CHAPTER 1

THE ACCOUNTANCY PROFESSION

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
OJECTIVES
 To understand the definition of accounting
 To identify the overall objective of accounting
 To describe the practice of the accountancy profession in the Philippines
 To understand the Continuing Professional Development in the field of accounting
 To know the meaning of generally accepted accounting principles
 To identify the standard-setting body in the Philippines
 To describe the creation of the International Accounting Standards Board
 To know the meaning of IFRS
DEFINITION OF ACCOUNTING
 Accounting Standards Council
 Accounting is a service activity.
 Accounting function is to provide quantitative information, useful in making
economic decision. primarily financial in nature, about economic entities,
that is intended to be
 Committee on Accounting Terminology of the American Institute of Certified
Public Accountants
 Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which
are in part at least of a financial character and interpreting the results
thereof.
 American Accounting Association in its Statement of Basic Accounting Theory
 Accounting is the process identifying, measuring and communicating
economic information to permit informed judgment and decision by users
of information.

IMPORTANT POINTS
 Accounting is about quantitative information.
 The information is likely to be financial in nature.
 The information should be useful in decision making.

COMPONENTS OF ACCOUNTNG (BASED ON AMERICAN ACCOUNTING

ASSOCIATION DEFINITION):
 Identifying as the analytical component.
 Measuring as the technical component.
 Communicating as the formal component.
IDENTIFYING
 It is the recognition or nonrecognition of business activities as “accountable”
events.
 Not all business activities are accountable.
 Example: Hiring of employees, death of the entity president and entering
into a contract
 An event is accountable or quantifiable when it has an effect on assets, liabilities
and equity.
 Subject matter is economic activity.
 Sociological and psychological matters are beyond the province of accounting.

EXTERNAL AND INTERNAL TRANSACTIONS

External transactions Internal transactions

Economic events involving one entity and
another entity
Examples:
 Purchase of goods from supplier
 Borrowing money from a bank
 Sale of goods to a customer
 Payment of salaries to employees
 Payment of taxes to the government
quality
Economic events involving the entity only. It
takes place entirely within the entity.
Examples:
 Production
- process by which resources are
transformed into products
 Casualty loss
- any sudden and unanticipated loss
from fire, flood, earthquake and
other event ordinarily termed as an
act of God

MEASURING
 It is the assigning of peso amounts to the accountable economic transactions
and events.
 Philippine peso is the unit of measuring accountable economic transactions.
 Measurement bases:
 Historical cost
 It is the original acquisition cost and the most common measure of
financial transactions.
 Current value
 It includes fair value, value in use, fulfillment value and current cost.

COMMUNICATING
 It is the process of preparing and distributing accounting reports to potential
users of accounting information.
 It is the reason why accounting has been called the “universal language of
business”.
 Implicit in the communication process are:
- Recording or journalizing
 It is the process of systematically maintaining a record of all economic
business transactions after they have been identified and measured.
 - Classifying
 It is the sorting or grouping of similar and interrelated economic
transactions into their respective classes. It is accomplished by posting to
the ledger.
- Summarizing
 It is the preparation of financial statements.

ACCOUNTING AS AN INFORMATION SYSTEM

 Accounting is an information system that measures business activities,
processes information into reports and communicates the reports to decision
makers.
 Key product
- Set of financial statements
 documents that report financial information about an entity to decision
makers.
- Financial reports
 How well an entity is performing in terms of profit and loss and where it
stands in financial terms.

OVERALL OBJECTIVE OF ACCOUNTING

 To provide quantitative financial information about a business that is useful to
statement users particularly owners and creditors in making economic decisions.
 Essence of accounting – decision-usefulness

THE ACCOUNTANCY PROFESSION

 Republic Act No. 9298 (Philippine Accountancy Act of 2004)
- Law regulating the practice of accountancy in the Philippines
 To practice the accountancy profession
- Person must finish a degree in Bachelor of Science in Accountancy
- Pass a very difficult government examination given by the Board of
Accountancy
 Board of Accountancy is the body authorized by law to promulgate rules
and regulations affecting the practice of the accountancy profession in the
Philippines. They are responsible for preparing and grading the Philippine
CPA examination.
 Examination is offered twice a year, one in May and another one in
October.

LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY

 Single practitioners and partnerships for the practice of public accountancy shall
be registered Certified Public Accountants in the Philippines.
 Certificate of Accreditation
- Issued to CPAs in public practice
- In accordance with rules and regulations promulgated by the Board of
Accountancy and approved by the Professional Regulation Commission
 - Registrant has acquired a minimum of three years of meaningful experience
in any of the public practice including taxation
 Securities and Exchange Commission shall not register any corporation
organized for the practice of public accountancy

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

 CPAs, firms and partnerships of certified public accountants are required to
register with the BOA and PRC for the practice of public accountancy.
 The PRC upon favorable recommendation of the BOA shall issue Certificate of
Registration to practice public accountancy which shall be valid for 3 years and
renewable every 3 years upon payment of required fees.
 Three main areas of practice in the profession:
- Public accounting
- Private accounting
- Government accounting

PUBLIC ACCOUNTING
 It is composed of individual practitioners, small accounting firms and large
multinational organizations that render independent and expert financial services
to the public.
 Three kinds of services:
- Auditing
 Primary service offered by most public accounting practitioners
 It is the examination of financial statements by independent CPA for
the purpose of expressing an opinion as to the fairness with which the
financial statements are prepared.
- Taxation
 It includes the preparation of annual income tax returns and
determination of tax consequences of certain proposed business
endeavors.
- Management advisory services
 It is used generally to refer to services to clients on matters of
accounting, finance, business policies, organization procedures,
product costs, distribution and many other phases of business conduct
and operations.

PRIVATE ACCOUNTING
 It includes maintaining the records, producing the financial reports, preparing the
budgets and controlling and allocating the resources of the entity.
 Private accounts have the major objective to assist management in planning and
controlling the entity’s operations. Also, they have the responsibility for the
determination of the various taxes the entity is obliged to pay.
 Controller
- Highest accounting officer in an entity.
GOVERNMENT ACCOUNTING
 It encompasses the process of analyzing, classifying, summarizing and
communicating all transactions involving the receipt and disposition of
government funds and property and interpreting the results thereof.
 Its focus is on custody and administration of public funds.
 Branches of the government where CPAs are employed:
- Bureau of Internal Revenue
- Commission on Audit
- Department of Budget and Management
- Securities and Exchange Commission
- Bangko Sentral ng Pilipinas

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

 Republic Act No. 10912
- It is the law mandating and strengthening the continuing professional
development program for all regulated professions, including the accountancy
profession.
 Continuing Professional Development
- It refers to the inculcation and acquisition of advanced knowledge, skill,
proficiency, and ethical and moral values after the initial registration of the
Certified Public Accountant for assimilation into professional practice and
lifelong learning.
- It raises and enhances the technical skill and competence of the Certified
Public Accountant.

CPD Credit Units

 It refers to the CPD credit hours required for the renewal of CPA license and
accreditation of a CPA to practice the accountancy profession every three years.
 Under the new BOA Resolution, all CPAs regardless of area or sector of practice
shall be required to comply with 120 CPD credit units.
 Excess credit units earned shall not be carried over to the next threeyear period,
except credit units earned for masteral and doctoral degree.
 EXEMPTION FROM CPD 
- A CPA shall be permanently exempted from the CPD requirements upon
reaching the age of 65 years.
- However, this exemption is applied only to the renewal of PA license and not
for the purpose of accreditation to practice the accountancy profession.

