CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Accounting
− an information system designed to identify,
collect, measure, and communicate economic
information about a business entity (firm) to those
having an interest in the financial affairs of the
entity
User of financial information
A. Primary users
- general purpose financial reports are
primarily directed
1. Existing investors
2. Potential investors
3. Lenders
4. Other creditors
B. Other users
- reports are not directed to them primarily
1. Employees – stability & profitability of the
entity
2. Customers – continuance of an entity
3. Gov’t and their agencies – allocation of
resources
4. Public – substantial contribution to local
economy
Financial Accounting
− the information accumulation, processing and
communication system designed to satisfy the
investment and credit decision-making
information needs of external users
− focuses on developing FS
Financial Statements
− principal output of a financial accounting
− the means by which a company communicates its
financial information to those outside the
organization
International Accounting Standards Board (IASB)
− independent group of experts with appropriate
mix of recent practical experience in selling
accounting standards in preparing, auditing or
using financial reports and in accounting
education
− founded on Apr. 1, 2001
− successor of IASC
− develops International Financial Reporting
Standards (IFRS) and promotes the use and
application of these standards
− effective from Dec. 1, 2016—14 board members,
of whom one is appointed as Chair and one as a
Vice-chair
− 5 year term, renewable for 3-5 years, term not
exceeding 10 years
− to ensure broad int’l diversity, the constitution
requires:
• 4 members from the Asia/Oceana region
• 4 from Europe
• 4 from the America
• 1 from Africa
• 1 from any area, subject to nominating
overall geographical balance
International Financial Reporting Standard (IFRS)
Foundation
− predecessor was Int’l Accounting Standards
Foundation (IASF)—Feb. 6, 2001
− IFRS Foundation—Jul. 1, 2010
− independent not-for-profit organization and the
primary objective is to develop in the public
interest, a single set of high quality ,
understandable, enforceable, and globally-
accepted IFRS based on clearly articulated
principles
− IFRS standards are set by IFRS Foundation’s
standards-setting body, the IASB
International Financial Reporting Interpretation
Committee (IFRIC)
− assist the IASB by providing guidance on the
application and interpretation of IFRS
− before Dec 2001, Standing Interpretations
Committee (SIC) was IASB’s interpretative body
− specified duties:
• interpret the application of IASs and
IFRSs, to provide timely guidance on
financial reporting issues not specifically
addressed in IASs and IFRSs, and
undertake other tasks at the request of the
IASB;
• carry out duties with regard to the IASBs
objective of working actively with
national standard setters to bring about
convergence of national accounting
standards;
• publish, after clearance by the IASB,
draft Interpretations for public comment
and consider comments made within a
 reasonable period before finalizing a
interpretation
• report to the IASB and obtain its approval
for final interpretation
− comprise of 14 voting members, appointed by the
Trustees of the IFRS Foundation
Financial Reporting Standards Council (FRSC)
− established by PRC under the Implementing
Rules and Regulations of the Philippine
Accountancy Act of 2004 to assist the BOA in
carrying out its power and function to promulgate
accounting standards in the Phil.
− successor of ASC—created in Nov 1981 by
PICPA to establish GAAP in the Phil.
− composed of 15 members with a chairman who
had been or presently a senior accounting
practitioner in any of the scope of accounting
practice and 14 representative from
• 1 BSP
• 1 BOA
• 1 BIR
• 1 COA
• 1 FINEX (Financial, Executive and
Professional Risks)
• 1 SEC
• 2 NACPAE (National Association of
CPAs in Education)
• 2 ACPAPP (Association of CPAs in
Public Practice)
• 2 GACPA (Gov’t Association of CPA)
• 2 ACPACI (Association of CPAs in
Commerce and Industry
− monitors technical activities of the IASB and
invites comments on exposure drafts of proposed
IFRSs as these are issued by the IASB; adopted as
PFRSs when finalized
− similarly monitors issuances of the IFRIC of the
IASB, which it adopts as Phil. Interpretations—
IFRIC, PFRSs and Phil. Interpretations—IFRIC
approved for adaptation are submitted to the BOA
and PRC for approval
Philippine Interpretation Committee (PIC)
− formed by FRSC on Aug 2006 to assist the FRSC
in establishing and improving financial reporting
standards in the Phil.
− role—principally issue implementation guidance
on PFRSs
− members are appointed by the FRSC and include
accountants in public practice, the academe and
regulatory bodies and users of financial
statements
− replaced IC by ASC in 2000
Philippine Regulatory Board of Accountancy
(PRBOA)
− composition:
• 1 chairman, 6 members appointed by the
Pres.
