CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS CONRADO T. VALIX, BSC, LLB Certified Public Accountant and Lawyer President, CPA Review Director and CPA Reviewer CPA Review School of the Philippines CPAR Lifetime Member Integrated Bar of the Philippines JOSE F. PERALTA, BBA, MBA, DBA Certified Public Accountant President and Dean Philippine School of Business Administration CHRISTIAN ARIS M. VALIX, BSME, BSA Certified Public Accountant Ateneo Management Engineering Graduate Assistant Review Director and CPA Reviewer CPA Review School of the Philippines CPAR 2022 Edition ; ;PREFACE This new book is in accordance with the memorandum of the Commission on Higher Education required for the degree of Bachelor of Science in Accountancy. The book covers description. of the Accountancy Profession, the Conceptual. Framework, an: introduction to the preparation of financial statements and concise discussion. of all Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards or PFRS related to financial accounting. The book will introduce the Bachelor of Science in Accountancy students to the wide world of accounting standards known as International Financial Reporting Standards or IFRS. Moreover, the book will provide a solid foundation for the Bachelor of Science in Accountancy students before taking up the three intermediate or financial accounting subjects. VALIX PERALTA VALIX January 2022Accounting Standards The following accounting standards related to financial accounting are discussed and exemplified in this book: PAS earn re 12 16 19 20 23 24 28 29 32 33 34 36 37 38 40 41 Presentation of financial statements Inventories Statement of cash flows Accounting policies, changes in accounting estimate and errors Events after the reporting period Income taxes Property, plant and equipment Employee benefits Accounting for government grant and disclosure of government assistance Borrowing costs Related party disclosures Investment in associates Financial reporting in hyperinflationary economy Financial instruments — presentation Earnings per share Interim financial reporting Impairment of assets Provisions, contingent liabilities and contingent assets Intangible assets Investment property AgriculturePFRS 1 13 16 16 IFRIC 1 17 19 First time adoption of PFRS Share-based payment Noncurrent assets held for sale and discontinued operation Exploration and evaluation of mineral resources Operating segments Financial instruments Fair value measurement Revenue from contracts with customers Leases Changes in existing decommissioning, restoration and similar liabilities Members' shares in cooperative entities and similar instrunients Distribution of noncash assets to owners Extinguishing financial liabilities with equity instruments The accounting standards related to advanced accounting are not covered in this book but are taken up in an advanced accounting course.CONTENTS CHAPTER 1 1 THE ACCOUNTANCY PROFESSION Definition of accounting The accountancy profession Limitation of the practice of public accountancy Accreditation to practice public accountancy Continuing professional development ~ Generally accepted accounting principles Financial Reporting Standards Council International Accounting Standards Board CHAPTER 2 27 CONCEPTUAL FRAMEWORK Objective of financial reporting Definition of Conceptual Framework Purposes of Conceptual Framework Scope of Conceptual Framework CHAPTER 3 Cinoes CONCEPTUAL FRAMEWORK Qualitative characteristics Fundamental qualitative characteristics Enhancing qualitative characteristics Cost constraint on useful information eeiE ACCOUNTANCY PROFESSION ICAL KNOWLEDGE accounting. the overall objective of accounting. crib e the practice of the accountancy profession in the erstand the Continuing Professional Development in the field of accqunting. the meaning of generally accepted accounting iples. the standard-setting body in the Philippines. and the International Accounting StandardsDEFINITION OF ACCOUNTING The Accounting Standards Council provides the following definition: Accounting is a service activity. The accounting function is to provide quantitative information, primarily. financial in nature, about economic entities, that is intended to be useful in making economic decision. The Committee on Accounting Terminology of the American Institute of Certified Public Accountants provides. the following definition: Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and evenis which are in part at least of a financial character and interpreting the results thereof. The American Accounting Association in its Statement of Basic Accounting Theory offers the following definition: Accounting is the process. of identifying, measuring and communicating economic information to permit ‘informed judgment and decision by users of the information. Important points The following important points made in the definition of accounting should be noted: One - Accounting is about quantitative information. Two - The information is likely.to be financialin nature. Three — The information should be useful in decision making. ‘The definition that has stood the test of time is the definition given by the American Accounting Association. This definition states that the very purpose of accounting is to provide quantitative information to be useful in making an economic decision. The definition also states that accounting has a number of components, namely: a. Identifying as the analytical component. b. Measuring as the technical component. c. Communicating as the formal component. 