Conceptual Framework and
Qualitative Characteristics of Useful Financial Information
Accounting Standards
Objective of financial reporting
The objective of financial reporting forms the
foundation of the Conceptual Framework.
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.
The objective of financial reporting is the “why”,
purpose or goal of accounting.
Specific Objectives of Financial Reporting
Accordingly, the specific objectives of financial
reporting are:
♥ 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.
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.
These characteristics are attributes that make the
information in financial statements useful to
investors, creditors, and others.
In deciding which information to include in financial
statements, the objective is to ensure that the
information is useful to the users in making economic
decisions.
Under the Conceptual Framework for Financial
Reporting, qualitative characteristics are classified
into “fundamental” and “enhancing” qualitative
characteristics:
☼ Fundamental- relate to the content or substance
of financial information
☼ Enhancing- Relate to the presentation or form of
financial information
Fundamental Qualitative Characteristics
o Relevance: capacity of the information to
influence a decision
o Faithful Representation: figures must watch
what really existed or happened
1. Relevance
- Information in financial statements is relevant
when it is capable of making a difference in the
decisions made by the users.
Ingredients of relevance:
◌ Predictive Value- information cam help
users increase the likelihood of correctly
predicting or forecasting the outcome of
certain events.
◌ Feedback Value- Information can help users
confirm or correct earlier expectations.
** Note that the predictive and confirmatory roles
of information are interrelated.
Materiality
☼ Information is material if omitting, misstating or
obscuring it could reasonably be expected to
influence the economic decisions that primary
users make on the basis of those statements
which provide financial information about a
specific reporting entity.
☼ A practical rule when items are not Significant
enough to affect the evaluation, decision, and
fairness
☼ Is an entity-specific aspect of relevance based
on the nature or magnitude, or both, of the items
to which the information relates in the context of
an individual entity’s financial report.
☼ Also known as the “Doctrine of Convenience”
When is an Item Material?
- No Strict or Uniform Rule
- Dependent on good judgement, professional
expertise, and common sense
- If omission or misstatement would influence the
decision of the user.
- Depends on Relative Size rather than Absolute
Size
Factors of Materiality
a. Size- relation to the total group to which the
item belongs
b. Nature- Inherently Material regardless of size
*It is important to note that materiality, though
frequently associated and discussed with the previous
topics, is not referred to as an ingredient of relevance
under the Framework.
2. Faithful Representation
- Financial reports represent economic
phenomena in words and numbers. To be useful,
financial information must not only represent
relevant phenomena, but it must also faithfully
represent the phenomena that it purports to
represent.
Ingredients of Faithful Representation
♥ Complete
◊ A complete depiction includes all
information necessary for a user to
understand the phenomenon being depicted,
including all necessary descriptions and
explanations.
◊ Also known as Principle of Full/Adequate
Disclosure
♥ Neutral
◊ A neutral depiction is without bias in the
selection or presentation of financial
information.
◊ A neutral depiction is not:
☼ Slanted
☼ Weighted
☼ Emphasized
☼ De-emphasized
☼ Otherwise manipulated
To increase the probability that financial
information will be received favourably or
unfavourably by users
♥ Free from error
◊ Means there are no errors or omissions in the
description of the phenomenon
◊ The process used to produce the reported
information has been selected and applied with
no errors in the process.
☼ Free from error does not mean a perfectly
accurately in all aspect due to estimates.
Supplementary concepts of Fundamental characteristics
Enhancing qualitative characteristics
Comparability, verifiability, timeliness and
understandability are qualitative characteristics that
enhance the usefulness of information that is relevant
and faithfully represented.
Comparability is the qualitative characteristic that
enables users to identify and understand similarities
in, and differences among items.
Verifiability helps assure users that information
faithfully represents the economic phenomena it
purports to represent. Verifiability means that
different knowledgeable and independent observers
could reach consensus, although not necessarily
complete agreement, that a particular depiction is a
faithful representation
Timeliness Having information available to decision-
makers in time to be capable of influencing their
decisions. Quarterly or Interim Reports enhances
Timeliness to Financial Information. The Older the
Information the Less Useful Except When assessing
Trends
Understandability- financial information must be:
Clear and Concise, Presented & expressed with
terminologies intended users readily understands
Note: Users must have “Reasonable knowledge of
business & economic activities”, otherwise seek
guidance from Advisors
Cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that
can be provided by financial reporting.
