation of the enterprise, it arises from a past event, and
is expected to result in a probable outflow of economic benefits.

 Trade and other payables

 Current tax liabilities and deferred tax liabilities
  Total Liabilities according to IFRS 5 Non-current assets Held for Sale and
Discontinued Operations

EQUITY- residual interest in the assets of the enterprise after deducting all its
liabilities. It refers to the interest of the owners in an enterprise measured as the
excess of the total assets over its liabilities, also called net assets.

 Issued capital and reserves attributable to owners of the parent

 Non-controlling interests

 Further subclassifications of the line items shall be disclosed either :

o directly in the statement of financial position or
o in the notes, such as disaggregation of property, plant, and equipment
into classes, and similar.
o Also, certain information related to the share capital, reserves, and a
few others shall be included in the statement of financial position, the
statement of changes in equity, or in the notes.

 PAS 1 does NOT prescribe the precise format of the statement of financial

position. Instead, several formats are acceptable if they fulfill all requirements
outlined above.
o Report form
 assets, liabilities, and equity are shown in that order in a
vertical manner.
o Account form
 this follows the T-account format where assets are shown
on the left side and liabilities on the right side of the
statement(horizontal form).
o Financial Position form
 emphasizes the working capital position of an enterprise.
 Presented in vertical form, the current liabilities are
deducted from current assets to derive the working capital.
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Conceptual Framework and Accounting Standards

 Non-current assets are then added and non-current

liabilities are deducted, leaving the residual amount as
equity, or net assets.

2.3 The Statement of

Comprehensive Income
The Statement of Comprehensive Income has
 Two (2) Basic Elements:
o Profit or loss for the period: all items of income and expenses 
(emanates from the regular operations of the business entity)
o Other comprehensive income: items of income or expenses that are
not recognized in the profit or loss  

 The Statement of Comprehensive Income must contain as a  minimum the

following items:

PROFIT OR LOSS

o Revenue
o Gains and losses arising from the derecognition of financial assets at
amortized cost
o impairment gains and losses on financial assets
o Finance costs
o Share of the profit or loss of associates and joint ventures (equity
method)
o Tax expense
o Post-tax profit/gain or loss of operations or assets in accordance with
IFRS 5 (Non-current assets Held for Sale and Discontinued
Operations)
o Profit or loss

OTHER COMPREHENSIVE INCOME


o changes in the revaluation surplus*
o re-measurement of the net defined benefit plan*
o FV changes - equity instrument*
o FV changes - a debt instrument**
o translation differences on foreign operations**
o the effective portion of cash flow hedge**
o Total Comprehensive Income
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 Other comprehensive Income is further classified as:

o Items that will not be reclassified subsequently to profit or loss*
o items that may be  reclassified subsequently to profit or loss**

 As opposed to US GAAP, PAS 1  prohibits reporting any transaction or item

as extraordinary items.

 Profit or loss for the period, as well as total comprehensive income, shall be
both presented in allocation:
o attributable to non-controlling interests and
o attributable to owners of the parent.

 Classification of expenses  :
o by nature of expense method (natural presentation)- classified as
depreciation, purchase of material, transport cost, employee benefits,
and advertising cost.
o by function of expense method (functional presentation)  - classified as
Cost of Sales, distribution cost. administrative expenses and other
functional classification (will need additional disclosure)

 PAS 1 prescribes the disclosure of certain items separately, either in the

statement of comprehensive income or in the notes.

      These items are as follows:


o write-downs of inventories and property,
o plant and equipment,
o their reversals,
o restructuring of activities and reversals of related provisions,
o disposals of property, plant, and equipment,
o disposals of investments,
o discontinuing operations,
o litigation settlements and other reversals of provisions.

 
Presentation of the Statement of Profit or Loss and Other Comprehensive Income

 A single statement of Profit or Loss and Other Comprehensive Income (Statement

of Comprehensive Income)
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 Two Statement
o 1) Statement of Profit or Loss ( Income Statement)-includes only items
of profit and loss
o 2) Statement of Other Comprehensive Income - starts with profit or
loss (as per Income Statement followed by other items comprising
other comprehensive income.