2‘Identifying This accounting process is the recoraition or nonrecognition of business activities as “accountable” events. Not ail: business activities are accountable. For example, the hiring of employees, the'death of the entity president and the ‘entering into a contract are all business activities but such events are not accountable because such activities cannot be quantified or expressed -in terms of'a unit of measure. An: event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other words, the subject. matter of accounting is economic activity or the measurement of economic resources and economic obligations, Only economic activities are emphasized and recognized.in accounting. Sociological and psychological matters are beyond the province ‘of accounting. External and internal transactions Economic activities of an entity are referred to as transactions which may be classified as external and internal. External transactions or exchange transactions are those economic events involving one entity and another entity. Examples of external transactions are: a. Purchase of goods from a supplier b. Borrowing money from a bank c. Sale of goods to a customer d. Payment of salaries to employees e. Payment of taxes to the government, Internal transactions are the economic activities that-take place entirely within the entity only. No other parties are involved. Production and casualty loss are examples of internal transactions. Production is the process by which resources are transformed into products: Casualty is. any. sudden and unanticipated loss froni fire, Hood ee e and other event ordinarily termed as an act of God. 3 tSMeasuring Measuring is the accounting process of assigning of peso amounts to the accountable economic transactions and events. If accounting information is to be useful, it must be expressed in terms of a common financial denominator. Financial statements without monetary amounts. would be largely unintelligible or’ incomprehensible. The measurement bases are. historical cost and current value. Historical: cost is the original acquisition cost and the most common measure of financial transactions. Current value includes fair value, value in use, fulfillment value and current cost. é Communicating Communicating is the process of preparing and distributing accounting reports to potential users of accounting information. Identifying and measuring are pointless if the information contained in the accounting records cannot be communicated in some form to potential users. Actually, the communicating process is the reason why accounting has been called the “universal language of business” Implicit in the communication process are the recording, classifying and summarizing aspects of accounting. Recording or journalizing is the process of systematically maintaining a record of all economic business transactions after they have been identified and measured. Classifying is the sorting or grouping of similar and interrelated economic transactions into-their respective classes. Classifying-is accomplished by posting to the ledger. The ledger is a group of accounts which are systematically categorized into asset accounts, liability accounts, equity accounts, revenue accounts and expense accounts. Summarizing is the preparation of financial statements which include the statement Stnagaeiat position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows. 4EE Overall objective of accounting The overall objective of accounting is to provide quantitative financial information about a business useful to statement users particularly owners and creditors in making economic ‘isions. Accounting is an information system that measures business activities, processes information into financial reports and communicates the reports to decision makers. An accountant’s primary task is to supply financial information so that the statement users could make informed Judgment and better decision. Financial reports tell us how well an. entity is performing in terms of profit and loss and where it stands in financial terms, THE ACCOUNTANCY PROFESSION At present, Republic Act No: 9298 is the law regulating the Practice of accountancy in the Philippines. ‘This law is known as the Philippine Accountancy Act of 2004. Accountancy has developed as a profession attaining a status equivalent to that of law and: medicine, Tn the Philippines, in order to qualify to practice the Secountancy profession, a person must finish a degree in Bachelor of Science in Accountancy and pass a very difficult =evernment examination given by the Board of Accountancy. The Board of Accountancy is the body authorized by law to promulgate rules and. regulations affecting the practice of the ‘Gecountancy profession in the Philippines. The Board of Accountancy is responsible for preparing and Grading the Philippirie CPA examination. This computer-based examination is offered: twice a year, one = May and another one in October, in authorized testing centers ound the country.Limitation of the practice of public accountancy Single practitioners and partnerships for the practice of public accountancy shall be registered certified public accountants in. the Philippines. A certificate of accreditation shall be issued to certified public accountants in public practice only upon showing in accordance with rules and regulations promulgated by the Board of Accountancy and ‘approved by the Proféssional Regulation Commission that such registrant has acquired a minimum of three years of méaningful’ experience in any of the’ areas of public practice inchiding taxation. The Securities and Exchange Commission shall not register any corporation organized for the practice of public