Review of Conceptual Framework and Accounting Rules The Conceptual Framework is not a standard.

If there is
a conflict between a standard and the Conceptual
Module 1: Valuation and Concepts
Framework, the requirement of the standard will
prevail.
Nature of Conceptual Framework

A conceptual framework can be defined as a system of

The authoritative status of the Conceptual Framework is
ideas and objectives that lead to the creation of a
depicted in the hierarchy of guidance shown
consistent set of rules and standards. Specifically in
accounting, the rule and standards set the nature, below:
function and limits of financial accounting and financial
statements. The main reasons for developing an agreed
conceptual framework are that it provides: Hierarchy of reporting standards:
 a framework for setting accounting standards;
 a basis for resolving accounting disputes;
Philippine Financial Reporting Standards (PFRS)
 fundamental principles which then do not have
to be repeated in accounting standards.

Judgment
Concepts and Standards

When making the judgment:

Concepts and Standards

Management shall consider the following:

The overall purpose of accounting standards is to
identify proper accounting
Requirements in other PFRSs dealing with similar
practices for the preparation and presentation of transactions
financial statements.

Accounting standards create common understanding

between preparers and Conceptual Framework

users of financial statements particularly on how items,

for example the
valuation of assets are treated. Financial statements
shall therefore comply with
all applicable accounting standards.
Management may consider the following:
Pronouncements issued by other standard-setting
bodies

Status of the Other accounting literature and industry practices.

conceptual framework

Scope or Territorial
Status of the conceptual framework Jurisdictions
Scope or Territorial Jurisdictions information about the reporting entity that is useful to
existing and potential

investors, lenders and other creditors in making

The Conceptual Framework is concerned with general
decisions about providing
purpose financial reporting,
resources to the entity. This objective is the foundation
which involves the preparation of general purpose
of the Conceptual
financial statements. The Conceptual
Framework. All the other aspects of the Conceptual
Framework provides the concepts that underlie general
framework revolve around
purpose financial reporting with
this objective.
regard to the following:

Purposes of the
The objective of financial reporting
conceptual framework

Qualitative characteristics of useful financial

information Purposes of the conceptual

framework

Financial statements and the reporting entity

The Conceptual Framework prescribes the concepts of

general purpose
The elements of financial statements
financial reporting. Its purpose is to:

Recognition and derecognition

assist he International Accounting Standards Board
(IASB) in developing
Measurement
standards that are based on consistent concepts;

Presentation and disclosure

assist preparers in developing consistent accounting
policies when no

Concepts of capital and capital maintenance standard applies to a particular transactions or when a
standard allows a

choice of accounting policy; and

Objectives of the

Framework
assist all parties in understanding and interpreting the
standards.
Objectives of the Framework

Purposes of the conceptual

The objective of general purpose financial reporting is framework
to provide financial
The Conceptual Framework provides the foundation for Income
the development of

Standards that:
Expenses

promote transparency by enhancing the international

Definition of financial statement
comparability and quality of
elements
financial information.

Asset
strengthen accountability by reducing the information
gap between providers of

capital and the entity’s management. An asset is “a present economic resource controlled by
the entity as a result of

past events. An economic resource is a right that has

contribute to economic efficiency by helping investors
the potential to produce
identify opportunities and
economic benefits.
risks around the world, thus improving capital
allocation. The use of a single,

trusted accounting language lowers the cost of capital The definition of an asset has the following three
and reduces international aspects:
reporting costs.

Right
Definition of financial

statement elements Potential to produce economic benefits

Definition of financial statement Control

elements

Definition of financial statement

The elements of financial statements are: elements

Assets Right

Liabilities Asset is an economic resource and an economic

resource is a right that has the potential to

produce economic benefits. Rights have the potential to

Equity
produce economic benefits including:
 services;

Rights that correspond to an obligation of another

party:
Used to enhance the value of other assets;

Right to receive cash, goods or services.

Used to promote efficiency and cost savings; or

Right to exchange economic resources with another

Used to settle a liability.
party on favourable terms.