Reporting financial information imposes costs, and it
is important that those costs are justified by the
benefits of reporting that information.
General objective of Financial Statements
FINANCIAL STATEMENTS provide information
about economic resources of the reporting entity,
claims against the entity and changes in the economic
resources and claims.
The financial statements provide financial
information about an entity's assets, liabilities, equity,
income, and expenses useful to users of financial
statements in:
- Assessing future cash flows to the reporting
entity.
- Assessing management stewardship of the
entity's economic resources.
Types of Financial Statements
The Revised Conceptual Framework recognizes three
types of financial statements:
◊ Consolidated Financial Statements- These are
the financial statements prepares when the
reporting entity comprises both the parent and
its subsidiaries.
◊ Unconsolidated Financial Statements- These are
the financial statements prepared when the
reporting entity is the parent alone.
◊ Combined Financial Statements- These are
financial statements when the reporting entity
comprises two or more entities that are not
linked by a parent and subsidiary relationship.
Reporting Entry
A reporting entity is an entity that is required or
chooses to prepare financial statements.
The reporting entity can be a single entity or a portion
of an entity or can comprise more than one entity.
A reporting entity is not necessarily a legal entity.
Accordingly, the following can be considered a
reporting entity:
◌ Individual corporation, partnership, or
proprietorship
◌ The parent alone
◌ The parent and its subsidiaries as single reporting
entity
◌ Two or more entities without parent and
subsidiary relationship as a single reporting
entity.
◌ A reportable business segment of an entity.
Reporting Period
The reporting period is the period when financial
statements are prepared for general purpose financial
reporting. Financial statements may be prepared on
an interim basis, for example, three months, six
months, or nine months.
Interim financial statements are not required but
optional.
However, financial statements must be prepared on
an annual basis or a period of twelve months.
Underlying Assumption (Postulates)
Accounting assumptions are the basic notions or
fundamental premises on which the accounting
process is based. Accounting assumptions are also
known as postulates. These serve as a foundation or
bedrock of accounting to avoid misunderstanding but
rather enhance the understanding and usefulness of
the financial statements. 
The Conceptual Framework for Financial Reporting
mentions ONLY ONE ASSUMPTION, that is
GOING CONCERN.
Going concern means financial statements presume
that an enterprise will continue in operation
indefinitely or if that presumption is not valid,
disclosure and a different basis of reporting are
required. Its foundation is the COST PRINCIPLE
(assets are recorded at COST).
NOTE: If there is evidence that the entity would
experience large losses or subject for termination,
GOING CONCERN IS ABANDONED
The Accrual accounting, founding on the going
concern assumption, depicts the effects of
transactions and other events and circumstances on a
reporting 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.
The illustration below shows changes in economic
resources and claims as reflected by accrual basis and
compared with cash basis of accounting:
Inherent assumptions of financial statements
Accounting Entity or Separate Entity
Concept
This assumption means that the entity is
separate from the owners, managers and
employees who constitute the entity.
Personal transactions of owners shall not be
allowed to distort the financial statements of
the entity.
Q: What is a "Single Economic Entity"?
A: This is where a Parent and Subsidiary
(PS) Relationship exists.
o PS Relationship consolidates their
Financial Statements
o Consolidation, however, does not
eliminate the legal boundary
segregating the affiliated entities
o Accounting will continue to be done
separately for each entity
Time Period
This assumption requires that the indefinite life of an
entity is subdivided into accounting periods, usually
of equal length or time-period, for the purpose of
preparing financial statements. The “one-year”
period is traditionally the accounting period.
