Professional Documents
Culture Documents
Reporting Framework
1.1 Overview of Accounting
Definition of Accounting
● Accounting is “the process of identifying, measuring, and
communicating economic information to permit informed judgment and
decisions by users of information.” (American Association of Accountants-AAA)
Measurement Bases
● The several measurement bases used in accounting include, but not limited
to, the following:
1. Historical Cost (Links to an external site.)
2. Fair Value (Links to an external site.)
3. Present Value (Links to an external site.)
4. Realizable Value (Links to an external site.)
5. Current Cost (Links to an external site.), and
6. sometimes Inflation-Adjusted Costs (Links to an external site.)
● The most commonly used is historical cost. This is usually combined with
the other measurement bases. Accordingly, financial statements are said to
be prepared using a mixture of costs and values.
● some are derived from the Conceptual Framework and the PFRSs but some
are implicit or generally accepted because of their long-time use.
● Double-Entry System – each accountable event is recorded in two parts, the
Debit and Credit.
● Going Concern - the entity is assumed to carry on its operations for an
indefinite period of time.
● Separate Entity – the entity is treated separately from its owners.
● Stable Monetary Unit - amounts in the financial statements are stated in
terms of a common unit of measure; changes in purchasing power are
ignored.
● Time Period – the life of the business is divided into series of reporting
periods.
● Materiality concept – information is material if its omission or misstatement
could influence economic decisions.
● Cost-benefit – the cost of processing and communicating information should
not exceed the benefits to be derived from it.
● Accrual Basis of Accounting – effects of transactions are recognized when
they occur (and not as cash is received or paid) and they are recognized in
the accounting periods to which they relate.
● Historical Cost Concept – the value of an asset is determined on the basis
of acquisition cost.
● Concept of Articulation – all of the components of a complete set of
financial statements are interrelated.
● Full Disclosure Principle – financial statements provide sufficient detail to
disclose matters that make a difference to users, yet sufficient condensation
to make the information understandable, keeping in mind the costs of
preparing and using it.
● Consistency Concept – financial statements are prepared on the basis of
accounting policies which are applied consistently from one period to the
next.
● Matching Principle– costs are recognized as expenses when the related
revenue is recognized.
● Residual Equity Theory – this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is “Assets –
Liabilities – Preferred Shareholders’ Equity = Ordinary Shareholders’ Equity.”
● Entity Theory- the objective is proper income determination (matching of
cost and revenues in the income statement). Exemplified by the equation
"Assets=Liabilities + Capital"
● Proprietary Theory - the objective is the proper valuation of assets in the
balance sheet. Exemplified by the equation "Assets- Liabilities = Capital"
● Fund Theory – the accounting objective is the custody and administration of
funds.
● Realization – the process of converting non-cash assets into cash or claims
for cash.
● Prudence (Conservatism) – the inclusion of a degree of caution in the
exercise of the judgments needed in making the estimates required under
conditions of uncertainty, such that assets or income are not overstated and
liabilities or expenses are not understated.
● Systematic and rational Allocation - costs that are not directly related to
income generation are initially recognized as an asset and recognized as
expenses over the period where their economic benefits are consumed.
● Immediate recognition -costs that do not/ceases to meet the definition of
assets are expensed immediately.
Note:
Some accounting concepts are implicit, or they are not expressly stated in the
framework but are generally accepted because of their long-time use in the profession.
Under R.A. 9298 also known as the “Philippine Accountancy Act of 2004” the
practice of accounting is sub-classified into the following:
● the standard-setting body of the IFRS Foundation with the main objective of
developing and promoting global accounting standards.
12. Securities and Exchange Commission (SEC)- the government agency tasked
with regulating corporations and partnerships, capital and investment markets, and the
investing public.
13. Bureau of Internal Revenue (BIR) - administers the provisions of the National
Internal Revenue Code.
14. Bangko Sentral ng Pilipinas (BSP) - influences the selection and application of
accounting policies by banks and other entities performing banking functions.
15. Cooperative and development Authority (CDA) - influences the selection and
application of accounting policies by cooperatives.
Note:
Note:
CPAs 65 years old and above shall be permanently exempted from the CPD requirement for renewal of
CPA license but not for the accreditation to practice the accountancy profession.
CFWFR Chapter 2
CFWFR Chapter 3
The financial statements should provide useful information about the reporting entity in
the:
Financial statements are always prepared for a specified period of time or the reporting
period.
● It means that an entity will continue to operate for the foreseeable future
(usually 12 months after the reporting date).
● A Reporting entity is an entity that must or chooses to prepare the financial
statements. It can be :
○ A Single entity – one company;
○ A portion of an entity – a division of one company;
○ More than one entity – a parent and its subsidiaries reporting as a
group.
CFWFR Chapter 4
CFWFR Chapter 5
The recognition process links the elements in the financial statements according to the
following formula:
Derecognition
CFWFR Chapter 6
Measurement
● selection of the measurement basis or the method of quantifying monetary
amount for the elements in the financial statements.
● IN WHAT AMOUNT to recognize assets, liabilities, equity, income, or expense
in your financial statements.
The Framework gives guidance on how to select the appropriate measurement basis
and what factors to consider (especially relevance and faithful representation).
CFWFR Chapter 7
The Framework discusses the classification of assets, liabilities, equity, income, and
expenses in greater detail with describing
● offsetting,
● aggregation,
● distinguishing between profit or loss and other comprehensive income (Links
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● and other related areas.