ACCOUNTING VERSUS AUDITING

ACCOUNTING AUDITING
Accounting embraces auditing. It is one of the areas of accounting specialization.
It is essentially constructive in nature. It is analytical.
Accounting ceases when financial statements are The work of an auditor begins when the work of
already prepared. the accountant ends.
ACCOUNTING VERSUS BOOKKEEPING
ACCOUNTING BOOKKEEPING
It is conceptual. It is procedural.
It is concerned with the why, reason or It is largely concerned with development and
justification for any action adopted. maintenance of accounting records. It is the
“how” of accounting.

ACCOUNTING VERSUS ACCOUNTANCY

ACCOUNTING ACCOUNTANCY
It refers to the profession of accounting practice. It is used in reference only to a particular field of
accountancy such as public, private and
government accounting.

FINANCIAL ACCOUNTING VERSUS MANAGERIAL ACCOUNTING

FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING
It is primarily concerned with the recording of It is the accumulation and preparation of financial
business transactions and the eventual reports for internal users only
preparation of financial statements.
It focuses on general purpose reports known as It emphasizes developing accounting information
FS intended for internal and external users. for use within an entity.
It emphasizes reporting to creditors and
investors.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 These represent the rules procedures, practice and standards followed in the preparation and
presentation of financial statements.
 These are like laws that must be followed in financial reporting.
 Political process
- Process of establishing GAAP which incorporated political actions of various interested user
groups as well as professional judgment, logic and research.

PURPOSE OF ACCOUNTING STANDARDS

 To identify proper accounting practices for the preparation and presentation of financial
statements.
 These accounting standards create common understanding between preparers and users of
financial statements particularly the measurement of assets and liabilities.

FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)

 It is the accounting standard setting body created by the PRC upon recommendation of BOA to
assist the COA in carrying out its powers and functions provided under RA 9298.
 Its main function is to establish and improve accounting standards that will be generally
accepted in the Philippines.
 The accounting standards promulgated by the FRSC constitute the “highest hierarchy” of GAAP
in the Philippines.
 The approved statements of the FRSC are known as Philippine Accounting Standards or PAS and
Philippine Financial Reporting Standards or PFRS.
COMPOSITION OF FRSC
 It is composed of 15 members with a chairman who had been or is presently a senior accounting
practitioner and 14 representatives from the following:
- Board of Accountancy 1
- Securities and Exchange Commission 1
- Bangko Sentral ng Pilipinas 1
- Bureau of Internal Revenue 1
- Commission on Audit 1
- Major organization of preparers and users of FS
 Financial Executives of the Philippines or FINEX 1
- Accredited national professional organization of CPAs:
 Public Practice 2
 Commerce and Industry 2
 Academe or Education 2
 Government 2
 The Chairman and members of the FRSC shall have a term of 3 years renewable for another
term. Any member of the ASC shall not be disqualified from being appointed to the FRSC.

PHILIPPINE INTERPRETATIONS COMMITTEE

 PIC was formed by the FRSC in August 2006 and has replaced the Interpretations Committee or
IC form by the Accounting Standards Council in May 2000.
 The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and to provide
timely guidance on financial reporting issues not specifically addressed in current PFRS.
 Interpretations intend to give authoritative guidance.
 The counterpart of the PIC in UK is the International Financial Reporting Interpretations
Committee (IFRIC) which has already replaced the Standing Interpretations Committee (SIC).

INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE

 The IASC is an independent private sector body, with the objective of achieving uniformity in the
accounting principles which are used by the business and other organizations for financial
reporting around the world.
 It was formed in June 1973 through an agreement made by professional accountancy bodies
from Australia, Canada, France, Germany, Japan, Mexico, the Netherland, the United Kingdom
and Ireland, and the United States of America.
 It is headquartered in London, United Kingdom.