The accounting period may be:
☼ Calendar year - A twelve (12) – month period
that ends on December 31
☼ Natural business year - A twelve (12) – month
period that ends on any month when the
business at its lowest or slack season
☼ Fiscal Year - A Twelve (12) - month period that
starts from any other month than January
☼ Interim Period - business period within an
accounting period. These are financial reports
prepared at any date even if the 12-month period
is not yet due. (weekly, monthly, quarterly or
semi-annual)
Monetary Unit
This assumption pertains to (1) quantifiability of the
peso and (2) stability of the peso. Quantifiability of
the peso means that the elements of the financial
statements should be stated under one unit of measure
which is the Philippine Peso. Stability of the peso
means that the purchasing power of the peso is stable
or constant and that instability is insignificant and
therefore ignored. Stability is also an amplification
of the going concern assumption, that adjustments are
unnecessary to account for nominal pesos only and
not for constant pesos.
Elements of Financial Statements (FS)
Refers to the quantitative information reported in the
statement of financial position and income statement
“Building Blocks” from which FS are constructed
With the use of the Elements of FS financial effects
can be grouped into classes according to
characteristics
Classification of Elements
Elements directly related to the measurement of
financial position:
1. Asset- a resource controlled by the enterprise as
a result of past events and from which future
economic benefits are expected to flow to the
enterprise.
2. Liability- A present obligation of the enterprise
arising from past events, the settlement of which
is expected to result in an outflow from the
enterprise of resources embodying economic
benefits.
3. Equity- the residual interest in the assets of the
entity after deducting all of the liabilities.
Elements directly related to the measurement of
financial performance:
4. Income- increases in economic benefits during
the accounting period in form of inflows or
enhancements of assets or decreases of liabilities
that result in increase in equity, other than those
relating to contributions from equity
participants.
5. Expense- decreases in economic benefits during
the accounting period in the form of outflows or
 depletions of assets or incurrence of liabilities
that result in decreases in equity, other than
those relating to distributions to equity
participants.
RECOGNITION OF THE ELEMENTS OF THE FS
The Reporting of an asset, liability, income, or
expense on the face of the financial statements of an
entity
Recognition Principles
Recognition is the process of incorporating in the
financial statements an item that meets the definition
of an element and satisfies the following criteria for
recognition:
It is probable that any future economic benefit
associated with the item will flow to or from the
enterprise; and The item's cost or value can be
measured with reliability.
Asset Recognition Principle
An asset is recognized in the statement of financial
position when it is probable that the future economic
benefits will flow to the enterprise and the asset has a
cost or value that can be measured reliably.
Three (3) aspects on the Definition of Assets
1. Rights
2. Future Economic Benefit- it is probable that
future economic benefits will flow to the entity
*Probable = Change is MORE LIKELY than less
likely
**Future economic benefit does not need to be
certain but only necessary that the right already exists
even if probability is low. An asset is recognized in
the statement of financial position when it is probable
that the future economic benefits will flow to the
enterprise and the asset has a cost or value that can be
measured reliably.
3. Control- There is control when;
◊ Ability for DIRECT USE
◊ Ability to enforce LEGAL RIGHTS
◊ Future Economic Benefits will flow directly or
indirectly to the entity
Liability Recognition Principle
A liability is recognized in the statement of financial
position when it is probable that an outflow of
resources embodying economic benefits will result
from the settlement of a present obligation and the
amount at which the settlement will take place can be
measured reliably.
The (3) aspects on the Definition of Liabilities
1. Present Obligation- a duty or responsibility that
an entity has no practical ability to avoid.
Types of Obligation
♥ Legal Obligation- Obligations may be legally
enforceable as a consequence of a binding
contract or statutory requirements
♥ Constructive Obligation- Arise from normal
business practice, custom and a desire to
maintain good business relations or act in an
equitable manner
2. Transfer an economic resource- Another term of
Settlement of Liability
Examples of ways to settle liability
☼ Payment of Cash
☼ Transfer of Non-Cash Assets
☼ Provision of Services
☼ Replacement of the obligation with
another obligation
☼ Conversion of Obligation to Equity
3. Result of Past Event- A present obligation exists
as a result of past events only if.