CFWFR Chapter 8
● Under the financial maintenance concept, the profit is earned only when the
amount of net assets at the end of the period is greater than the amount of
net assets in the beginning, after excluding contributions from and
distributions to equity holders.
The main difference between the 2 concepts is how the entity treats the effects of
changes in prices in assets and liabilities.
● PAS represents the old accounting standard issued by the ASC, while the
● PFRS represents the new accounting standard, issued by the FRSC.
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PAS 19 Employee Benefits (2011) 2011
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*Emphasis of ACCTG 016
Summary Module 1
Development of the Financial Reporting Framework
Overview of Accounting
Financial Statements
● structured representation of the entity's financial position and results of
operation.
● preparation and presentation of the F/S in accordance with the PFRSs -Chief
Financial Officer (CFO) and the Chief Executive Officer (CEO)
● oversight of the financial reporting process and review and approval of the FS
- Board of Directors (Chairman)
● responsibilities are clearly stated in the "Statement of Management
Responsibility for Financial Statements" attached as a cover letter to the
audited Financial Statements.
Legend:
*the ability of the entity to continue its operations for a period at least, but not limited to twelve (12)
months.
○ current assets
○ current liabilities
○ non-current assets
○ non-current liabilities
● Basically, the asset or liability is current when it is expected to be recovered
or settled within 12 months after the reporting period.
LIABILITIES - the present obligation of the enterprise, it arises from a past event, and is
expected to result in a probable outflow of economic benefits.
EQUITY- residual interest in the assets of the enterprise after deducting all its liabilities.
It refers to the interest of the owners in an enterprise measured as the excess of the
total assets over its liabilities, also called net assets.
PROFIT OR LOSS
○ Revenue
○ Gains and losses arising from the derecognition of financial assets
at amortized cost
○ impairment gains and losses on financial assets
○ Finance costs
○ Share of the profit or loss of associates and joint ventures (equity
method)
○ Tax expense
○ Post-tax profit/gain or loss of operations or assets in accordance
with IFRS 5 (Non-current assets Held for Sale and Discontinued
Operations)
○ Profit or loss
● Classification of expenses :
○ by nature of expense method (natural presentation)- classified as
depreciation, purchase of material, transport cost, employee
benefits, and advertising cost.
○ by function of expense method (functional presentation) -
classified as Cost of Sales, distribution cost. administrative
expenses and other functional classification (will need additional
disclosure)
Accounting for dividends: If an entity declares dividends to shareholders after the end
of the reporting period, the entity shall not account for those dividends as a liability at
the reporting date.
If dividends are declared after the end of the Reporting Period, but before the financial
statements are approved for issue, the dividends are disclosed in the notes to the
financial statements.
Overview of PAS 8
● Issued: in 1978; re-issued in 1993 and 2003, followed by amendments
● Effective date: 1 January 2005
● What it does:
○ It prescribes the criteria for selecting and changing accounting
policy ;
○ It explains a change in accounting estimate, how to recognize
the effect of such a change in the financial statements and what to
disclose;
○ It provides the rules on how to correct errors made in the prior
period financial statements
○ It discusses impracticability in respect of the retrospective
application and retrospective restatement.
Errors
Accounting Policies
● are anything from rules, guidelines, conventions, principles, and similar norms
used by entities for the preparation of the financial statements.
● PAS 8 specifically points out that the basis, especially measurement basis is
an accounting policy.
● Examples:
○ historical cost or fair value measurement
○ Fifo method to weighted average method
○ Cost model to revaluation model for PPE
○ Change to a new policy resulting from the requirement of a new
PFRS.
○ Change in Financial Reporting framework from PFRS for SMEs to
Full PFRS.
1. Find the specific PFRS, or find other PFRS or IFRIC/SIC dealing with similar or
related issues.
● For example, if you are selecting your accounting policy for artwork, maybe
PAS 16 Property, Plant and Equipment or PAS 40 Investment Property are
standards dealing with similar issues.
2. Apply concepts from the Conceptual Framework for Financial Reporting.
3. Look to other standard-setting bodies and their own rules or standards for
guidance (pronouncements) or other accounting literature and industry practices.
Many companies do it regularly.
1. When it is required by another IFRS. This will be the case when new IFRS
is issued and you have to apply it mandatorily.
2. When a new accounting policy provides better, more reliable, and relevant
information. In this case, you apply the new accounting policy voluntarily.
Note:
Errors
● are some omissions or misstatements in the financial statements as a
result of ignoring or misusing the information that was available or could be
reasonably obtained when preparing these financial statements.
● Correct it if it is material.
Overview of PAS 24
● Issued: in 1984; re-issued in 2003 and 2009, followed by amendments
● Effective date: 1 January 2011
● What it does:
○ It helps identify:
■ Related party relationships and transactions;
■ Outstanding balances between the reporting entity and
its related parties,
■ When the disclosures should be made.
○ It determines what disclosures should be made.
○ An entity must present related party disclosures even though there
have been no transactions.
The disclosures are presented separately for each category of related parties and
include:
● Amount of transactions;
● Amount of outstanding balances, together with their terms and conditions and
guarantees.
● Provisions for doubtful debts related to the amount of open balances; and
● The expense during the period for bad or doubtful debts due from related
parties.
Summary of Module 2
PAS 1 - Presentation of Financial Statements