accountancy. Accreditation to practice public accountancy Certified public accountants, firms and partnerships of certified public accountants, including partners and staff'members are required to register with the Board of Accountancy and Professional Regulation Commission for the practice of public accountancy. The Professional Regulation Commission upon favorable recommendation of the Board of Accountancy shall issue the Certificate of Registration to practice public accountancy which shall be valid for 3 years and renewable évery 3 years upon payment of required fees. Certified Public Accountants generally practice their profession in three main areas, namely: a. Public accounting b. Private accounting ec. Government accounting.PUBLIC ACCOUNTING The field of public accounting or public accountancy is composed of individual practitioners, small accounting firms and large multinational organizations that render independent and expert financial services to the public. Public accountants usually offer three kinds’ of services, namely auditing, taxation and management advisory services. As a matter of fact, large multinational accounting firms have separate division for each of these services. Auditing Auditing has traditionally been the primary service offered by most public accounting practitioners. Auditing or external auditing is the examination of financial statements by independent certified public accountant for the purpose of expressing an opinion as to the fairness with which the financial statements are prepared. Actually, external auditing is the attest function of independent CPAs. The Bureau of Internal Revenue requires audited financial statements to accompany the filing of annual income tax return. Banks and other lending institutions frequently require an eer by an independent CPA before granting a loan to the rower. ; Creditors and prospective investors place considerable eee on audited financial statements on making economic ecision. s, Taxation Taxation service includes the preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavors. The CPA not infrequently represents the client in tax investigations. To offer, this service effectively and efficiently, the public accountant must be thoroughly familiar with the tax laws and regulations and updated with changes in taxation law and court casés-concerned with interpreting taxation law. 2Management advisory services Management advisory services have become increasingly important in recent years although audit and tax services are undoubtedly the mainstay of public accountants. The term management advisory services has no precise coverage but is used generally to refer to services to clients on the following matters: Advice on installation of computer system Quality control Installation and modification of accounting system ae ne, Forward planning and forecasting PRIVATE ACCOUNTING Many Certified Public Accountants are employed in ‘business entities in various capacity as accounting staff, chief accountant, internal auditor and controller. 2 Re SP The highest accounting officer in an entity.is known as the controller. The major objective of the private accountant is to assist anagement in planning and contro’'ing the entity's operations. Private accounting includes eee the Renard, producing the financial reports, preparing the budgets and controlling and allocating the resources of the entity. GOVERNMENT ACCOUNTING Government accounting encompasses the: process'of analyzing, classifying, summarizing and communicating all transactions involving the receipt and disposition of government funds and property and interpreting the results thereof. The focus of government accounting is the custody and administration of public funds. Many Certified Public Accountants are employed in:some branches of the government, more particularly Bureau of Internal Revenue, Commission on Audit, Securities and Exchange ‘Commission and Bangko Sentral ‘ng Pilipinas.CONTINUING PROFESSIONAL DEVELOPMENT (CPD) Republic Act No. 10912 is the law mandating and strengthening the continuing professional development program for all regulated professions, including the accountancy profession. All certified public accountants shall abide by the requirements, rules and regulations. on continuin, professional development to pe ents by the Board o: Accountanc subject to the approval of the Professional gulation Commission. ine Professional development is the acquisition of advanced knowledge, skill and proficiency. rofessional development raises and enhances the ft the Certified Public Accountant, Continui technical skill and competence oj CPD credit units The CPD credit units refer to the CPD credit hours required for the renewal of CPA license and accreditation of a CPA to Practice the accountancy profession every three years. Under the new BOA Resolution, all Certified Public Accountants regardless of area or sector of practice shall be required to comply with 120 CPD credit units. The Bee Professional Development is required for the renewal of CPA license and accreditation of CPA to practice the accountancy profession. The Continuing Professional Development has become mandatory for Certified Public Accountants. As recently promulgated, only 15-CPD credit units are required ie the renewal of CB license. However, 120 CPD credit units are required for accreditation of a CPA to practice the accountancy profession. Excess credit units earned shall not be carried over to the next three-year period, except credit units earned for masteral and doctoral degrees. Exemption from CPD A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65 