OBJECTIVES OF IASC
 To formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance and
observance.
 To work generally for the improvement and harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements.
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
 The IASB now replaces the International Accounting Standards Committee (IASC).
 It publishes standards in a series of pronouncements called International Financial Reporting
Standards (IFRS).
 However, the IASB has adopted the body of standards issued by the IASC.
 The pronouncements of the IASC continue to be designated as International Accounting
Standards (IAS).
 The IASB influences economic decisions process includes in the correct order research,
discussion paper, exposure draft and accounting standard.

MOVE TOWARD IFRS

 In the past years, most of the Philippine standards issued are based on American accounting
standards.
 At present, the FRSC has adopted in the entirety all International Accounting Standards and
International Financial Reporting Standards.
 The move toward IFRS is essential in achieving the goal of one uniform and globally accepted
financial reporting standards.
 The Philippines, effective January 2005, is fully compliant with IFRS, a process which has started
back in 1997 in moving from USA GAAP to IFRS.

FACTORS CONSIDERED IN DECIDING TO MOVE TOTALLY TO INTERNATIONAL ACCOUNTING STANDARDS:

 Support international accounting standards by Philippine organizations, such as the Philippine
SEC, BOA and PICPA.
 Increasing internationalization of business which has heightened interest in a common language
for financial reporting.
 Improvement of international accounting standards for removal of free choices of accounting
treatments.
 Increasing recognition of international accounting standards by the World Bank, Asian
Development Bank and World Trade Organization.

PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS)

 These are standards issued by the FRSC.
 The PFRS collectively include all of the following:
- PFRS which correspond to IFRS. The PFRS are numbered the same as their counterpart in
IFRS.
- Philippine Accounting Standards which correspond to International Accounting Standards.
The PAS are numbered the same as their counterpart in IAS.
- Philippine Interpretations which correspond to Interpretations of the IFRIC and the Standing
Interpretations Committee, and Interpretations developed by the Philippine Interpretations
Committee.
CHAPTER 2
CONCEPTUAL FRAMEWORK
Objective of financial reporting
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

OBJECTIVES
 To know the nature of the Revised Conceptual Framework
 To describe the purpose and usefulness of a Conceptual Framework
 To understand the authoritative status of a Conceptual Framework
 To understand the objective of financial reporting
 To know the limitations of financial reporting

CONCEPTUAL FRAMEWORK
 The Conceptual Framework for Financial Reporting is a complete, comprehensive and single
document promulgated by the International Accounting Standards Board.
 It is a summary of the terms and concepts that underlie the preparation and presentation of
financial statements for external users.
 In other words, it describes the concepts for general purpose financial reporting.
 It is an attempt to provide an overall theoretical foundation for accounting.
 It is the underlying theory for the development of accounting standards and revision of
previously issued accounting standards.

The Conceptual Framework provides the foundation for Standards that:

 Contribute to transparency by enhancing international comparability and quality of financial
information.
 Strengthen accountability by reducing information gap between the providers of capital and the
people to whom they have entrusted their money.
 Contribute to economic efficiency by helping investors to identify opportunities and risks across
the world.

PURPOSES OF REVISED CONCEPTUAL FRAMEWORK

 To assist the International Accounting Standards Board to develop IFRS Standards based on
consistent concepts.
 To assist preparers of financial statements to develop consistent accounting policy when no
Standard applies to a particular transaction or other event or where an issue is not yet
addressed by an IFRS.
 To assist preparers of financial statements to develop accounting policy when a Standard allows
a choice of an accounting policy.
 To assist all parties to understand and interpret the IFRS Standard.
AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK
 The Standard or an Interpretation overrides the Conceptual Framework.
 In the absence of a standard or an 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.
 The Conceptual Framework is not an International Financial Reporting Standard.
 Nothing in the Conceptual Framework overrides any specific International Financial Reporting
Standard.
 In case of conflict, the IFRS shall prevail over the Conceptual Framework.