Definition of financial statement

Right to benefit from an obligation of another party to
transfer economic resource is a specified uncertain elements
future event occurs

Control
Rights that do not correspond to an obligation of
another party:
Control means the entity has the exclusive right over
the benefits of an asset and
Right over physical objects (e.g., right to use a property the ability to prevent others from accessing those
or right to sell an inventory) benefits. Accordingly, if one

party controls an asset, no other party controls the

asset.
Right to use intellectual property

Control does not mean that the entity can ensure the
Definition of financial statement
resource will produce
elements
economic benefits in all circumstances. It only means
that if the resource

Potential to produce economic benefits produces benefits, it is the entity who will obtain those
benefits and not another

party.
An economic resource can produce economic benefits
for an entity in many ways. For

example, the asset may be: Definition of financial statement

elements

Sold, leased, transferred or exchanged for other assets;

Liability

Used singly or in combination with other assets to

produce goods or provide
Liability is a “present obligation of the entity to transfer
an economic resource as
a result of past events. The definition of a liability has
the following three
aspects:
Obligation
Transfer of an economic resource
Present obligation as a result of past events
Definition of financial statement
elements
Obligation
An obligation is a duty or responsibility that an entity
has no practical ability to avoid. An
obligation is either:
Legal obligation – an obligation that results from a
contract, legislation, or other
operation of law; or
Constructive obligation – an obligation that results from
an entity’s actions (e.g., past
practice or published policies) that create a valid
expectation on others that the entity
will accept and discharge certain responsibilities
An obligation is always owed to another party.
However, it is not a necessary that the identity of
that party is known, for example, an obligation for
environmental damages may be owned to the
society at large.
Definition of financial statement
elements
Transfer of an economic resource
The liability is the obligation that has the potential to
require the transfer of an
economic resource to another party and not the future
economic benefits that the
obligation may cause to be transferred. Thus, the
obligation’s potential to cause a
transfer of economic benefits need not be certain, or
even likely, for example, the
transfer may be required only if a specified uncertain
future event occurs. What
is important is that the obligation already exists and
that, in at least one
circumstance, it would require the entity to transfer an
economic resource.
Definition of financial statement
elements
Transfer of an economic resource (continued)
Consequently, a liability can exist even if the probability
of a transfer of economic resource is
low, although that low probability affects decisions on
whether the liability is to be recognized,
how it is measured, what information is provided.
An obligation to transfer an economic resource may be
an obligation to:
 “Equity is the residual interest in the assets of the entity
after deducting all its
Pay cash, deliver goods, or render services;
liabilities. The definition of equity applies to all entities
regardless of form (i.e.,
Exchange assets with another party on unfavourable
sole proprietorship, partnership, cooperative,
terms;
corporation, non-profit entity, or

government entity).
Transfer assets if a specified uncertain future event
occurs; or
Definition of financial statement

elements
Issue a financial instrument that obliges the entity to
transfer an economic resource.

Income

Definition of financial statement

elements Income is “increases in assets, or decreases in liabilities,

that result in increase in

equity, other than those relating to contributions from

Present obligation as a result of past events
holders of equity claims”

The obligation must be a present obligation that exists

Expense
as a result of past events.

A present obligation exists as a result of past events if:

Expenses are decreases in assets, or increase in
liabilities, that result in decrease
The entity has already obtained economic benefits or
of equity, other than those relating to distributions to
taken an action; and
holders of equity claims”

As a consequence, the entity will or may have to

Definition of financial statement
transfer economic resource
elements
that it would not otherwise have had to transfer.

Income and Expenses (continued)

Definition of financial statement

elements
The definitions of income and expense are opposites.