2.4 The Statement of Changes in

Equity
 The Statement of Changes in Equity as a minimum must contain the following
items:

 total comprehensive income for the period, showing separately amounts

attributable to owners of the parent and to non-controlling interests
 the effect of retrospective application (change in accounting policy) or
retrospective restatement (correction of a prior period error) for each component
of equity (if applicable)
 the reconciliation between the carrying amount at the beginning and the end of
the period for each component of equity.

 The following changes shall be disclosed separately:

o those resulting from profit or loss
o resulting from other comprehensive income
o resulting from transactions with owners (contributions, distributions,
and changes in ownership)

 PAS 1 prescribes to present the amount of dividends recognized as distributions

and the related amount per share on the face of the Statement of Changes in
Equity or in the notes.

2.5 The Notes to the Financial

Statements
 Notes to the Financial Statements
 are meant to be the document accompanying numerical financial statements.
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 They should provide additional information

o not contained in the numbers,
o the basis of preparation of the financial statements, and
o some additional information that might be relevant.
 an integral part of a complete set of financial statements.

 PAS 1 requires an entity to present the notes in a systematic manner. The notes
shall contain:
o general information about the entity
o a statement of compliance with PFRS (only if the entity complies with
all the requirements of the PFRSs.)
o summary of significant accounting policies applied,
o supporting information for the numbers presented in the financial
statements and
o other disclosures required by PFRS such as:
 contingent liabilities and unrecognized contractual
commitments
 non-financial disclosures (entity's financial risk
management)
 non-adjusting events after the reporting date (if material)
 changes in accounting policies and estimates and
correction of a prior period error
 related party disclosures
 judgment and estimations
 capital management
 dividends declared after the reporting period but before
the issuance of the F/S
 amount of any cumulative preference dividends not
recognized.
 other disclosures not required by PFRS but deemed
relevant by the management for the understanding of the
FS.

 The notes shall be prepared in a very detailed manner.

Summary of Module 2  
PAS 1 - Presentation of Financial Statements
 The objective of PAS 1  is to prescribe the basis  for the presentation of general
purpose financial statements to ensure comparability
 General-purpose financial statements
o are those statements that cater to the common needs of the external
users or "stakeholders"
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o the purpose is to provide information about the financial position,

financial performance, cash flow of an entity that will be useful to a
wide range of users.
 The complete set of financial statements is consists of the following:
o Statement of Financial Position-maybe presented as
 classified format - shows the current and non-current. This
presentation is encouraged.
 unclassified format -based on liquidity. No current or non-
current distinction.
 deferred tax assets/liabilities are classified as non-current
items.
o Income and expenses  may be presented in :
 a single statement -Statement of Profit or Loss and Other
Comprehensive Income
 two (2) statements form 
 Profit or Loss Statement and the
 Statement of Comprehensive Income (all other
income not presented in the profit or loss)
 Expenses may be presented
 by function  (additional disclosure is needed)
 by nature
o Statement of Changes in Equity - shows the owner's changes in equity
o Statement of Cash Flows - shows the inflows and outflows of cash
o Notes to the Financial Statements -an integral part of the financial
statements
 presents the basis of preparation of the financial
statements
 information required by the PFRSs
 other information not required by PFRSs but is relevant to
the users of the financial statements.
 comparative information
o Additional Statement of Financial Position when an entity makes a
retrospective application/restatement or reclassifies items - with
material effect.

 PAS 24 Related Party Disclosures

 The standard helps identify:
 Related party relationships and
transactions;
 Outstanding balances between the
reporting entity and its related
parties,
 When the disclosures should be
made.
 It determines what disclosures
should be made.
 A related party - a person or an entity that
is related to the reporting entity:
 A person or a close member of that
person's family is related to a
reporting entity if that person has
control, joint control, or significant
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influence over the entity or is a

member of its key management
personnel.
 Related party transactions - transfer of
resources, services, or obligations between
related parties regardless of whether a price is
charged.
 An entity should disclose:
 Nature of the relationship and
 Information about transactions and
outstanding balances
 Disclosures to be  presented separately for
each category of related parties:
 Amount of transactions;
 Amount of outstanding balances,
together with their terms and
conditions and guarantees.
 Provisions for doubtful debts related
to the amount of open balances; and
 The expense during the period for
bad or doubtful debts due from
related parties.
 An entity must present related party
disclosures even though there have been no
transactions.