UNIVERSITY OF CALOOCAN CITY CONCEPTUAL FRAMEWORK AND

Camarin Campus ACCOUNTING STANDARDS

Conceptual Framework:
 Complete, comprehensive, and single document promulgated by the IASB. It is a summary of the terms and
concepts that underlie the preparation and presentation of financial statements for external users.
 Not an accounting standard. In case where there is a conflict between a standard and the conceptual
framework, the requirements of the standards shall prevail.

Scope of revised Conceptual framework

 Introduction
 Chapter 1: The objective of Financial Reporting
 Chapter 2: Qualitative Characteristics of Useful Financial Information
 Chapter 3: Financial Statements and the reporting entity
 Chapter 4: The elements of Financial Statements
 Chapter 5: Recognition and Derecognition
 Chapter 6: Measurement
 Chapter 7: Presentation and disclosure
 Chapter 8: Concepts of Capital and Capital Maintenance
 Glossary

Purpose of conceptual framework

 Assist the International Accounting Standard Board to develop IFRS that are based on consistent concepts;
 Assist preparers to develop consistent accounting policies when no standard applies to particular transaction
or other event, or when a standard allows a choice of accounting policies;
 Assist all parties to understand and interpret the standards.

THE CONCEPTUAL FRAMEWORK

Chapter 1: The objective 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 economic decisions about
providing resources to the entity.

Specific Objective 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.

Users of Financial Information

1. Primary Users
 Existing and Potential Investors
 Lenders and other creditors
2. Other Users
 Employees
 Customers
 Governments and their agencies
 Public

Chapter 2: Qualitative characteristics of useful financial information

 Qualitative characteristics are the qualities or attributes that make financial accounting information useful
to users.

Fundamental Qualitative Characteristics

 This relate to content or substance of financial information

1. Relevance
a. Predictive value – financial information has predictive value if it can be used as an input to processes
employed by users to predict future outcome.
 b. Confirmatory value – financial information has confirmatory value if it provides feedback about previous
evaluations.
c. Concept of Materiality or Doctrine of Convenience
d. 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.

2. Faithful representation
a. Completeness – requires that relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication. Completeness is the result of adequate disclosure
standard or the principle of full disclosure.
b. Neutrality – a neutral depiction is without bias in the preparation or presentation of financial information.
b.1. Prudence is the exercise of care and caution when dealing with the uncertainties in the
measurement process such that assets or income are not overstated and liabilities or expenses are not
understated.
b.2. Conservatism means that when alternatives exist, the alternative which has the least effect on
equity should be chosen.
c. Free from error – means that there are no errors or omissions in the description of the phenomenon or
transaction.

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 are accounted in accordance with their substance and reality and
not merely their legal form.

Enhancing Qualitative Characteristics

1. Verifiability - means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.
2. Comparability - means the ability to bring together for the purpose of noting points of likeness and
difference. It also means uniform application of accounting method between and across entities in the same
industry.
 Consistency – the uniform application of accounting method from period to period within an entity.
Comparability is the goal and consistency helps to achieve comparability.
3. Understandability - requires that financial information must be comprehensible or intelligible if it is to be
most useful.
4. Timeliness - means that financial information must be available or communicated early enough when a
decision is to be made.

 Cost constraint on useful information – it is a consideration of the cost incurred in generating financial
information against the benefit to be obtained from having the information.

Chapter 3: Financial Statements and the reporting entity

General Objective of Financial Statements

 To provide information about the reporting entity’s assets, liabilities, equity, income and expenses that is
useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting
entity and in assessing management’s stewardship of the entity’s economic resources.

Types of Financial Statements

 Consolidated Financial Statements – these are the financial statements prepared 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 the financial statements when the reporting entity comprises
two or more entities that are not linked by a parent and subsidiary relationship.

Basic Financial Statements

 Statement of Financial Position
 Statement of Financial Performance
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes to Financial Statements
Reporting Entity – The 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.

Reporting Period – This is the period when the financial statements are prepared for general purpose financial
reporting.

Underlying Assumptions
 Accounting assumptions are the basic notions or fundamental premises on which the accounting process is
based. Accounting assumptions are also known as postulates.
 The Conceptual Framework only mentions one assumption, namely going concern.
 
However, implicit in accounting are the basic assumptions of accounting entity, time period, and monetary unit.
1. Going Concern or Continuity assumption – in the absence of evidence to the contrary, the accounting
entity is viewed as continuing in operation indefinitely.
2. Accounting Entity – the entity is separate from the owners, managers, and employees who constitute the
entity.
3. Time Period – requires that the indefinite life of an entity is subdivided into accounting periods which are
usually of equal length for the purpose of preparing financial reports on financial position, performance, and
cash flows.
4. Monetary Unit
a. Quantifiability – means that the assets, liabilities, equity, income and expenses should be stated in
terms of a unit of measure which is a peso in the Philippines.
b. Stability of peso – means that the purchasing power of the peso is stable or constant and that its
instability is insignificant and therefore may be ignored.