Equity
Income
Expenses The objective of financial reporting refers to the
following so called the primary users:

Increases in assets or decreases

Existing and potential investors; and
in liabilities

Lenders and other creditors

Decreases in assets or increases in

liabilities
Objectives of financial reporting

Results in increase in equity

Decisions about providing resources to the entity

Results in decrease in equity

The primary users’ decisions about providing resources
to the entity involve
Excludes contributions from the
decisions on:
entity’s owners

Buying, selling or holding investments;

Excludes distributions to the

entity’s owners
Providing or settling loans and other forms of credit; or

Objectives of financial
Exercising voting or similar rights that could influence
reporting management’s

actions relating to the use of the entity’s economic

resources.
Objectives of financial reporting

Objectives of financial reporting

The objective of general purpose financial reporting is
to provide financial information

about the reporting entity that is useful to existing and Information on Economic resources, Claims, and
potential investors, lenders and Changes

other creditors in making decisions about providing

resources to the entity.
General purpose financial reports provide information
on a reporting entity’s:

Primary users
Financial position – information on economic resources
(assets) and claims
against the reporting entity (liabilities and equity); and refers to an entity’s ability to meet its long-term
obligations.

Changes in economic resources and claims –

information on financial Objectives of financial reporting

performance (income and expense) and other

transactions and events that lead to
Changes in economic resources and claims
changes in financial position.

Changes in economic resources and claims result from:

Collectively, these are referred to under the Conceptual
Framework as economic
Financial performance (income and expense); and
phenomena.

Other events and transactions

Objectives of financial reporting

Information on financial performance helps users assess

Economic resources and Claims
the entity’s ability to

produce returns from its economic resources. Return

Information about the nature and amounts of an provides an indication on
entity’s economic resources (assets) and
how well management has efficiently and effectively
claims (liabilities and equity) can help users to identify used the entity’s resources.
the entity’s financial strengths

and weaknesses. That information can help users in

Objectives of financial reporting
assessing the entity’s:

Information about use of the entity’s economic

Liquidity and solvency;
resources

Needs for additional financing and how successful it is

Information on how efficiently and effectively the
likely to be in obtaining
entity’s management has
that financing; and
discharged its responsibilities to use the entity’s
economic resources helps users

Management’s stewardship on the use of economic assess the entity’s management’s stewardship. This
resources. information also helps in

predicting how efficiently and effectively the entity’s

resources will be used in
Liquidity refers to an entity’s ability to pay short-term
obligations while solvency future periods, thus helping in the assessment of the
entity’s prospects for future
net cash flows. simultaneous recognition of income and expense is also
called “matching of costs and income” (matching

concept)
Recognition principles

Recognition of income resulting in an increase

Recognition principles
in asset.

The recognition process

Recording a sale increases both

cash/receivables (asset) and sales (income)

Recognition is the process of including in the

financial position or the statements of financial

Recognition of income resulting in a decrease in
performance an item that meets the definition of
liability.
one of the financial statements elements (i.e.,

asset, liability, equity, income or expense). This

Earning an unearned income decreases unearned
involves recording the item in words and in
income (liability) and increases income.
monetary amount and including that amount in

the totals of those statements. The amount at

Recognition of expense resulting in an increase on
which an asset, a liability or equity is recognized
liability.
in the statement of financial position is referred to

as its carrying amount. Recognition links the

Accruing unpaid salaries increases both salaries expense
elements, the statements of financial performance
and salaries payable (liability).
as follows:

Recognition of expense resulting in a decrease in

Recognition principles
assets.

The statements are linked because the recognition of

one element (or a change in its carrying amount) Payment for supplies expense increases supplies

requires the recognition or derecognition of another expense decreases cash.

elements.

Recognition principles
Examples:

Recognition criteria
Sometimes the recognition of income results in the
simultaneous recognition of related expense. This
An item is recognized if:

An asset or liability must be measured for it to be

recognized. Often, measurement requires
It meets the definition of an asset, liability, equity,
income or expense; and estimation and thus subject to measurement
uncertainty. The use of reasonable estimates is an

essential part of financial reporting and does not

Recognizing it would provide useful information, i.e.,
necessarily undermine the usefulness of
relevant and faithfully
information. However, an exceptionally high
represented information.
measurement uncertainty can affect the faithful

representation of an item and one or more of the

Recognition principles following circumstances exist:

Relevance There is an exceptionally wide range of possible

outcomes and each outcome is

exceptionally difficult to estimate.