◊ The entity has already obtained economic
benefits and
◊ As a consequence, the entity will transfer
economic resource
 Income Recognition Principle Expense Recognition Principle
Income is recognized in the when an increase in Expenses are recognized when a decrease in future
future economic benefits related to an increase in an economic benefits related to a decrease in an asset or
asset or a decrease of a liability has arisen that can be an increase of a liability has arisen that can be
measured reliably. This means, in effect, that measured reliably. This means, in effect, that
recognition of income occurs simultaneously with the recognition of expenses occurs simultaneously with
recognition of increases in assets or decreases in the recognition of an increase in liabilities or a
liabilities
POINT OF SALE
o Legal title to the goods passes to the buyer “the
risk & rewards” of ownership at point of sale
o It is usually the point of delivery.

EXPECTATIONS to the POINT OF SALE

1. Installment Method
decrease in assets.
◌ Revenue is recognized at the point of collection
◌ Revenue = Gross Profit Rate x Collections Matching Principle
2. Cost Recovery Method
◌ Revenue is recognized at the point of collection  It requires that cost and expenses incurred in
◌ Collections are applied first to cost of earning a revenue shall be reported in the same
merchandise sold period
3. Percentage of Completion Method  There must be a Cost in earning a Revenue
◌ Contract Revenue and Contract Cost associated “NO PAIN, NO GAIN”
with construction contract shall be recognized as Application of Matching Principle
revenue and expenses, respectively
4. Production Method ◌ Cause and Effect Association - Expense is
◌ Revenue is recognized at the point of production recognized when Revenue is Recognized
◌ Applicable to Agricultural, forest and mineral Examples:
products  Cost of Merchandise Inventory
Other Income Recognition
 Doubtful Accounts
 Warranty Expense
a. Interest Revenue  Sales Commission
o Revenue is Recognized on ◌ Systematic and Rational Allocation -
a TIME Proportion basis that takes into Expensed by Allocating over the
account the EFFECTIVE YIELD on the PERIODS benefited
asset Examples:
b. Royalties  Depreciation
o Accrual = Based on AGREEMENT  Amortization
c. Dividends  Allocation of Prepayments
o Upon Declaration ◌ Immediate Recognition - Cost Incurred is
d. Installation Fees Expense outright because.
o Stage of Completion 1. NO future economic Benefit
e. Subscription Revenue 2. Cease to qualify as an asset
o Straight Line Basis over the Subscription Examples:
Period  Administrative & Selling Expenses
f. Admission  Loss from Disposal of Asset
o When the Event Takes Place DERECOGNITION
g. Tuition Fees
o The Period in Which Tuition is Provided
The Revised Conceptual Framework introduced the
term derecognition.
Derecognition is defined as the removal of all or part
of a recognized asset or liability from the statement of
financial position.
Derecognition of an asset normally occurs when the
entity loses control of all or part of the asset.
Derecognition of a liability occurs when the entity
no longer has a present obligation for all or part of the
liability.
MEASUREMENT OF THE ELEMENTS of the
FS
Measurement involves assigning monetary amounts
at which the elements of the financial statements
are to be recognized and reported.
The Revised Conceptual Framework mentions two
categories, including:
1. Historical Cost - Also known as “Past
Purchase Exchange Price” & it is the Most
Commonly Adopted
◌ The Amount of:
A. Cash or Cash
Equivalent PAID or RECEIVED
Transaction Cost
Costs that is directly attributable to the acquisition,
issue or disposal of an asset or liability
Examples: Legal Fees, Finder Fee
B. Fair Value (FV) of the consideration given to
acquire the asset “at the time of acquisition”
What is Fair Value?
The price that would be received
 to sell an asset or
 Transfer a liability
in an orderly transaction between market participants
at the measurement date.
Hierarchy or best evidence of fair value
 Level 1 -INPUTS
o Quoted Price in an active
market for Identical Assets
*Active Market – transactions take place
with sufficient regularity and volume
 Level 2 -OBSERVABLE INPUTS
o Quoted Price in an active
market for Similar Assets or
o Quoted Price in an inactive market for Similar
Assets or Identical
 Level 3 - UN-OBSERVABLE INPUTS
o Assets Developed by the entity using BEST
AVAILABLE INFORMATION from
entity’s own data
2. Current Value 
 Also known as "Current Purchase
Exchange Price"
 Current Value includes
◌ Fair value (at measurement date)
◌ Value in use for asset- the present value
of the cash flows that an entity expects to
derive from the use of an asset and from
the ultimate disposal. 