Chapter 4: The elements of Financial Statements

1. Asset – present economic resource controlled by the entity as a result of past events. An economic resource
is a right that has the potential to produce economic benefits.
2. Liability – present obligation of an entity to transfer an economic resource as a result of past events.
Obligation is a duty or responsibility that an entity has no practical ability to avoid. Obligations can either be
legal or constructive. Legal obligation arises from a contract or a statutory requirement. Constructive
obligation arises from normal business practice, custom, and a desire to maintain good business relations to
act in an equitable manner.
3. Equity – residual interest in the assets of the entity after deducting all of the liabilities.
4. Income – increases in assets or decreases in liabilities that result in increase in equity, other than those
relating to contributions from equity holders. Income encompasses both revenue and gains.
a. Revenue arises in the course of ordinary regular activities and is referred to by variety of different
names including sales, fees, interest, dividends, royalties, and rent.
b. Gains represent other items that meet the definition of income and do not arise in the course of the
ordinary regular activities.
5. Expense – decreases in assets or increases in liabilities that result in decreases in equity, other than those
relating to distributions to equity holders. Expenses encompasses both losses and expenses incurred in the
course of ordinary regular activities.

Chapter 5: Recognition and 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.

The amount at which an asset, liability, or equity is recognized in the statement of financial position is reported as
carrying amount.

Income recognition
⮚ Income is recognized when earned, or when the performance obligation is satisfied. This will be further
discussed in PFRS 15.

Expense recognition
⮚ Expenses are recognized when incurred. The expense recognition principle is the application of matching
principle. The matching principle requires that those costs and expenses incurred in earning a revenue shall be
reported in the same period.

The matching principle has three applications, namely:

 1. Cause and effect association – the expense is recognized when the revenue is already recognized.
Examples: cost of sales, doubtful accounts, warranty expense, sales commission

2. Systematic and rational allocation – some costs are expensed by simply allocating them over the periods
benefited.
Examples: depreciation of PPE, amortization of intangibles, allocation of prepayments

3. Immediate recognition – cost incurred is expensed outright because of uncertainty of future economic
benefits or difficulty of reliably associating certain costs with future revenue.
Examples: salaries, advertising expense, loss from disposals

Derecognition – removal of all or part of a recognized asset or liability from the statement of financial position.

Chapter 6: Measurement

Measurement – quantifying in monetary terms the elements in the financial statements.

Categories:
1. Historical Cost – historical cost or original acquisition cost of an asset is the cost incurred in acquiring or
creating the asset comprising the consideration paid plus transaction cost. The historical cost of liability is the
consideration received to incur the liability minus transaction cost.

2. Current Value
a. Fair value – the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is an exit price or exit value.
b. 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.
c. Fulfillment value – present value of cash that an entity expects to transfer in paying or settling a
liability.
d. Current cost – for an asset, it is the cost of an equivalent asset at the measurement date comprising the
consideration paid and transaction cost. For a liability, current cost is the consideration that would be
received less any transaction cost at measurement date.

Similar to historical cost, current cost is also based on the entry price or entry value but reflects market conditions on
measurement date.

Chapter 7: Presentation and disclosure

PRESENTATION
⮚ Appropriate presentation of the elements of financial statements is important as it helps users to have a better
understanding of the financial position and performance of the company. Presentation of financial statements
is governed by PAS 1.
⮚ Assets and liabilities are generally classified and presented as current and noncurrent, although presentation
based on liquidity is more relevant for other industries. Equity accounts are presented based on their nature,
such that ordinary share capital, preference share capital, share premium, and retained earnings are
separately presented.
⮚ Income and expenses are classified as components of profit or loss and other comprehensive income.

DISCLOSURE
⮚ Note disclosures provide a more detailed description and narrative in relation to the information presented in
the other components of the financial statements. For every account or transaction, the standards require a
specific disclosure that must be included in the notes.

Chapter 8: Concepts of Capital and Capital Maintenance

AGGREGATION
⮚ Aggregation is the adding together of assets, liabilities, equity, income, and expenses that have similar or
shared characteristics and are included in the same classification.

CAPITAL MAINTENANCE
⮚ The financial performance of an entity is determined using two approaches, namely transaction approach and
capital maintenance approach.
1. Transaction Approach – it is the traditional preparation of an income statement. Revenues and
expenses are identified on a per transaction basis.
2. Capital Maintenance Approach – means that net income occurs only after the capital used from the
beginning of the period is maintained.
a. Financial Capital – it is the monetary amount (historical cost) of the net assets contributed by
shareholders and the amount of the increase in net assets resulting from earnings retained by the
entity.
b. Physical Capital – it is the quantitative measure of the physical productive capacity to produce goods
and services. This concept requires that productive assets be measured at current cost.