USERS OF FINANCIAL INFORMATION

 Primary users
- are parties to whom general purpose financial reports are primarily directed
- Existing and potential investors
 Concerned with the risk inherent in and return provided their investment.
- Lenders and other creditors
 Interested in information which enables them to determine whether their loans,
interest thereon and other amounts owing to them will be paid.
 Other users
- They are parties that may find the general purpose financial reports useful but the
reports are not directed to them primarily.
- Employees
 Interested in the information about the stability and profitability of the entity.
- Customers
 Interested in the information about the continuance of an entity
- Government and their agencies
 Interested in the allocation of resources and therefore the activities of the
entity.
- Public
 Interested in the information about the trend and the range of its activities.

SCOPE OF 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
OBJECTIVES OF FINANCIAL REPORTING
 The overall objective of financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.
 Financial reporting is the provision of financial information about an entity to external users that
is useful to them in making economic decisions and for assessing the effectiveness of the entity’s
management.
 Financial reporting encompasses not only financial statements but also other information such
as financial highlights, summary of important financial figures, analysis of financial statements
and significant ratios,
TARGET USERS
 Existing and potential investors, lenders and other creditors
- Most critical and immediate need for information in financial reports
- Parties that provide resources to the entity

SPECIFIC OBJECTIVES OF FINANCIAL REPORTING

 To provide information useful in making decisions about providing resources to the entity.
 To provide information useful in assessing the cash flow prospects of the entity.
 To provide information about entity resources, claims and changes in resources and claims.

TARGET USERS ECONOMIC DECISIONS ASSESSING CASH FLOW

Existing and potential investors
Existing and potential lenders
and other creditors
Making decisions whether to
buy, sell or hold equity
investment
Making decisions whether to
provide or settle loans and
other forms of credit
PROSPECTS
Depend on the returns that they
expect from an investment
Depend on the principal and
interest payments or other
returns that they expect

ECONOMIC RESOURCES AND CLAIMS

 General purpose financial reports provide information about the financial position of a reporting
entity.
 Financial position is information about the entity’s economic resources and the claims against
the reporting entity.
 Financial position comprises the assets, liabilities and equity of an entity at a particular moment
in time.
 Information about financial position can help users to assess the entity’s liquidity, solvency and
the need for additional financing.
- Liquidity
 Is the availability of cash in the near future to cover currently maturing
obligations
- Solvency
 Is the availability of cash over a long term to meet financial commitments when
they fall due.
CHANGES IN ECONOMIC RESOURCES AND CLAIMS
 Change in economic resources and claims result from financial performance and from other
events or transactions, such as issuing debt or equity instruments.
 Financial performance of an entity comprises revenue, expenses and net income or loss for a
period of time.
- It is the level of income earned by the entity through the efficient and effective use of its
resources.
- It is also known as results of operations and is portrayed in the income statement and
statement of comprehensive income.

USEFULNESS OF FINANCIAL PERFORMANCE

 Helps users to understand the return that the entity has produced on the economic resources.
 Helps in predicting the future returns on the entity’s economic resources.
 Useful in assessing the entity’s ability to generate future cash inflows from operations

ACCRUAL ACCOUNTING
 It depicts the effects of transactions and other events and circumstances on an entity’s
economic resources and claims in the periods in which those effects occur even if the resulting
cash receipts and payments occur in a different period.
 Recognized when they occur and not as cash is received or paid.
 It means that income is recognized when earned regardless of when received and expense is
recognized when incurred regardless of when paid.

LIMITATIONS OF FINANCIAL REPORTING

 General purpose financial reports do not and cannot provide all of the information that existing
and potential investors, lenders and other creditors need. These users need to consider
pertinent information from other sources, for example, general economic conditions, political
events and industry outlook.
 General purpose financial reports are 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.
 General purpose financial reports are intended to provide common information to users and
cannot accommodate every request for information.
 To a large extent, general purpose financial reports are based on estimate and judgment rather
than exact depiction.

