CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS
items measured are said to be valued by fact.
DEFINITION OF ACCOUNTING
• Accounting is “the process of identifying, measuring,
and communicating economic information to permit
informed judgment and decisions by users of
information.”
THREE IMPORTANT ACTIVITIES
1. Identifying - the process of analyzing events and
transactions to determine whether or not they will be
recognized. Only accountable events are recognized.
2. Measuring - involves assigning numbers, normally in
monetary terms, to the economic transactions and
events.
3. Communicating - the process of transforming economic
data into useful accounting information, such as
financial statements and other accounting reports, for
dissemination to users.
TYPES OF EVENTS
 External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal
giving and receiving
b. Non-reciprocal transfer – “one way”
transaction
c. External event other than transfer – an
event that involves changes in the economic
resources or obligations of an entity caused by
an external party or external source but does
not involve transfers of resources or
obligations.
 Internal events – events that do not involve an external
party.
a. Production – the process by which resources
are transformed into finished goods.  
b. Casualty – an unanticipated loss from
disasters or other similar events.
MEASUREMENT
 The several measurement bases used in accounting
include, but not limited to, the following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
 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.
VALUATION BY FACT OR OPINION
 When measurement is affected by estimates, the items
measured are said to be valued by opinion. 
 When measurement is unaffected by estimates, the
BASIC PURPOSE OF ACCOUNTING
 The basic purpose of accounting is to provide
information about economic activities intended to be
useful in making economic decisions.
TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS
TO USERS’ NEEDS
 General purpose accounting information - designed to
meet the common needs of most statement users. This
information is governed by the Philippine Financial
Reporting Standards (PFRSs).
 Special purpose accounting information - designed to
meet the specific needs of particular statement users.
This information is provided by other types of
accounting, e.g., managerial accounting, tax basis
accounting, etc.
 Basic Accounting Concepts
 Double-entry system – each accountable event is
recorded in two parts – 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. 
BASIC ACCOUNTING CONCEPTS - CONTINUATION
 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 – 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.”
 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.
COMMON BRANCHES OF ACCOUNTING
 Financial accounting - focuses on general purpose
financial statements.
 Management accounting – focuses on special
purpose financial reports for use by an entity’s
management.
 Cost accounting - the systematic recording and
analysis of the costs of materials, labor, and overhead
incident to production.
 Auditing - the process of evaluating the
correspondence of certain assertions with established
criteria and expressing an opinion thereon.
 Tax accounting - the preparation of tax returns and
rendering of tax advice, such as the determination of tax
consequences of certain proposed business endeavors.
 Government accounting - refers to the accounting for
the government and its instrumentalities, placing
emphasis on the custody of public funds, the purposes
for which those funds are committed, and the
responsibility and accountability of the individuals
entrusted with those funds.
FOUR SECTORS IN THE PRACTICE OF ACCOUNTANCY
 Practice of Public Accountancy - involves the
rendering of audit or accounting related services to
more than one client on a fee basis.
 Practice in Commerce and Industry - refers to
employment in the private sector in a position which
involves decision making requiring professional
knowledge in the science of accounting and such
position requires that the holder thereof must be a CPA.
 Practice in Education/Academe – employment in an
educational institution which involves teaching of
accounting, auditing, management advisory services,
finance, business law, taxation, and other technically
related subjects.
 Practice in the Government – employment or
appointment to a position in an accounting professional
group in the government or in a government–owned
and/or controlled corporation where decision making
requires professional knowledge in the science of
accounting, or where civil service eligibility as a CPA is
a prerequisite.
ACCOUNTING STANDARDS IN THE PHILIPPINES
 Philippine Financial Reporting Standards (PFRSs)
are Standards and Interpretations adopted by the
Financial Reporting Standards Council (FRSC). They
comprise:
1. Philippine Financial Reporting Standards
(PFRSs);
2. Philippine Accounting Standards (PASs);
and
3. Interpretations
THE NEED FOR REPORTING STANDARDS
 Entities should follow a uniform set of generally
acceptable reporting standards when preparing and
presenting financial statements; otherwise, financial
statements would be misleading.
 The term “generally acceptable” means that either:
a. the standard has been established by an
authoritative accounting rule-making body; or
b. the principle has gained general acceptance
due to practice over time and has been proven
to be most useful.
 The process of establishing financial accounting
standards is a democratic process in that a majority of
practicing accountants must agree with a standard
before it becomes implemented.
PURPOSE OF THE CONCEPTUAL FRAMEWORK
 The Conceptual Framework prescribes the concepts for
general purpose financial reporting. Its purpose is to:
1. assist the International Accounting Standards
Board (IASB) in developing Standards that are
based on consistent concepts;
2. assist preparers in developing consistent
accounting policies when no Standard applies
to a particular transaction or when a Standard
allows a choice of accounting policy; and
3. assist all parties in understanding and
interpreting the Standards.
STATUS OF THE CONCEPTUAL FRAMEWORK
 The Conceptual Framework is not a PFRS. When there
is a conflict between the Conceptual Framework and a
PFRS, the PFRS will prevail.
  In the absence of a standard, management shall II. Enhancing qualitative characteristics
consider the Conceptual Framework in making its
judgment in developing and applying an accounting (1) Comparability
policy that results in useful information. (2) Verifiability
SCOPE OF THE CONCEPTUAL FRAMEWORK (3) Timeliness
The Conceptual Framework is concerned with general purpose (4) Understandability
financial reporting. General purpose financial reporting involves
the preparation of general purpose financial statements. The FUNDAMENTAL VS. ENHANCING
Conceptual Framework provides the concepts regarding the
following: • The fundamental qualitative characteristics are the
characteristics that make information useful to users.
1. The objective of financial reporting
• The enhancing qualitative characteristics are the
2. Qualitative characteristics of useful financial information characteristics that enhance the usefulness of
information
3. Financial statements and the reporting entity
RELEVANCE
4. The elements of financial statements
• Information is relevant if it can affect the decisions of
5. Recognition and derecognition users.
6. Measurement • Relevant information has the following:
7. Presentation and disclosure • Predictive value – the information can be
8. Concepts of capital and capital maintenance used in making predictions