• The board shall elect a Vice chairman
from among each member for a term of
one year
− qualifications:
• natural resident citizen
• CPA with at least 10 year relevant
experience
• good moral
• no pecuniary interest in any school
− term office:
• 3 years
• any vacancy shall be filled up for the
unexpired portion of the term only
• no person who has served 2 successive
complete terms shall be eligible for
reappointment until the lapse of 1 year
• appointments to fill up an expired term is
not to be considered as a complete term
− powers and functions of the board:
• prescribe and adopt the rules and
regulations necessary for carrying the
provisions of the Phil. Accountancy Act
of 2004
• supervise the registration, licensure and
practice of accountancy in the Phil.
• issue, suspend, revoke, reinstate the
certificate of registration for the practice
of the accountancy profession
• adopt an official seal
• prescribe and/or adopt a Code of Ethics
for the practice of accountancy
Philippine Institute of Certified Public Accountants
(PICPA)
− Section 30 of RA 9298 states that all registered
CPAs shall be united and integrated through their
membership in a one only registered and
accredited national professional organization of
registered and licensed CPAs
− founded in 1929, accredited professional
organization (APO) of CPAs by PRC
− objectives:
 • promote and maintain high professional Scope of Framework:
and ethical standards among accountants 1. OBJECTIVE AND GENERAL-PURPOSE
• advance the science of accounting FINANCIAL REPORTING
• develop and improve accountancy
education Overall Objective of Financial Reporting.
• encourage cordial relations among To provide financial information about the
accountants reporting entity that is useful to target in
• protect certificate of CPA granted by the making decisions about providing resources
Republic of the Philippines to the entity.
Specific Objectives of Financial Reporting
− 4 sectors of accountancy profession:
a. To provide information useful in making
• commerce & industry
decisions about providing resources to
• public practice
the entity
• government b. To provide information useful in
• education/academe assessing the prospects of future net cash
− four geographical groupings: flows to the entity
• Luzon c. To provide information about entity
• Visayas resources, claims and changes in
• Mindanao resources and claims
• NCR
Financial Position
Accreditation to Practice Public Accountancy
− information about the economic entity’s
− CPAs, firms and partnerships of CPAs engaged in
economic resources and the claims of a
the practice of public accountancy shall register
reporting entity at a particular moment in
with the PRC and the Board such registration to
time
be renewed every 3 years
Financial Performance
− single practitioners and partnerships for the
− level of income earned by the entity
practice of pubic accountancy shall be registered
through the efficient and effective use of
CPAs in the Phil.
its resources
− Certificate shall be issued to CPAs in public
practice only upon showing, that such registrant Accrual Accounting
has acquired a minimum of 3 years meaningful
− depicts the effects of the transactions and
experience in any areas of public practice
other events and circumstances on an
including taxation
entity’s economic resources and claims in
Conceptual Framework the periods in which those effects occur
− sets out fundamental concepts of financial even if the resulting cash receipts and
reporting that guide the IASB in developing IFRS payments occur in a different period
− helps to ensure that the standards are conceptually Accrual Cash Basis
consistent and that similar transactions are treated Revenue earned collected
the same way, so as to provide useful information Expense incurred paid
− assists companies in developing accounting
policies when no IFRS applies to a particular
transaction, and more broadly, helps stakeholders 2. QUALITATIVE CHARACTERISTICS OF
USEFUL INFORMATION
to understand and interpret the standards
A. Fundamental
− does not override any specific IFRS
• content or substance
− should the IASB decide to issue a new or revised
1. Relevance
pronouncement that is in conflict with the
- capacity if the information to
framework, the IASB will highlight the fact and
influence a decision
explain the reasons for the departure in the basis
a. predictive value – used
for conclusions
to predict future outcome
 b. feedback
(confirmatory) value –
used to confirm or correct
earlier expectations
2. Faithful Representation
- actual effect of transactions
shall be properly accounted
for and reported in the FS
a. completeness – adequate
or full disclosure of all
necessary information
b. neutrality – fairness and
freedom from bias
c. free from error – no
inaccuracies and
omissions
B. Enhancing
• presentation or form
1. Comparability
- information can be compared
with similar information
about other entities and with
similar information about the
same entity for another
period or date
2. Understandability
- classifying, characterizing
and presenting information
clearly and concisely makes
it understandable.