years. However, ‘this Sen ee applied only to the renewal of CPA license and not for the purpose of accreditation to-practice the accountancy profession.Accounting versus auditing In a broad sense, accounting embraces auditing. Auditing is one of the areas of accounting specialization. In a limited sense, accounting‘is essentially, constructive in nature, Accounting ceases when financial statements are already prepared. On the other hand, auditing is analytical. The work of an auditor begins when the work of the accountant ends, After the financial statements are prepared, the auditor will begin to perform the task of auditing. The auditor examines the financial statements to ascertain whether they are in conformity with generally accepted accounting principles. Accounting versus bookkeeping Bookkeeping is procedural and largely concerned with development and maintenance of accounting records. Bookkeeping is the “how” of ‘accounting. Accounting is conceptual and is concerned with the why, reason or justification for any action adopted. Bookkeeping is a procedural element of accounting as arithmetic is a procedural element of mathematics. Accounting versus accountancy Broadly speaking, the two terms are synonymous because they both refer to the entire field of accounting theory and practice. Technically speaking, however accountancy refers to the profession of accounting practice. Accounting is used in reference only to a particular field of accountancy such as public accounting, private accounting and government accounting. 10Financial accounting versus managerial accounting Financial accounting is primarily concerned with the recording of business transactions and the eventual preparation of financial statements. Financial accounting focuses on general purpose reports known as financial statements intended for internal and external users. Financial accounting is the area of accounting that emphasizes reporting to creditors and investors. Managerial accounting is the accumulation and preparation of financial reports for internal users only. In other ‘words, managerial. accounting is the area of accounting that emphasizes developing accounting information for use within an entity. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Accounting has evolved through time changing with the needs of society. As new types of transactions occur in trade and commerce, accountants develop rules and procedures for recording: them. These accounting rules, procedures and.practices came to be. known’ as generally accepted accounting principles or simply GAAP. The principles have deyeloped on the basis of experience, reason, custom, usage and practical necessity. Generally accepted accounting principles represent the rules, procedures, practice and standards followed: in the preparation and presentation of financial statements. Generally accepted accounting principles are like laws that must be followed in financial reporting. The process of establishing GAAP is a political process which incorporates political actions of various interested user groups as well as professional judgment, logic and research. 11Purpose of accounting standards The overall purpose of accounting standards is to identify proper accounting practices for the preparation and presentation of financial statements. Accounting standards create a common understanding between preparers and users of financial statements particularly the measurement of assets and liabilities. A set of high-quality accounting standards is a necessity to ensure comparability and uniformity in financial statements based on the same financial information. FINANCIAL REPORTING STANDARDS COUNCIL In the Philippines, the development: of. generally accepted accounting principles is formalized initially through the creation of the Accounting Standards. Council or ASC. The Financial Reporting Standards Council or-FRSC now replaces the Accounting Standards Council. The FRSC is the accounting standard setting body created by the Professional Regulation Commission upon recommendation of the-Board of Accountancy to assist the Board of Accountancy in carrying out its powers and functions provided under R.A. Act No. 9298. The main function is to establish and improve accounting standards that will be generally accepted in the Philippines. The accounting standards promulgated’ by the Financial Reporting Standards Council constitute the highest hierarchy of generally accepted accounting principles in the Philippines. The approved statements of the FRSC are known as Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards or PFRS. 12Composition of FRSC The FRSC is composed of 15 members with a Chairman who had been or is presently a senior accounting practitioner and 14 representatives from ‘the following: Securities and Exchange Commission Bangko Sentral ng Pilipinas Bureau of Internal Revenue ‘Commission on Audit Major organization of preparers and users of financial statements — Financial Executives Institute of the Philippines or FINEX Accredited national professional organization of CPAs: Public Practice _ Comimerce and Industry Academe or Education Government Total The Chairman and members of the FRSC shall have a term of 3 years renewable for another term. : bat te Ils ho no vo 20 Philippine Interpretations Committee The Philippine Interpretations Committee or PIC was formed by the FRSC in August 2006 and has replaced the Interpretations Committee or IC formed by the Accounting Standards Council in May 2000. The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and to provide timely guidance on financial reporting issues not specifically addressed in current PFRS. ce In other words, interpretations are intended to give authoritative. guidance on. issues that are’ likely to receive divergent or unacceptable treatment because the standards do not provide ‘specific and clearcut rules and guidelines. The counterpart of the PIC in the International Accounting Standards Board is the International Financial Reporting Interpretations Committee or IFRIC. 18INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE The International Accounting Standards Committee or IASC is an independent private sector body, with the objective of achieving uniformity in the accounting principles which are used by business and other organizations for financial reporting around the world. It was formed in June 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United ‘States of America. ‘The IASC is headquartered in London, United Kingdom. Objectives of IASC a. To formulate and publish in the publicinterest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance. b. To work:generally for the improvement and harmonization of regulations, accdunting standards ‘and procedures relating to the presentation of financial statements. INTERNATIONAL ACCOUNTING STANDARDS BOARD The International Accounting Standards Board or IASB now pepinces the International Accounting Standards Committee or . The IASB publishes standards-in.a series of pronouncements called International Financial Reporting Standards or IFRS. However, the IASB has adopted the body of standards issued by the IASC. The pronouncements of the IASC continue to be designated as International Accounting Standards or IAS. The IASB standard-setting process includes in the correct order research, discussion paper, exposure draft and accounting standard. The IASB declared that the merits of proposed standards are assessed from a position of mantraliy: A due process system is employed to.enable interested parties to express théir views on issues. under consideration. 14 .Move toward IFRS : In developing accounting standards that will be generally accepted in the Philippines, standards issued by other standard setting bodies such as the USA Financial Accounting Standards Board (FASB) and the IASB are considered. In the past years, most of the Philippine standards are based on American accounting standards. At present, the FRSC has adopted in their entirety all International Accounting Standards and International Financial Reporting Standards. : The move toward IFRS is essential to achieve the goal of one uniform and globally accepted financial reporting standards. Philippine Financial Reporting Standards ‘The Financial Reporting Standards Council issues standards in a series of pronouncements called Philippine Financial Reporting Standards or PFRS. The Philippine Financial Reporting Standards collectively include all of the following: - . = Philippine Financial Reporting Standards which correspond to International Financial Reporting Standards. : The Philippine Financial Reporting Standards are numbered the same as their counterpart in International Financial Reporting Standards. b Philippine Accounting Standards, which correspond to International Accounting Standards. The Philippine Accounting Standards are numbered the same as their counterpart in International Accounting Standards. e Philippine Interpretations which correspond to Interpretations of the IFRIC and Interpretations developed by the Philippine Interpretations Committee. 15Pe EE NW ‘QUESTIONS 1. Define accounting. 2. Explain identifying as a cobiporitat of accounting. 3. When is a transaction accountable or. quantifiable? 4. Explain measuring as a component of accounting? 5. Explain communicating as component of accounting. 6. Explain recording, classifying.and summarizing in relation to the communicating component ‘of accounting. 7. What is the overall objective of accounting? 8. Describe the accountancy profession. 9. What is R.A..No. 9298? 10. What do you understand by the Board of Accountancy? 11. Explain the limitation of the practice of public accountancy. 12. Explain the accreditation to practice of accountancy. 13. What are the three main areas in the practice of the accountancy profession? 14. Explain public accounting. 15. Explain auditing, taxation. service and mnagement advisory services. 16. Explain private acocunting. _ 17. Explain government accounting. : . 18. What do you understand by the Continuing Professional Development of CPAs? : 16- What is che meaning of CPD credit units? How many CPD credit units are required? What is the purpose of the required CPD credit units? What is the exemption from the CPD requirements? : Distinguish accounting and auditing. Distinguish accounting and bookkeeping. Distinguish accounting and accountancy. Distinguish financial accounting and managerial _ accounting. Explain generally accepted accounting principles or GAAP. What constitute. GAAP in the Philippines? Explain the purpose of accounting standards. What do you understand: about the Financial Reporting _ Standards Council? What-is the composition of FRSC? What do you understand about the International Accounting Standards Committee? S. What do you understand by the Internationl Accounting Standards Board? What do you understand by the International Financial Reporting Standards? What are collectively included in Philippine Financial __ Reporting Standards? 