OBJECTIVE OF GENERAL PURPOSE FINANCIAL • Confirmatory value – the information can be

REPORTING used in confirming past predictions

 The objective of general purpose financial reporting • Materiality – is an ‘entity-specific’ aspect of

relevance.
is to provide financial information about the reporting
entity that is useful to primary users in making decisions FAITHFUL REPRESENTATION
about providing resources to the entity.
• Faithful representation means the information provides
 The objective of general purpose financial reporting a true, correct and complete depiction of what it
forms the foundation of the Conceptual Framework. purports to represent.
 PRIMARY USERS • Faithfully represented information has the following:
• Primary users – are those who cannot demand • Completeness – all information necessary for
information directly from reporting entities. The primary users to understand the phenomenon being
users are: depicted is provided.
a. Existing and potential investors • Neutrality – information is selected or
b. Lenders and other creditors. presented without bias.
a) Only the common needs of primary users are met by • Free from error – there are no errors in the
the financial statements. description and in the process by which the
information is selected and applied.
QUALITATIVE CHARACTERISTICS
ENHANCING QUALITATIVE CHARACTERISTICS
I. Fundamental qualitative characteristics
1. Comparability – the information helps users in
(1) Relevance
identifying similarities and differences between different
(a) Predictive value sets of information.

(b) Feedback value 2. Verifiability – different users could reach consensus as

to what the information purports to represent.
 Materiality – entity-specific aspect of
relevance 3. Timeliness – the information is available to users in
time to be able to influence their decisions.
(2) Faithful representation
4. Understandability – users are expected to have:
(a) Completeness
a. reasonable knowledge of business activities; and
(b) Neutrality b. willingness to analyze the information diligently.

(c) Free from error FINANCIAL STATEMENTS AND THE REPORTING ENTITY
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:
a. the entity’s ability to generate future net cash
inflows; and
b. management’s stewardship over economic
resources.
FINANCIAL STATEMENTS AND THE REPORTING ENTITY
Reporting period
• Financial statements are prepared for a specific period
of time (i.e., the reporting period) and include
comparative information for at least one preceding
reporting period.
Going concern
• Financial statements are normally prepared on the
assumption that the reporting entity is a going
concern, meaning the entity has neither the intention
nor the need to end its operations in the foreseeable
future.
Reporting entity
• A reporting entity is one that is required, or chooses, to
prepare financial statements, and is not necessarily a
legal entity. It can be a single entity or a group or
combination of two or more entities.
ELEMENTS OF FINANCIAL STATEMENTS
ASSET
• Asset is “a 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.” (Conceptual Framework 4.3 & 4.4)
THREE ASPECTS IN THE DEFINITION OF AN ASSET
1. Right – asset refers to a right, and not necessarily to a
physical object, e.g., the right to use, sell, lease or
transfer a building.
2. Potential to produce economic benefits – the right
has a potential to produce economic benefits for the
entity that are beyond the benefits available to all
others. Such potential need not be certain or even likely
– what is important is that the right already exists and
that, in at least one circumstance, it would produce
economic benefits for the entity.
3. Control – means the entity has the exclusive right over
the benefits of an asset and the ability to prevent others
from accessing those benefits.
LIABILITY
 Liability is “a present obligation of the entity to transfer
an economic resource as a result of past events.”
THREE ASPECTS IN THE DEFINITION OF A LIABILITY
1. Obligation – An obligation is “a duty or responsibility
that an entity has no practical ability to avoid.” (CF 4.29)
An obligation can be either legal obligation or
constructive obligation.
2. Transfer of an economic resource – the obligation
has the potential to require the transfer of an economic
resource to another party. Such potential need not be
certain or even likely – what is important is that the
obligation already exists and that, in at least one
circumstance, it would require the transfer of an
economic resource.
3. Present obligation as a result of past events – A
present obligation exists as a result of past events if:
a. the entity has already obtained economic benefits
or taken an action; and
b. as a consequence, the entity will or may have to
transfer an economic resource that it would not
otherwise have had to transfer.
EXECUTORY CONTRACTS
 An executory contract “is a contract that is equally
unperformed – neither party has fulfilled any of its
obligations, or both parties have partially fulfilled
their obligations to an equal extent.” (CF 4.56)
 An executory contract establishes a combined right
and obligation to exchange economic resources.
 The contract ceases to be executory when one
party performs its obligation.
o If the entity performs first, the entity’s
combined right and obligation changes to
an asset.
o If the other party performs first, the entity’s
combined right and obligation changes to
a liability.
EQUITY
 “Equity is the residual interest in the assets of the
entity after deducting all its liabilities.” (Conceptual
Framework 4.63)
 Equity equals Assets minus Liabilities
INCOME AND EXPENSES
• Income
Income is “increases in assets, or decreases in
liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims.”
(Conceptual Framework 4.68)
 • Expenses
Expenses are “decreases in assets, or increases in
liabilities, that result in decreases in equity, other than those
relating to distributions to holders of equity claims.”
(Conceptual Framework 4.69)
RECOGNITION & DERECOGNITION
THE RECOGNITION PROCESS
• Recognition is the process of including in the statement
of financial position or the statement(s) of financial
performance an item that meets the definition of one of
the financial statement elements (i.e., asset, liability,
equity, income or expense). This involves recording the
item in words and in monetary amount and including
that amount in the totals of either of those statements.
RECOGNITION CRITERIA
• An item is recognized if:
a. it meets the definition of an asset, liability,
equity, income or expense; and
b. recognizing it would provide useful information,
i.e., relevant and faithfully represented
information.
RELEVANCE
• The recognition of an item may not provide relevant
information if, for example:
a. it is uncertain whether an asset or liability
exists; or
b. an asset or liability exists, but the probability of
an inflow or outflow of economic benefits is
low. (Conceptual Framework 5.12)
However, the presence of one or both of the foregoing
does not automatically lead to the non-recognition of an item.
Other factors should also be considered.
FAITHFUL REPRESENTATION
• The level of measurement uncertainty and other factors
can affect an item’s faithful representation, but not
necessarily its relevance.
MEASUREMENT UNCERTAINTY
• Measurement uncertainty exists if the asset or liability
needs to be estimated. A high level of measurement
uncertainty does not necessarily lead to the non-
recognition of an asset or liability if the estimate
provides relevant information and is clearly and
accurately described and explained.
• However, measurement uncertainty can lead to the
non-recognition of an asset or a liability if making an
estimate is exceptionally difficult or exceptionally
subjective.
DERECOGNITION
• Derecognition is the removal of a previously recognized
asset or liability from the entity’s statement of financial
position.
• Derecognition occurs when the item ceases to meet the
definition of an asset or liability.
UNIT OF ACCOUNT
• Unit of account is “the right or the group of rights, the
obligation or the group of obligations, or the group of
rights and obligations, to which recognition criteria and
measurement concepts are applied.”
MEASUREMENT BASES
• Historical cost
• Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
HISTORICAL COST
• The historical cost of:
a. an asset is the consideration paid to acquire
the asset plus transaction costs.
b. a liability is the consideration received to incur
the liability minus transaction costs.
• Historical cost is updated over time to depict the
following:
 Depreciation, amortization, or impairment of
assets
 Collections or payments that extinguish part or
all of the asset or liability
 Unwinding of discount or premium when the
asset or liability is measured at amortized cost
FAIR VALUE
• Fair value is “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.”
VALUE IN USE AND FULFILMENT VALUE
• Value in use is “the present value of the cash flows, or
other economic benefits, that an entity expects to derive
from the use of an asset and from its ultimate disposal.”
• Fulfilment value is “the present value of the cash, or
other economic resources, that an entity expects to be
obliged to transfer as it fulfils a liability.”
CURRENT COST
• The current cost of:
• an asset is “the cost of an equivalent asset at the
measurement date, comprising the consideration
that would be paid at the measurement date plus
the transaction costs that would be incurred at that
date.”
• 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.”
ENTRY VALUES VS. EXIT VALUES
• Current cost and historical cost are entry values
(i.e., they reflect prices in acquiring an asset or
incurring a liability), whereas fair value, value in use
and fulfilment value are exit values (i.e., they
reflect prices in selling or using an asset or
transferring or fulfilling a liability).
CONSIDERATIONS WHEN SELECTING A MEASUREMENT
BASIS
• When selecting a measurement basis, it is important to
consider the following:
a. The nature of information provided by a particular
measurement basis (e.g., measuring an asset at
historical cost may lead to the subsequent recognition
of depreciation or impairment, while measuring that
asset at fair value would lead to the subsequent
recognition of gain or loss from changes in fair value).
b. The qualitative characteristics, the cost-constraint,
and other factors (e.g., a particular measurement
basis may be more verifiable or more costly to apply
than the other measurement bases).
MEASUREMENT OF EQUITY
• Total equity is not measured directly. It is simply equal
to difference between the total assets and total
liabilities.
• Because different measurement bases are used for
different assets and liabilities, total equity cannot be
expected to be equal to the entity’s market value nor the
amount that can be raised from either selling or
liquidating the entity.
• Equity is generally positive, although some of its
components can be negative. In some cases, even total
equity can be negative such as when total liabilities
exceed total assets.
PRESENTATION AND DISCLOSURE
• Information is communicated through presentation and
disclosure in the financial statements.
• Effective communication makes information more
useful. Effective communication requires:
a. focusing on presentation and disclosure
objectives and principles rather than on rules.
b. classifying information by grouping similar
items and separating dissimilar items.
c. aggregating information in a manner that it is
not obscured either by excessive detail or by
excessive summarization.
CLASSIFICATION
• Classifying means combining similar items and
separating dissimilar items.
• Offsetting of assets and liabilities is generally not
appropriate.
Classification of income and expenses
• Income and expenses are classified as recognized
either in:
a. profit or loss; or
b. other comprehensive income.
AGGREGATION
• Aggregation is “the adding together of assets, liabilities,
equity, income or expenses that have shared
characteristics and are included in the same
classification.” (Conceptual Framework 7.20)
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
• Financial concept of capital – capital is regarded as
the invested money or invested purchasing power.
Capital is synonymous with equity, net assets, and net
worth.
• Physical concept of capital – capital is regarded as
the entity’s productive capacity, e.g., units of output per
day.
OBJECTIVE OF PAS 1
PAS 1 prescribes the basis for presentation of general purpose
financial statements to improve comparability both with the
entity's financial statements of previous periods (intra-
comparability) and with the financial statements of other entities
(inter-comparability).
GENERAL PURPOSE FINANCIAL STATEMENTS
• General purpose financial statements are those
intended to serve users who do not have the authority
to demand financial reports tailored for their own needs.
General purpose financial statements cater to most of
the common needs of a wide range of external users.
General purpose financial statements are the subject
matter of the Conceptual Framework and the PFRSs.
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
(5a) comparative information in respect of the preceding
period; and
6. Additional statement of financial position (required only
when certain instances occur)
GENERAL FEATURES