3. Verifiability
- implies consensus
- financial information
supported by evidence is
verifiable
- means that different
knowledgeable and
independent observers could
reach consensus, although not
necessarily complete
agreement, that a particular
depiction is a faithful
representation
4. Timeliness
- means information is
available to decision-makers
in time to be capable of
influencing their decisions.
Constraints
Affect all items in the FS
• Materiality – an item is material if
its omission or misstatements could
influence economic decisions
• Cost-benefit – the cost of processing
information should not exceed the
benefits to be derived from it
3. FINANCIAL STATEMENTS AND THE
REPORTING ENTITY
Financial Statements
− particular form of financial reports that
provide information about the reporting
entity’s assets, liabilities, equity, income
and expenses
Types:
a. consolidated – parent and
subsidiaries
b. unconsolidated – parent only
c. combines fs – two or more not all
linked by a parent-subsidiary
relationship
Complete Set of Financial Statements
1. Statement of Financial Position
2. Statement of Profit or Loss and Other
Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements
4. ELEMENTS OF FINANCIAL STATEMENTS
• quantitative information reported in
the statement of financial position
and income statement
a. assets - present economic
resource controlled by the entity
as a result of past events
b. liabilities - present obligation of
an entity to transfer an economic
resource as a result of past events
c. equity - residual interest in the
assets of the entity after
deducting all of the liabilities
d. income - increases in assets or
decreases in liabilities that result
in increases in equity, other than
those relating to contributions
from equity holders
e. expense - decreases in assets or
increases in liabilities that result
in decreases in equity, other than
 those relating to distributions to
equity holders
5. RECOGNITION & DERECOGNITION
Recognition
• process of capturing for inclusion in
the financial statements an item that
meets the definition of an asset,
liability, equity, income or expense
Derecognition
• removal of all or part of a recognized
asset or liability from the statement of
financial position
• normally occurs when an item no
longer meets the definition of an asset
or a liability
• for an asset when the entity losses
control of all or part of the recognized
asset
• for a liability when an entity no
longer has a present obligation for all
or part of the recognized liability
6. MEASUREMENT
• quantifying in monetary terms the
elements in the financial statements
a. historical cost
- original acquisition cost of an
asset is the cost incurred in
acquiring or creating the asset
comprising the consideration
paid plus transaction cost
- entry price or entry value to
acquire an asset or to incur a
liability
b. current value
• fair value - price that
would be received to sell
an asset
• value in use - 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 -
present value of cash that
an entity expects to
transfer in paying or
settling a liability
• current cost - cost of an
equivalent asset at the
measurement date
comprising the
consideration paid and
transaction cost
7. PRESENTATION AND DISCLOSURE
− communication tools
− reporting entity communicates
information about its assets, liabilities,
equity, income and expenses by
presenting and disclosing information in
the financial statements
a. focusing on presentation and
disclosure objectives and principles
rather than focusing on rules
b. classifying information in a manner
that grouped similar items and
separates dissimilar items; and
c. aggregating information in such way
that it is not obscured either by
unnecessary detail or excessive
aggregation
8. CONCEPTS OF CAPITAL AND
CAPITAL MAINTENANCE
Concept of Capital
1. Financial Concept of Capital
• Adopted by most entities
• Capital is synonymous with the net
assets or equity of the entity.
• Adopted if the users of FS are
primarily concerned with the
maintenance of nominal invested
capital or the purchasing power of
invested capital
2. Physical Concept of Capital
• Capital is regarded as the productive
capacity of the entity based on, for
example, units of output per day.
• If the main concern of users is with
the operating capability of the entity,
a physical capital should be used.
 Concepts of capital maintenance
Capital maintenance – means that net
income occurs only after the capital used
from the beginning of the period is
maintained
1. Financial capital maintenance concept
− invested money or invested
purchasing power, capital is
synonymous with net assets or
equity of the entity
− traditional concept based on
historical cost and adopted by
most entities
− net assets—excess of total assets
over total liabilities
2. Physical capital maintenance
− quantitative measure of the
physical productive capacity to
produce goods and services
− physical productive capacity—
units of output per day or
physical capacity of productive
assets to produce goods and
services
− productive assets—measured at
current cost rather than historical
cost
− productive assets—include
inventories and PPE

The Accounting Cycle

1. Identification of events to be recorded
2. Transactions are recorded in journal
3. Entries ported to the ledger
4. Preparation of trial balance
5. Preparation of worksheet with adjusting entries
6. Preparation of financial statements
7. Adjusting entries are journalized & posted
8. Closing entries are journalized & posted
9. Preparation of post-closing trial balance
10. Reversing entries are journalized & posted