17PROBLEMS Problem 1-1 Multiple choice (ACP) 1. Accounting is a service activity and the function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. This accounting definition is - given by a. Accounting Standards Council b.. AIGPA Committee on Accounting. Terminology c. ‘American Accounting Association d. Board of Accountancy 2. All of the following describe accounting, except a. A service activity 4. An information system c. A universal larguage of business d. An exact science rather than an art 8. The important points. made ‘in the definition of accounting include all of the following, except a. Accounting information is quantitative. b.- Accounting information is qualitative. ~ ¢. Accounting information is financial in nature. od Accounting information is useful in decision making. 4. This accounting process is the recognition or nonrecognition of business activities as accountable events. a. Identifying b. Measuring c, Communicating d. Reporting 5. What are the events that affect the entity and in which other entities participate? a.’ Internal events b. External events c. Current events d. Obligating events 186. Which is incorrect in relation to an accountable event? a. An event is accountable when it has an effect on asset, liability or equity. b. The subject matter of accounting is the measurement of economic resources and obligations. Only economic activities are emphasized and recognized in accounitng. d. Sociological and psychological matters are quantifiable. 7. What is the measuring component in the definition of accounting? Pp a. The recognition or nonrecognition of business activities as accountable events. b. The assigning of peso amounts to the accountable events. c. The preparation and distribution of accounting reports to‘users of accounting information. d. The preparation of audit report by CPAs. 8 The most common financial attribute used in measuring ial information is a. Historical cost b. Current cost c. Fair value d. Value in use 9. The communicating ‘process of accounting includes all of the following, except a. Recording b. Classifying e. Summarizing d. Interpreting * 10. What is the overall objective of accounting? a. To provide the information that the managers of an economic entity need to control the operations. To provide information that the creditors can use in deciding whether to grant loans to an entity. To measure the periodic income of the economic entity. |. To provide quantitative financial information about an entity useful in making economic decision. gupst ge 19Problem 1-2 Multiple choice (ACP) 1, What is the law regulating the practice of accountancy in the Philippines? a. R.A.No. 9298 b. RA. No. 9198 c RA No, 9928 d. RA. No. 9892 2. What is the body authorized by law to ee rules ~ and regulations affecting the practice of the accountanty profession in the Philippines? a. Board of Accountancy b. Philippine Institute of Certified Public Accountants & Securities and Exchange Commission . Financial Reporting Standards Council 3. What are the three main areas in the practice of the accountancy profession? a. Public accounting, private accounting and managerial accounting. b. Auditing, taxation and managerial accounting. c. Financial accounting, managerial accounting and corporate accounting. d: Public accounting, private accounting and government accounting. 4. Which statement is correct in relation to the practice of public accountancy? a. Single practitioners for the practice of public accountancy shall be registered CPAs in the Philippines. b. Partners of partnerships formed for the tes of public accountancy shall be registered CPAs in the Philippines. c. The Securities and Exchange Commission shall not register any corporation organized for the practice of public accountancy. d. All of-these statements are correct about the practice of public accountancy. 5. CPAs are licensed by a. The PICPA b. The SEC c. The city government d. State government 20Problem 1-3 Multiple choice (ACP) 1. What is the standard-setting body in thie Philippines at the present time? a. Accounting Standards Council b. Auditing and Assurance Standards Council ¢. Philippine Accounting Standards: Board d. Financial Reporting Standards Council 2. All of the following are represented in FRSC, except a. Board of Accountancy b. Securities and Exchange Commission c Commission on Audit d. Department of Budget and Management 3.The Philippine Financial Reporting Standards collectively include a. b. ©. PFRS corresponding to IFRS. PAS corresponding. to IAS . Philippine Interpretations corresponding to IFRIC and SIC Interpretations and Interpretations developed by PIC. . All of these are included in Philippine Financial Reporting Standards 4 Accounting standard-setting has been characterized as a. A political process b. Using the scientific method Cc. Pure deductive reasoning d. A legal process 5. GAAP is an abbreviation for a. Generally authorized accounting procedures b. Generally applied accounting procedures c. Generally accépted auditing practices d. Generally accepted accounting principles 216. What is the primary service of CPAs in public practice? a. Auditing b. Taxation c. Managerial accounting- d. Controllership 7. Accountants employed in entities in various capacity as accounting staff, chief accountant or controller are said to be engaged in a. Public accounting b. Private accounting c. Government accounting d. Financial accounting 8.It is the area of the accountancy profession that encompasses the process of analyzing, classifying, summarizing and communcating all‘ transactions involving the receipt and disposition of government funds ‘and property and interpreting the results thereof. a. In ternal auditing b: External auditing c: Private accounting d. Government accounting 9. The Continuing Professional Development is required for a. Renewal