The recognition of an item may not provide relevant
information if, for example:
The measure is highly sensitive to small changes in
estimates of the probability of
It is uncertain whether an asset or liability exists; or
different outcomes.

An asset or liability exists, but the probability of an

inflow or outflow of The measurement requires exceptionally difficult or
exceptionally subjective allocations
economic benefits is low.
of cash flows that do not relate solely to the asset or
liability being measured.
Faithful representation

Recognition principles
The recognition of an item is appropriate if it provides
both relevant and faithfully
Derecognition
represented information. The level of measurement
uncertainty and other factors (i.e.,

presentation and disclosure) affect an item’s faithful Derecognition is the opposite of recognition. It is the
representation. removal of a previously

recognized asset or liability from the entity’s statement

of financial position.
Recognition principles
Derecognition occurs when the item no longer meet the
definition of an asset or
Measurement uncertainty liability, such as when the entity loses control of all or
part of the asset, or no longer has
a present obligation for all part of the liability. On specific measurement bases for different types of
derecognition, the entity: assets, liabilities, income and

expenses.

Derecognizes the assets or liabilities that have expired

or gave been consumed, collected,
Measurement or valuation basis
fulfilled or transferred (i.e., transferred component),
and recognizes any resulting income and
Measurement bases
expenses.

The Conceptual Framework describes the following

Continues to recognize any assets or liabilities retained
measurement bases:
after derecognition (i.e., retained

component). No income or expense is normally

recognized on the retained component unless Historical cost
there is a change in its measurement basis. After
derecognition, the retained component
Current value
becomes a unit of account separate from the
transferred component.
Fair value

Measurement or

valuation basis Value in use and fulfilment value

Measurement or valuation basis Current cost

Measurement Measurement or valuation basis

Recognition requires quantifying an item in monetary Historical cost

terms, thus necessitating

the selection of an appropriate measurement basis. The historical cost of an asset is the consideration paid
to acquire the asset plus

The application of the qualitative characteristics, transaction cost. The historical of liability is the
including the cost constraint, is consideration received to incur

likely to result in the selection of different measurement the liability minus transaction costs. In cases where it is
bases for different not possible to identify

assets, liabilities, income and expenses. Accordingly, the the cost, such as on transactions that are not on market
standards prescribe terms, the resulting asset

or liability is initially recognized at current value.

Measurement or valuation basis Measurement or valuation basis

Current value Value in use and fulfilment value

Current value measures reflect changes in values at the Value in use is “the present value of the cash flows, or
measurement date. other economic benefits,

Current value measures bases include the following: that an entity expects to derive from the use of an asset
and from its ultimate

disposal.
Fair value

Fulfilment value is “the present value of the cash, or

Value in use for assets and fulfilment value for liability
other economic resources,

that an entity expects to be obliged to transfer as it

Current cost fulfils a liability.

Measurement or valuation basis Measurement or valuation basis

Fair Value Current cost

Fair value is the “price that would be received to sell an Current cost of an asset is “the cost of an equivalent
asset, or paid to transfer asset at the measurement

a liability, in an orderly transactions between market date, comprising the consideration that would be paid
participants at the at the measurement date

measurement date.” plus the transaction costs that would be incurred at that
date.

Fair value reflects the perspective of market

participants. Accordingly, it is not
an entity-specific measurement.
Fair value can be measured directly by observing prices
in an active market or
Current cost of a liability is “the consideration that
would be received for an
equivalent liability at the measurement date minus the
transaction costs that
would be incurred at that date.”

indirectly using measurement techniques. Fair value is

not adjusted for Measurement or valuation basis

transaction costs.
Consideration when a selecting a measurement basis the usefulness of information. They consist the
following:

When selecting a measurement basis, it is important to

consider the following: Comparability

The nature of information provided by a particular Verifiability

measurement basis;

and
Timeliness

The qualitative characteristics, the cost constrain, and

Understandability
other factors.

Qualitative characteristics of
Qualitative
decision-useful information
characteristics of

decision-useful
Relevance
information

Information is relevant if it can make a difference in the

Qualitative characteristics of
decisions of users.
decision-useful information
Relevant information has the following:

The Conceptual Framework classifies the qualitative

Predictive value – the information can help the users in
characteristics into the following:
making predictions

about future outcomes.