◌ Fulfillment value for liability- the present
value of cash that an entity expects to
transfer in paring or settling a liability. 
◌ Current Cost- the cost of an equivalent
asset at the measurement dare comprising
the consideration that would be received
less any transaction cost at measurement
date.  
Note: The Framework does not include concepts or
principles for selecting which measurement basis
should be used for particular elements of financial
statements or in particular circumstances.
Components of Financial Statements
A complete set of financial statements comprises:
1) A statement of financial position as at the end of
the period
2) A statement of comprehensive income for the
period
3) A statement of changes in equity for the period
4) A statement of cash flows for the period
5) Notes, comprising a summary of significant
accounting policies and other explanatory
information
6) A statement of financial position as at the
beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or
makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in Current liabilities
its financial statements.
An entity shall classify a liability as current when:
Statement of Financial Position- Shows the financial
condition of an entity of a particular date (a) It expects to settle the liability in its normal
operating cycle
Current/Noncurrent Distinction- An entity must (b) It holds the liability primarily for the purpose of
normally present a classified statement of financial trading
position, separating current and noncurrent assets and (c) The liability is due to be settled within twelve
liabilities. Only if a presentation based on liquidity months after the reporting period
provides information that is reliable and more (d) The entity does not have an unconditional right to
relevant may the current/noncurrent split be omitted. defer settlement of the liability for at least twelve
months after the reporting period
Current assets
An entity shall classify all other liabilities as non-
An entity shall classify an asset as current when: current.
SHAREHOLDERS’ EQUITY
(a) It expects to realize the asset, or intends to sell or
consume it, in its normal operating cycle I. CONTRIBUTED (PAID-IN / INVESTED
(b) It holds the asset primarily for the purpose of CAPITAL) CAPITAL
trading
(c) It expects to realize the asset within twelve Represent the amount invested or contributed by
months after the reporting period owners.
(d) The asset is cash or a cash equivalent (as defined
This is divided into:
in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least 1. Capital Share – the contributions equal to the par
twelve months after the reporting period. or stated value of the share purchased by owners; or
the total contribution by owners in case of no-par
An entity shall classify all other assets as non-
share.
current.
2. Share Premium – contribution in excess of the par
Normal Operating Cycle – The time between the or stated value, gains from share transactions and
acquisition of assets for processing and their “other” equity items that are not included in earnings
realization cash or cash equivalents. When the or other comprehensive income.
entity’s normal operating cycle is not clearly II. RETAINED EARNINGS
identifiable, its duration is assumed to be twelve
months. Accumulated profits and losses that have not been
declared as dividends.
Classified into retained earnings that are prohibited
from being declared as dividends due to legal and
contractual requirements or upon the decision of the
Board of Directors, “appropriated” and retained
earnings available as dividends to shareholders,
“unappropriated”.
1. Increases – Effect of changes in accounting policy
and correction of prior period errors, Net Income and
Quasi re-organization.
2. Decreases - Effect of changes in accounting policy
and correction of prior period errors, Dividends,
Losses on share transactions like retirement and
reissuance of treasury shares, conversion of
preference shares and recapitalization of par value
other than share splits.
Forms of Statement of Financial Position
1. Report Form- This form set forth the three (3)
major sections in Downward sequence of Assets,
Liabilities and Equity
2. Account Form- Assets are shown in the Left side
and the liabilities and equity on the Right
Note: In the Philippines, the common practice is to
present current assets/liabilities before non-current
assets/liabilities
Income Statement / Statement of Comprehensive
Income
An entity shall present all items of income and
expense recognized in a period:
(a) In a single statement of comprehensive income, or
(b) In two statements: a statement displaying
components of profit or loss (separate income
statement) and a second statement beginning with
profit or loss and displaying components of other
comprehensive income (statement of comprehensive
income).