of CPA license b. Accreditation to practice the accountancy profession c. Both renewal of CPA license and accreditation to practice the accountancy profession d. Neither renewal of CPA licénse nor accreditation to practice the accountancy profession 10. ACPA shall be permanently exempted from renewal of CPA . license a. At the age of 65 years -b, When working abroad c. When practicing the profession abroad d. When studying abroad _ 22Problem 1-4 Multiple choice (IFRS) 1. The International Accounting Standards Board was formed . Todas bares i Herd . develop a single set of high quality IFRS c. To establish accounting standards for multinational entities d. To develop accounting standards. for countries that do not have their own standard-setting bodies 2. The International Accounting Standards Board a. Was the predecesgor'to the LASC. b. Can overrule the USA GAAP when their policies disagree. c. Promotes the use of high-quality and understandable bal accounting standards. d. its headquarters in Geneva 3. The IASB declared that the merits of proposed: standards are assessed a. From a position of neutralit b. From a position of materiality c. Based on possible impact on behavior da. Based on arguments of lobbyist 4 The standard-setting process includes in the correct order a. Exposure draft, research, discussion paper and accounting standard b. Research, exposure draft, discussion paper and accounting standard e. Research, discussion paper, exposure draft and accounting standard d. Discussion paper, research, exposure draft and accounting standard 5. The IASB employs a due process system which a. Is an efficient system for collecting dues from members. b. Enables interested parties to express their views on issues under ennsidaretnie c. Identifies the accounting issues that are the most important. - ,% Requires that all CPAs must receive a copy of IFRS. 236. What is due process in standard-setting by IASB? a. IASB operates in full view of the ‘public. b. Public-hearings are held on proposed standards. c. Interested parties can make- their views known. d. All of these are part of due process in standard-setting. 7. The standards published by IASB are called a. International Accounting Standards b.. Financial Reporting Standards c. International Financial Reporting Standards d. Statement of Financial Accounting Standards 8. What is a possible danger if politics plays too big-a role in developing IFRS? a. Financial reporting standards are not truly generally accepted. b. Individuals may influence the standards. c. User groups become active. d. The IASB delegates its authority to elected officials. 9. Accounting standard-setting a. Can be described.as a political process which reflects political actions of various interested user groups as well as a product of research and logic. b. Is based solely on research and empirical findings. Is a legalistic process Is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable. ao 10. IFRIC Interpretations issued by IASB a. Are considered authoritative and must be followed. b. Cover newly identified financial reporting issues not specifically addressed. c. Cover issues. where unsatisfactory or conflicting interpretations have developed. d. All of these are true about IFRIC Interpretations. 24Problem 1-5 Multiple choice (IAA) 1. Financial accounting is concerned with a. General purpose reports on financial position and financial performance. Special reports for inventory management. Special reports for income tax computation. . General purpose reports on changes in share prices. 2. Financial accounting can be broadly defined as the area of accounting that prepares pes a. General purpose financial statements to be used by parties internal to the entity. b. Financial statements to be used by investors. c. General purpose financial statements to be used by parties both internal:and external to the entity. d. Financial statements ‘to be used primarily by management. 3. Financial accounting emphasizes reporting to a. Management b. Regulatory bodies c. Internal auditors d.. Creditors and investors 4. Managerial accounting emphasizes Reporting financial information to external users Reporting to the SEC : Expertise in data processing Developing accounting information for use within an entity 5. Which statement is‘true regarding managerial and financial accounting? : a. Managerial accounting is generally more precise. b. Managerial accounting néed‘not follow generally accepted accounting principles while financial accounting must follow GAAP. Managerial accounting has a future focus. . The emphasis on managerial accounting. is relevance and the emphasis on financial accounting is timeliness. Be op ae 25Problem 1-6 Multiple choice (IAA) 1. Generally accepted accounting principles a. Are accounting nee rane based on law. b. Derive their credibility and authority from legal rulings and court precedents. c. Derive their credibility and authority from a Ferner regulatory authority. erive their credibility and authority from general recognition and acceptance by the accountancy profession. 2. Which statement best describes GAAP? a. The accounting principles have been formulated in-the “public sector. b. The accounting principles have been developed on the basis of such factors as usage and practical necessity. c. The accounting principles are the same as laws. d. The accounting principles do not apply to small and medium-sized entities. 