Fundamental qualitative characteristics – these are the
characteristics that make
Confirmatory value (feedback value) – the information
information useful to users. They consist of the
can help users in
following:
confirming their previous predictions.

Relevance
Qualitative characteristics of

decision-useful information
Faithful representation

Materiality
Enhancing qualitative characteristics – these are the
characteristics that enhance
Information is material if omitting, misstating or Neutrality – information is selected or presented
obscuring it could reasonably without bias. Information is not manipulated to increase
the
be expected to influence decisions that the primary
users of a specific reporting probability that users will receive it favourably.
Neutrality is supported by prudence, which is the use of
entity’s general purpose financial statements make on
caution
the basis of those financial
when making judgments under conditions of
statements.
uncertainty, such that assets or income are not
overstated and liabilities

Materiality is an entity specific aspect of relevance, or expenses are not understated.

meaning materiality depends

on the facts and circumstances surrounding a specific

Free from error – this does not mean that the
entity. Hence, materiality
information is perfectly accurate in all aspects. Free
is a matter of judgment. from error

means there are no errors in the description and in the

process by which the information is selected and
Qualitative characteristics of applied. If
decision-useful information the information is an estimate, that fact should be
described clearly. Including an explanation of the
process used in
Faithful representation
making that estimate.

Faithful representation means the information provides

a true, correct and complete depiction of the economic Qualitative characteristics of

phenomena that it purports to represent. Depicting only decision-useful information

the legal form would not faithfully represent the
economic
Enhancing qualitative characteristics
phenomenon. Faithfully represented information has
the following characteristics:
Comparability

Completeness – all information (in words and numbers)

necessary for users to understand the phenomenon
Comparability means the ability to bring together for
being
the purpose of noting points of likeness and
depicted is provided. These include description of the
difference. Comparable information presents
nature of the item, numerical depiction, description of
similarities and dissimilarities. Comparability may be
the
made within an entity or across entities. To be more
numerical depiction and explanations of significant facts
useful, the financial information shall be compared
surrounding the item.
with similar information of previous periods (intra-
comparability), or with information produced by
other entities (inter-comparability/dimensional
comparability).
Verifiability
Verifiability 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. The
financial information is verifiable in the sense that it is
supported by evidence so that an accountant that
would look into the same evidence would arrive at the
same economic decision or conclusion.
Qualitative characteristics of
decision-useful information
Enhancing qualitative characteristics (continued)
Timeliness
Timeliness means having information available to
decision makers in time to influence their decisions.
Timeliness is an important enhancing qualitative
characteristics because “relevant and faithfully
represented
financial information furnished after a decision is made
is useless or of no value.”
Understandability
Understandability requires that financial information
must be comprehensible or intelligible if it is to be
useful. Accordingly, the information should be
presented in a form and expressed in terminology that a
user
understands. An essential quality of the information
provided in financial statements is that it is readily
understandable by users. Understandability is very
essential because a relevant and faithfully represented
information may prove useless if it is not understood by
users.
Concept of Capital
and capital
maintenance
Concept of Capital and capital
maintenance
The Conceptual Framework mentions two concepts of
capital, namely:
Financial concept of capital – capital is regarded as the
invested money or
invested purchasing. Capital is synonymous with equity,
net assets, or net worth.
Physical concept of capital – capital is regarded as the
entity’s productive
capacity, e.g., units of output per day.
The choice of an appropriate concept is based on user’s
need. Thus, if users are
primarily concerned with the maintenance of nominal
invested capital or purchasing
power of invested capital, the financial concept should
be used; whereas, if their
primary concern is the entity’s operating capability, the
physical concept should be
used. Most entities adopt the financial concept of Concept of Capital and capital
capital in preparing their financial
maintenance
statements.