MANAGEMENT STEWARDSHIP
 Information about how efficiently and effectively management has discharged its responsibilities
to use the entity’s economic resources helps users to assess management stewardship of those
resources.
 Such information is also useful for predicting how management will use the entity’s economic
resources in future periods.
 Hence, the information can be useful for assessing the entity’s prospects for future net cash
flows.
 Example:
- Management can decide not to dispose or sell investments when prices are declining in
order to avoid realized losses.
CHAPTER 3

CONCEPTUAL FRAMEWORK
Qualitative Characteristics

Objectives
- To identify the qualitative characteristics of accounting information
- to identify the fundamental qualitative characteristics
- to identify the enhancing qualitative characteristics
- to understand the cost constraint on useful information

Qualitative Characteristics
- These are qualities or attributes that make financial accounting information useful to
the users.
- Its objective is to ensure that the information is useful to the users in making economic
decisions.
- Classified into:
1. Fundamental qualitative characteristics
2. Enhancing Qualitative Characteristics

Fundamental Qualitative Characteristics

- It relates to the content or substance of financial statements.
- the fundamental qualitative characteristics are relevance and faithful representation
- Information must be both relevant and faithfully represented if it is to be useful.

Application of Qualitative Characteristics

1. Identify an economic phenomenon that has the potential to be useful.
2. Identify the type of information about the phenomenon that would be most relevant
and can be faithfully represented.
3. Determine whether the information is available.

1. RELEVANCE
- it is the capacity of the information to influence a decision.
- it requires that the financial information should be related or pertinent to the
economic decision.
- Information that does not bear on an economic decision is useless.

Ingredients of Relevance
- It has predictable value and confirmatory value.
a. Predictable value
- It can used as an input to processes employed by users to predict future
outcomes.
- It can help users to increase the likelihood of correctly or accurately predicting
or forecasting outcome of events.
b. Confirmatory value
- it provides feedback about previous evaluations
- it enables users confirm or correct earlier expectations.

MATERIALITY
- it is also known as the doctrine of convenience
- it is a practical rule in accounting which dictates that strict adherence to GAAP is not
required when the items are not significant enough to affect the evaluation, decision and
fairness of the financial statements.
- The relevance of information is affected by its nature and materiality.
- Materiality is a sub quality of relevance based on the nature or magnitude or both of
the items to which the information relates.

MATERIALITY IS RELATIVITY
- materiality of an item depends on relative size rather than absolute size.

WHEN IS AN ITEM MATERIAL?

- this is dependent on good judgment, professional expertise and common sense.
- general guide:
- an item is material if knowledge of it could reasonably affect or influence the
economic decision of the primary users of the financial statements.

NEW DEFINITION OF MATERIALITY

- International Accounting Standards Board:
- Information is material if omitting, misstating, or obscuring it could reasonably
be expected to influence the economic decisions that primary users of general purpose
financial statements make on the basis of those statements which provide financial
information about a specific reporting entity.
a. Could reasonably be expected to influence
- material information shall be limited to the economic decision of primary
users than to all users which is too broad in scope.
- capable of influencing economic decision of the primary users
b. Obscuring information
- information is obscured if presenting or communicating it would have a
familiar effect as omitting or misstating the information.
- characterized by deliberate vagueness, ambiguity and abstruseness.
c. Primary Users
- include the existing and potential investors, lenders and other creditors.

FACTORS OF MATERIALITY
a. The size of the item in relation to the total of the group to which the item belongs is
taken into account.
- examples:
- The amount of advertising in relation to the total selling expenses
- The amount of office salaries to total administrative expenses
b. The nature of the item may be inherently material because by its very nature it affects
economic decision.
- example:
- The discovery of a P20,000 bribe is a material event even for a very
large entity.

2. FAITHFUL REPRESENTATION
- It means that financial reports represent economic phenomena or transactions in
words and numbers.
- It means that the actual effects of the transactions shall be properly accounted for and
reported in the financial statements.