1. Fair Presentation and Compliance with PFRSs - The

application of PFRSs, with additional disclosure when necessary,
is presumed to result in financial statements that achieve a fair
presentation.

2. Going concern - An entity is not a going concern if, as of the

financial reporting date or prior to the date of authorization of the
financial statements for issue, management either:

a. Intends to liquidate the entity or to cease trading, or

b. Has no realistic alternative but to do so.

• The assessment of going concern is at least 12

months.

3. Accrual Basis of Accounting - An entity shall prepare its

financial statements, except for cash flow information, using the
accrual basis of accounting.

4. Materiality & Aggregation - Each material class of similar

items must be presented separately in the financial statements.

5. Offsetting - Assets and liabilities, and income and expenses,

shall not be offset unless required or permitted by a PFRS.

• Measuring assets net of valuation allowances, for

example, obsolescence allowances on inventories,
allowances for doubtful accounts on receivables, and
accumulated depreciation on property, plant, and
equipment are not offsetting.

6. Frequency of reporting – An entity shall present a complete

set of financial statements (including comparative information) at
least annually.

• When an entity changes the end of its reporting period

and presents financial statements for a period longer or
shorter than one year, an entity shall disclose the
following:

1. The period covered by the financial

statements,

2. The reason for using a longer or shorter

period, and

3. The fact that amounts presented in the

financial statements are not entirely
comparable.