Components of Comprehensive Income
1. Profit and Loss - Income minus Expenses
including Tax expense and any Income or Loss from
Discontinued Operations.
2. Other Comprehensive income – –Items of
income and expenses including reclassification
adjustments (RA) that are not included in Profit and
Loss as required by a standard or interpretation.
There are two types of OCI items, those that are
reclassified to profit or loss (RA) and those that are
reclassified to Retained Earnings (RE). OCI includes
the following;
 Unrealized gain or loss on equity investments
measured at FVOCI (RE)
 Unrealized gain or loss on debt investments
measured at FVOCI (RA)
 Unrealized gain or loss from derivative contracts
designated as cash flow hedge (RA)
 Revaluation Surplus (RE)
 Remeasurement Gains and losses for defined
benefit plans (RE)
  Change in fair value arising from credit risk for
financial liabilities measured at FVPL (RE)
 Translation gains and losses of foreign
operations
An entity shall present either an analysis of expenses
using a classification based on either;
 the nature of expenses or
 their function within the entity, whichever
provides information that is reliable and more
relevant.
Nature of expense method – Expenses are
aggregated in the income statement according to their
nature and are not reallocated among various
functions within the entity.
Function of expense or cost of sales method –
Classifies expenses according to their function as part
of cost of sales or, for example, the cost of
distribution or administrative activities.
Presentation and Disclosure
1. Going Concern
- An entity preparing PFRS financial statements is
presumed to be a going concern.
- If management has significant concerns about
the entity's ability to continue as a going
concern, the uncertainties must be disclosed. If
management concludes that the entity is not a
going concern, the financial statements should
not be prepared on a going concern basis, in
which case PAS 1 requires a series of
disclosures.
2. Accrual Basis of Accounting
- PAS 1 requires that an entity prepare its
financial statements, except for cash flow
information, using the accrual basis of
accounting.
3. Consistency of Presentation
- The presentation and classification of items in
the financial statements shall be retained
from one period to the next unless a change is
justified either by a change in circumstances
or a requirement of a new PFRS.
4. Materiality and Aggregation
- Each material class of similar items must be
presented separately in the financial statements.
Dissimilar items may be aggregated only if they
are individually immaterial.
5. Offsetting
- Assets and liabilities, and income and expenses,
may not be offset unless required or permitted
by a Standard or an Interpretation.
6. Comparative Information
- PAS 1 requires that comparative information
shall be disclosed in respect of the previous
period for all amounts reported in the financial
statements, both face of financial statements and
notes, unless another Standard requires
otherwise. If comparative amounts are changed
or reclassified, various disclosures are required.
Concepts of Capital & Capital Maintenance
Concepts of Capital
Financial concept of capital - capital is
synonymous with net assets of the enterprise. This
is the concept of capital adopted by most
enterprises. A financial concept of capital, e.g.
invested money or invested purchasing power,
means capital is the net assets or equity of the
entity.
Physical concept of capital – capital is regarded as
the productive capacity of the enterprise based on,
for example, units of output per day.
Concepts of Capital Maintenance
Financial capital maintenance – Under this concept,
a profit is earned only if the financial (or money)
amount of the net assets at the end of the of the period
exceeds the financial (or money) amount of the net
assets at the beginning of the period, after excluding
any distributions to, and contributions from, owners
during the period.
There is profit if the ending net assets are greater than
the beginning net assets, after taking out the effects of
investments by owners and distributions made to
owners

NET ASSET END  > NET ASSET BEGINNING = 

PROFIT

Physical capital maintenance – Under this concept,

a profit is earned only if the physical productive
capacity (or operating capability) of the enterprise (or
the resources need to achieve that capacity) at the end
of the period exceeds the physical productive
capacity at the beginning of the period, after
excluding any distributions to, and contributions
from, owners during the period.

A profit is earned only if the physical productive

capacity or operating up ability at the end of the
period exceeds that of the beginning, after excluding
contributions from the distributions to owners