Capital maintenance adjustments

Concept of Capital and capital

maintenance
The revaluation or restatements of assets and liabilities
results in increases or

The concept chosen affects the determination of profit. decreases in equity. Although these increases or
In this regard, the concepts of capital decreases meet the definition of

give rise to the following concepts of capital income or expenses, they are not recognized in profit or
maintenance: loss under certain

concepts of capital maintenance. Accordingly, these

items are included in equity
Financial capital maintenance – under this concept,
profit is earned if the net assets at the as capital maintenance adjustments or revaluation
reserves.
end of the period exceeds the net assets at the
beginning of the period, after excluding any

distributions to, and contributions from, owner during Reporting entity and
the period. Financial capital
financial statements
maintenance can be measured In either nominal
monetary unit or units of constant
Reporting entity and financial
purchasing power.
statements

Physical capital maintenance – under this concept,

profit is earned only if the entity’s
productive capacity at the end of the period exceeds
the productive capacity at the
beginning of the period, after excluding any
distributions to, and contributions from,
owners during the period.
Reporting period
Financial statements are prepared for a specified period
of time and provide information on assets, liabilities
and equity that existed at the end of the reporting
period, or during the reporting period, and income and

expenses for the reporting period.

The concept of capital maintenance is essential in
distinguishing between a return on capital
Comparative information
and a return of capital. Only inflows of assets in excess
of the amount needed to maintain

capital is regarded as return on capital or profit. To help users of financial statements in evaluating
changes and trends, financial statements also
provide comparative information for at least one Reporting entity and financial
preceding reporting period.
statements

Forward looking presentation

The reporting entity

Financial statements are designed to provide

A reporting entity is one that is required, or chooses, to
information about past events. Information about
prepare financial statements,
possible future transactions and other events is
and is not necessarily a legal entity. It can be a single
included in the financial statements only if it relates
entity or a group or combination
to the past information presented in the financial
of two or more entities.
statements and is deemed useful to users of

financial statements.
Sometimes, an entity controls another entity. The
controlling entity is called a parent,
Perspective adopted financial statements
while the controlled entity is called subsidiary. If a
reporting entity comprises both the

Information in financial statements is prepared from the parent and subsidiaries, the reporting entity’s financial
perspective of the reporting entity, not from statements are referred to as

the perspective of any particular group of financial consolidated financial statements. If a reporting entity is
statements user. the parent alone, the reporting

entity’s financial statements are referred to as

unconsolidated financial statements. If a
Reporting entity and financial
reporting entity comprises two or more entities that are
statements
not linked by a

parent-subsidiary relationship, the reporting entity’s

Going concern assumption financial statements are referred to

as combined financial statements.

Financial statements are normally prepared on the

assumption that the reporting
Reporting entity and financial
entity is a going concern, meaning the entity has neither
statements
the intention nor the

need to end its operations in the foreseeable future. If it

is not the case, the Consolidated and unconsolidated financial statements

entity’s financial statements are prepared on another

bases (e.g., measurement at
Consolidated financial statements provide information
realizable values rather than mixture of costs and on a parent and its subsidiaries
values.
viewed as a single reporting entity. Consolidated
financial statements are not designed
to provide information on any particular subsidiary; that Statement of financial position (for recognized assets,
information is provided on the liabilities and equity);

subsidiary’s own financial statements.

Statement(s) of financial performance (for income and

expenses);
Consolidated information enables users to better assess
the parents prospects for future

cash flows because the parent’s cash flows are affected Other statements and notes (for additional information
by the cash flows of its on recognized assets and

subsidiaries. Accordingly, when consolidation is liabilities, information on unrecognized assets and

required, unconsolidated financial liabilities, information on cash flows,

statements cannot be used as substitute for information on contributions from/distributions to

consolidated financial statements. However, owners,

a parent may nonetheless be required or choose to

prepare unconsolidated financial

statements in addition to consolidated financial

statements.

Objective and Scope of

financial statements

Objective and Scope of financial

statements

The objective of general purpose financial statements is

to provide financial information about

the reporting entity’s assets, liabilities, equity, income

and expenses that is useful in assessing:

The entity’s prospects for future net cash inflows; and

Management’s stewardship over economic resources.

That information is provided in the: