CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

ACCOUNTING – process of identifying, measuring, and communicating economic information to permit users an
informed judgments and decisions. It has a purpose to provide information useful in making economic decisions
Important activities included:
 IDENTIFYING – analyzing events and transactions whether it affects assets, liabilities, and equity. Hence, only
accountable events are recognized and recorded. However, some non-accountable events are disclosed in the notes
if it has accounting relevance.
Types of events/transactions:
i. EXTERNAL EVENTS – involve entity and an external party
o Exchange (reciprocal transfer) happens when there is giving and receiving of an asset or discharging of obligations (sale,
purchase, payment of liabilities)
o Non-reciprocal transfer is a “one way” transaction where a party is giving something that does not receive anything (donations
gifts, payment of taxes)
o External event other than transfer involves changes in the assets or liabilities caused by an external party but does not involve
transfer of resources or obligations (changes in fair value and price levels, technological changes)
ii. INTERNAL EVENTS – do not involve an external party
o Production is the process which resources are transformed into finish goods (raw materials to finish products)
o Casualty is an unanticipated loss from disaster or similar events

 MEASURING – involves assigning numbers to economic transactions and events. The measurement basis includes
historical cost (most common), fair value, present value, realizable value, current cost, and inflation-adjusted cost.
But financial statements can be prepared using mixture of costs and values.
Valuation by fact of Opinion
 use of estimates in providing relevant information
MEASUREMENT IS AFFECTED BY ESTIMATES BUT VALUED BY OPINION
o estimates of uncollectible amounts of receivables
o depreciation and amortization expenses which is affected by estimates of useful life and residual value
o estimates of liabilities such as provisions
o retained earnings which is affected by estimates of income and expenses
MEASUREMENT IS UNAFFECTED BY ESTIMATES BUT VALUED BY FACT
o ordinary share capital value at par
o land stated at acquisition cost
o cash measured at face amount

 COMMUNICATION – transforming economic data into useful accounting information such as financial statements
and other accounting reports
3 aspects of communicating process:
i. RECORDING – writing the identified and measured accountable events (journalizing)
ii. CLASSIFYING – grouping similar items into their classes in the ledger (posting)
iii. SUMMARIZING – putting together into condensed form (preparation of financial statements
and accounting report)
iv. INTERPRETING – involves computation of financial statement rations to be disclosed in the
note to financial statements
Types of information provided by accounting
 QUALITATIVE INFORMATION – expressed in words or descriptive form. Mostly found in note to financial statements
and other financial statements
 QUANTITATIVE INFORMATION – expressed in numbers, quantities, and units
 FINANCIAL INFORMATION – expressed in monetary amounts
Types of accounting information classified as to users’ needs
 GENERAL PURPOSE accounting information – designed to meet the common needs of users which is governed by
GAAP represented by the PFRS. This information is provided by the financial accounting (external user)
 SPECIAL PURPOSE accounting information – designed to meet the special needs of users. This information is
provided by other accounting such as management accounting, tax basis accounting, and the like (internal users)
Accounting Concepts
- principles which the accounting process is based
o DOUBLE-ENTRY SYSTEM – accountable events is recorded in debit and credit
 o GOING CONCERN ASSUMPTION – entity is assumed to continue its operation in the foreseeable future
o SEPARATE ENTITY – entity is viewed separately from its owners
o STABLE MONETARY UNIT – assets, liabilities, equity, income, and expenses are expressed in common unit (peso)
o TIME PERIOD – accounting reporting period such as fiscal year period (12mos and star at any time of the year) and calendar year (jan
to dec)
o MATERIALITY CONCEPT – information is material if it affects the economic decision. It may be a matter of professional judgment and
based on its size and nature
o COST-BENEFIT – cost of processing and communicating information should not exceed to its purpose or benefit
o ACCRUAL BASIS OF ACCOUNTING – income and expenses are recorded at the time it is earned and incurred not when cash is
received or paid
o HISTORICAL COST CONCEPT – value of assets must be determined on its acquisition cost. However, this is not always maintained
because inventories are measured at net realizable value
o CONCEPT OF ARTICULATION – components of the financial statements is interrelated. Users every financial statemen to making
decisions
o FULL DISCLOSURE PRINCIPLE – nature and amount of information must be disclosed
o CONSISTENCY CONCEPT – financial statements are prepared in basis of accounting principles that are applied indefinitely. Changes
should be disclosed in the notes
o MATCHING – costs are recognized as expenses when related revenue is earned
o ENTITY THEORY – assets = liabilities + capital (proper income determination)
o PROPRIETY THEORY – assets – liabilities = capital (proper valuation of assets)
o RESIDUAL EQUITY – applicable when ordinary shares and preferred shares are issued by the corporation. assets – liabilities –
preferred shareholder equity = ordinary shareholder equity (computation of book value per share and return of equity)
o FUND THEORY – cash inflow – cash outflow = fund (directed towards cash flow). It is used in government and judiciary accounting
o REALIZATION – process of converting non-cash assets into cash or claims for cash
o PRUDENCE – use of caution when making estimates. Always choose the one which has least effect on equity
o MATCHING CONCEPT – costs related to revenue are recognized as expenses in the same period revenue is earned
o SYSTEMATIC AND RATIONAL ALLOCATION – costs that are not directly related to earning are initially recorded as assets and
recognized as expense over the consumption period
o IMMEDIATE RECOGNITION – cost do not meet the definition of assets are expensed immediately
Accounting Assumptions
- fundamental concepts or principles and basic notion that provides foundation of the accounting process
Accounting Theory
- logical reasoning in the form of sets of broad principles that provides general frame of reference which
accounting practice can be evaluated and guides the development of new practices and procedures such
as Conceptual Framework and the Philippine Financial Reporting Standards
Financial Reporting
- the provision of financial information about entity useful for its external users (lenders and investors) in
making credit and investing decision
Objectives of Financial Reporting
1. provide information about entity’s economic resources and claims and changes of resources
2. provide information in assessing management stewardship
Accountancy
- profession or practice of accounting. The practice of accounting can be classified by two – (1) public and (2)
private practice. Public practice does not involve employer-employee relationship while private practice
involves and employer-employee relationship meaning the accountant is an employee.
Four sectors in the practice of accountancy
Under RA 9298, the Philippine Accountancy Act of 2004, the practice of accounting is sub-classified into the following:
1. Practice of Public Accountancy – rendering audit or accounting related services to more than one client on fee basis
(public practice)
2. Practice in Commerce and Industry – employment in private sector in position which involves decision making
requiring professional knowledge in the science of accounting and position requires certified public accountant
(private practice)
3. Practice in Education/Academe – employment in educational institution involves teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and other technical related subjects (public practice)
4. Practice in the Government – employment or appointment to a position in an accounting professional group in the
government or government-owned or controlled corporation including those performing propriety functions where
decision making requires professional judgment and knowledge in the science of accounting or where civil service
eligibility as certified public accountant is a prerequisite (private practice)
Accounting Standards
Philippine Financial Reporting Standards (PFRS) represents the generally accepted accounting principles
(GAAP) in the Philippines. The PFRS are standards and interpretations adopted by FRSC which comprises of:
- Philippine Financial Reporting Standards (PFRSs)
- Philippine Accounting Standards (PASs)
- and Interpretations
Need of Reporting Standards
 Fair presentation of all the assets, liabilities, equity, income, and expenses
 Comparable reports from other entities
 Avoid fraudulent activities
Conceptual Framework for Financial Reporting
The Conceptual Framework provides the foundation for the development of Accounting Standards, promote
comparability of financial information, and reduce information gap among the management and the owners of business.

The Conceptual Framework is not an Accounting Standard. When identifying business transactions, measuring its
monetary terms, and presenting for communication, the following hierarchy of rules should be followed.
• follow the applicable Accounting Standard on the said transaction.
• use judgement based on other similar transactions that has an existing Accounting Standards and the
Conceptual Framework.
Purpose of the Conceptual Framework
• assist the International Accounting Standards Board (IASB) in developing standards based on consistent
concepts
• assist prepares in developing consistent accounting policies when no standards apply to a particular
transaction or when standards allow a choice of accounting policy
• assist all parties in understanding and interpreting the standards
Conceptual Framework Provides Foundation for the Development of Standards
• promote transparency by enhancing comparability and quality of financial information
• strengthen accountability by reducing information gap among providers of capital and entity’s
management
• contribute to economic efficiency by helping investors identify opportunities and risks thus provide capital
allocation. The use of single, trusted accounting language lowers the cost of capital and reduces
international reporting costs
Scope of the Conceptual Framework
1. Objective of Financial Reporting
- to provide financial information about the reporting entity that is useful to existing and potential investors,
lenders, and other creditors in making decision about providing capital resources to the entity.
NOTE: Primary users of financial reports cannot demand what cannot demand whatever information from
the business and must rely on general purpose financial statements. General-purpose financial reporting
provides information that caters to the common needs of the primary users.
Decisions about providing resources to the entity
o buying, selling, holding investments
o providing or settling loans and other forms of credit
o exercising voting or similar rights that could influence managements actions relating to the use of
economic resources
Thus, primary users of general-purpose financial information depend on their decision on business’s expected return.
Expectation about the return depends on the assessment of the entity’s prospective net cash inflows, and management
stewardship. To make these assessments, the primary users need the financial information:
• on the economic resources of the entity, the claims, and the change in those resources and claims (statement
of financial position and statement of changes in economic resources and claims)
• how efficiently the business management utilized these economic resources (financial performance and
utilization of economic resources)
2. Qualitative Characteristics of Useful Financial Information
• financial information qualitative characteristics, not just a group of words and numbers. These qualitative
characteristics make financial information more useful for primary users. The Conceptual Framework classified
 these qualitative characteristics as fundamental qualitative characteristics and enhancing qualitative
characteristics
Fundamental Qualitative Characteristics
These characteristics make financial information useful to users with its relevance and faithful representation. When any
fundamental qualitative characteristic is lacking, then the financial information is not that useful to the users, to arrive a
good economic decision.
• Relevance – it can make difference in the decision making of the users. It is relevant of it has predictive value
(make predictions about future outcomes) and confirmatory value (confirm the predictions made). Information
is relevant when material information is presented properly. Information is material if omitting or misstating it
could reasonably be expected to influence decisions that the primary users make, based on those financial
statements.
• Faithful Representation – information provides true, correct, and complete depiction of the economic situation
that it represents. It is faithfully represented when it has completeness (presents all necessary information for
the user to understand the situation of business including the nature and explanation of transactions and its
monetary effect), neutrality (information is presented without bias), and free from error (no errors in
description and in the process in which information is selected and applied)
Enhancing Qualitative Characteristics
These characteristics make a financial information more useful to decision makers. Lacking on these areas, however, still
makes the financial information useful for having a good economic decision. Enhancing qualitative characteristics are
comparability, verifiability, timeliness, and understandability.
• Comparability – help users identify similarities and differences between sets of information from other time
periods and other reports. This can be achieved when concept of consistency is observed
• Verifiability – when different users can reach general agreement as to what the information purports to
represent. Direct verification involves physical observation, and indirect verification is when using calculations,
formula, or models to verify an information
• Timeliness – making the information timely enough to be able to influence the users on their decisions
• Understandability – information is presented in a clear and concise manner which makes information simple
enough for primary users, the people who have reasonable knowledge about the business, and who are willing
to analyze the information diligently
The accountants should strive to achieve these qualitative characteristics on their financial statements or financial
reports. In reality, there are situations, and circumstances that hinders the accountant to achieve these characteristics
(like the cost and time needed to generate the reports). The accountant should make judgement to balance the need to
have financial information that is useful for the users.
o COST CONSTRAINT – cost is a pervasive constraint to entity’s ability to provide useful information. As
providing information entails costs and can only be justified with benefits that is expected in return.
Accordingly, an optimum balance between costs and benefits is desirable such that costs does not
outweigh the benefits
3. Financial Statements and The Reporting Entity
- Financial statements are reports on the business’s, or entity’s, economic resources, claims, and how
efficiently the business’s management utilized these economic resources. The parts of a complete financial
statement are.
o Statement of financial position (balance sheet) – shows economic resources of the entity, the
claims, and change in those resources
o Statement of comprehensive income (income statement) – shows information on how
management utilized these economic resources
o Statement of changes in equity – shows items or transactions that affect the equity accounts, or
the owners accounts during the period
o Statement of cash flows – shows information as to where the cash of the business or entity is
coming from, where it is spent during the period
o Notes to financial statements – explains the details on items found in the previous statements
o Additional statement of financial position – required when there are changes in accounting
policy from one period to other
 - Reporting entity is the organization, or component of an organization, or a group of organizations, that the
financial statements are prepared for. Sometimes an organization, the parent company, controls other
organization, the subsidiaries.
o Consolidated Financial Statement – financial report includes both the parent and the subsidiary
o Unconsolidated Financial Statement – report of a parent entity or subsidiary alone
o Combined Financial Statement – two subsidiaries are combined in a report
Financial statements are prepared on the perspective of the organization. It shows the organization’s economic
resources, its claims, the movements of these resources and claims. It also shows how the management efficiently uses
these economic resources.
The financial statements are prepared under the following assumptions:
• Fair presentation in compliance with the Accounting Standards
• Going concern assumption
• Accrual Accounting
• Materiality and Aggregation
• Offsetting principle
• Reporting frequency
• Comparative information
• Consistency of presentation.
4. The Elements of Financial Statements
- The financial statements provide information on the entity's (a) economic resources; (b) claims of these
resources; and (c) the change in those resources and claims.
The financial statements therefor should contain the following elements:
• Assets - the present economic resources controlled by the entity as a result to past events. An economic
resource is a right that has the potential to produce economic benefits.