INGREDIENTS OF FAITHFUL REPRESENTATION

a. Completeness
- It requires that relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication.
- It is the result of adequate disclosure standards or the principles of full
disclosure.
- all significant and relevant information leading to the representation of
financial statements shall be clearly reported.

b. Neutrality
- A neutral depiction is without bias in the preparation or presentation of financial
statements.
- To be neutral is to be fair.

c. Free from error

- It means there are no errors or omissions in the description of the phenomenon
or transaction.
- Free from error does not mean perfectly accurate in all aspects.

PRUDENCE
- It is exercise of care and caution when dealing with the in the measurement process
such that assets or income are not overstated and liabilities and expenses are not
understated.
- Neutrality is supported by the exercise of prudence.

CONVERTISM
- It is synonymous with prudence
- it means that when alternatives exist, the alternative which has the least effect on
equity should be chosen.
- In simples worlds, “in case of doubt, record any loss and do not record any gain”.
MEASUREMENT UNCERTAINTY
- It arises when monetary amounts in financial reports cannot be observed directly and
must instead be estimated.
- It can affect faithful representation if the level of uncertainty in providing an estimate is
high.
- As long as the estimate is clearly and accurately described and explained, even a high
level of measurement uncertainty does not affect the usefulness of the financial
information.

SUBSTANCE OVER FORM

- If information is to represent faithfully the transactions and other events it purports to
represent, it is necessary that the transactions and events accounted in accordance
with their substance and reality and not merely their legal form.

ENHANCING QUALITATIVE CHARACTERISTICS

- It relates to the presentation or form of the financial information.
- These are intended to increase the usefulness of the financial information that is
relevant and faithfully represented.
- The enhancing qualitative characteristics are comparability, understandability,
verifiability, and timeliness.

1. COMPARABILITY
- It means the ability to bring together for the purpose of noting points of likeness and
difference.
- It enables users to identify and understand similarities and dissimilarities among items.
a. Comparability within an entity
- it is the quality of information that allows comparisons within a single
entity through time or from one accounting period to the next.
- Also known as horizontal comparability or intracomparability.
b. Comparability between and across entities
- It is the quality of information that allows comparisons between two or
more entities engaged in the same industry.
- Also known as intercomparability or dimensional comparability.

CONSISTENCY
- Implicit in the qualitative characteristic of comparability is the principle of consistency.
- In a broad sense, it refers to the use of the same method for the same item, either
from period to period within an entity or in a single period across entities.
- In a limited sense, it is the uniform application of accounting method from period to the
period within an entity.

2. UNDERSTANDABILITY
- It requires that financial information must be comprehensible or intelligible if it is to be
most useful.
- Understandability is very essential because relevant and faithfully represented
information may prove useless if it is not understood by users.
3. VERIFIABILITY
- It means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is
a faithful representation.
- In other words, verifiability implies consensus.
- It helps assure users that information represents the economic phenomenon or
transaction it purports to represent.
- Types of verification:
a. Direct
- it means verifying an amount or other representation through direct
observation, for example, counting cash.
b. Indirect
- it means checking the inputs to a model, formula or other technique and
recalculating the inputs using the same methodology.

4. TIMELINESS
- it means that financial information must be available or communicated early enough
when a decision is to be made.
- It enhances the truism that without knowledge of the past, the basis for prediction will
usually be lacking and without interest in the future, knowledge of the past is sterile.
- What happened in the past would become the basis of what would happen in
the future.
- relevant and faithfully represented financial information furnished after a decision is
made is useless or of no value.

COST CONSTRAINT ON USEFUL INFORMATION

- Cost is a pervasive constraint on the information that can be provided by financial
reporting.
- The cost constraint is a consideration of the cost incurred in generating financial
information against the benefit to be obtained from having the information.
- The benefit derived from the information should exceed the cost incurred in obtaining
the information.
- Evaluation of the cost constraint is substantially a matter of professional judgment.