• Liabilities - present obligations of the entity to transfer an economic resource as a result of past events. An
obligation is a duty or responsibility that the entity has no practical ability to avoid.
• Equity - the residual interest in the assets of the entity after deducting all its liabilities.
• Income - the increase in the assets of the entity, or decrease in liabilities, that results in the increase in equity,
other than those relating to contributions from holders of equity claims (owner's investments).
• Expenses - is the decrease in assets, or increase in liabilities, that result in decrease in equity, other than those
relating to distribution to holders of equity claims (owner's withdrawals).
An accountant should master the analysis of business transactions to the effects in the elements of the financial
statements.
5. recognition and derecognition
- Recognition is the process of including in the statement of financial position or in the statement of
comprehensive income, an item that meets the definition of one of the elements of a financial statement.
This involves recording the item in words and in monetary terms within the financial report.
An item is recognized in the financial statements, if:
• It meets the definition of an asset, liability, equity, income, or expense; and
• Recognizing it would provide useful information. It should be relevant and faithfully represented information
Recognition is what is being determined in the accounting process of analyzing business transactions. When a business
transaction influences assets, liabilities, or equity, then that transaction shall be recognized as part of the financial
statements.
- Derecognition is the opposite of recognition. It is the removal of a previously recognized asset or liability
from the entity’s financial statements. Derecognition occurs when the item no longer meets the definition
of an asset or liability, such as when the entity loses control of all or part of an asset, or no longer has the
present obligation for all or part of the liability.
Unit of account
- It 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.
Assets are different from each other, depending on the nature and purpose, hence these are recognized and measured
separately. For example, cash is an asset, and it has its own recognition and measurement rules from the accounting
standards, while office equipment is another kind of asset that has its own accounting standard for recognition and
measurement. Although both are the same assets, each has its own separate unit of account. This concept also applies to
liabilities, equity, income, and expense.
To recap, recognition is the process of including an item of a transaction into the financial statements while
derecognition is the process of removing a previously recognized asset, liability, or equity.
6. Measurement
Recognition requires quantifying an item in monetary terms, thus necessitating the selection of an appropriate
measurement basis.
The Conceptual Framework describes the following measurement bases:
• Historical cost – the historical cost of an asset is the consideration paid to acquire the asset, plus transaction
costs, while historical cost of a liability is the consideration received to incur the liability, minus transaction
costs.
Illustration: A business purchased a blending machine paying ten thousand pesos for the item, and five hundred
pesos for delivery cost. The historical cost of the blending machine therefore is ten thousand five hundred
pesos, the consideration paid (the ten thousand pesos) plus transaction cost (the five hundred pesos).
• Current value – the current value measurement is subclassified as:
o Fair value –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.
o Value in use or Fulfilment value – Value in use present value of cash flows or other economic benefits
that an entity expects to derive from the use of an asset. Fulfilment value is the present value of the
cash, or other economic resources, that the entity expects to be obliged to transfer as it fulfils a
liability.
o Current cost – cost of an equivalent asset at the measurement date, comprising that would be paid,
plus transaction costs. Current cost of a liability is the consideration that would be received for an
equivalent liability at the measurement date, minus the transaction costs.
Accounting Standards give a specific measurement basis for a specific unit of account. When the Accounting Standard
mentions historical cost or fair value, then it means the following definitions above. When a transaction has no
Accounting Standards yet, the accountant can choose between historical cost or current value, taking into consideration
the effort needed for measuring the transaction, the qualitative characteristics of relevance and faithful representation,
against the benefits that the information will provide to the decision makers.
7. Presentation and Disclosure
Information about the assets, liabilities, equity, income, and expenses is communicated through presentation and
disclosure in the financial statements. Effective communication makes information more useful. It requires:
• focusing on presentation and disclosure objectives and principles, rather than rules
• classifying information by grouping similar items and separating dissimilar items.
• aggregating information in a manner that it is not obscured by excessive detail or by excessive summarization.
The cost constraint affects the decision about presentation and disclosure. The accountant should judge when the item
requires more cost than benefit when presented or when disclosed.
Effective communication through presentation and disclosure requires:
• entity-specific information, not a standardized descriptions;
• aggregation for large volume of detail, thus making information more useful;
• the minimization of providing duplication of information;
• the avoidance of combining dissimilar items since it reduces the usefulness of information;
• the avoidance of offsetting since it combines dissimilar items;
Typically, aggregation is presented at the statement of financial position and comprehensive income, while the detailed
information is disclosed at the notes to financial statements.
8. Concepts of Capital and Capital Maintenance
Equity is the residual of assets less liabilities while capital is the amount of investment by the owners into the business.
These terms are mostly used interchangeably but it is important to know the difference