3. Proper application of accounting principles is most dependent upon a. Existence of specific guidelines b. Oversight of regulatory bodies e. External audit function d. Professional judgment of the accountant 4. Once an accounting standard has been established a. The standard is continually reviewed to see if modification is necessary. b. The standard is not reviewed unless a.regulatory ee makes a complaint. c. The task of reviewing the standard is given to the national accounting organization. d. The principle of consistency requires that no revisions ever be made to the standard. 5. The primary responsibility for properly applying GAAP lies with a. External auditor b. Internal auditor c. Management d. National accounting organization 26CHAPTER 2 CONCEPTUAL FRAMEWORK Objective of financial reporting TECHNICAL KNOWLEDGE To know the nature of the Revised Conceptual Framework. To describe the purpose and usefulness of a Conceptual Framework, : To understand the, authoritative status of a Conceptual Framework. To understand the objective of financial reporting. To know the limitations of financial reporting.CONCEPTUAL FRAMEWORK The Conceptual Framework for Financial Reporting is a complete, comprehensive and single document promulgated by the International Accounting Standards Board. _The Conceptual Framework is a summary of the terms and concepts that underlie the preparation and presentation of financial statements for external users. In other words,.the Conceptual Framework; describes the concepts for general purpose financial reporting. The Conceptual Framework is an attempt to provide an overall theoretical foundation for accounting. The Conceptual Framework is intended to guide standard setters, preparers and users of financial ‘information in the preparation and presentation of statements. The Conceptual Frmework is the underlying theory for.the development of accounting standards and revision of previously issued accounting standards. The Conceptual Framework will be used in future standard setting decision but no changes are made to the current IFRS. The Conceptual Framework provides the foundation for Standards that: a. Contribute to transparency by enhancing international comparability and quality of financial information. b. Strengthen accountability by reducing information gap between the providers of capital and the people to whom they have entrusted their money. c. Contribute to economic efficiency by helping investors to idextify opportunities and risks across the world. 28Purposes of Revised Conceptual Framework @ To assist the International: Accounting Standards Board to develop IFRS Standards based on consistent concepts. 6. To assist preparers of financial statements to develop consistent accounting policy when no Standard applies to a particular transaction or other event or where an issue is not yet addressed by an IFRS. c To assist preparers of financial statements to develop accounting policy when a Standard allows a choice of an accounting policy. ad. To assist all parties to understand and interpret the IFRS Standards. _ Authoritative status of Conceptual Framework If there is a standard or an interpretation that specifically _ applies to a transaction, the standard or interpretation _ everrides the Conceptual Frameuiork. _ In the absence of a standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in developing and applying an accounting policy that results in _ information that is relevant and reliable. However, it is to be stated that the Conceptual Framework 4s not an International Financial Reporting Standard. _ Nothing in the Conceptual Framework overrides any specific International Financial Reporting Standard. Is case where there is a conflict, the requirements of the _ International Financial Reporting Standards shall prevail _ ever the Conceptual Framework.Users of financial information Under the Conceptual Framework for Financial Reporting, the users of financial information may be classified into two, namely: : a. Primary users b. Other users The primary users include the existing and potential investors, lenders and other creditors. The other users include the employees, customers, governments and their agencies, and the public. Primary users The primary. users of financial information are the parties to whom general purpose financial reports are primarily directed. Such primary users cannot require reporting entities to provide information directly to them and therefore must rely on general purpose financial reports for how much of the financial information is needed. Existing and potential investors Existing and potential investors are concerned with the risk inherent in and return provided by their investments. The investors need information to help them determine whether they should buy, hoid or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends. Lenders and other creditors Existing and potential lenders and other creditors are interested in information which enables them to determine whether their loans, interest thereon and other amounts owing to them will be paid when due. 30Other users _ By residual definition, other users are users of financial _ information other than the existing and potential investors, lenders and other creditors. _ Other users are so called because they are parties that may find the general purpose financial reports useful but the reports are not directed to them primarily. Employees ; Employees are interested in information about the stability and profitability of the entity. . _ The employees are interested in information which enables them to assess the ability of the entity to provide Temuneration, retirement benefits and employment _ @pportunities. _ Customers Customers have an interest in information about the _@entinuance of an entity especially when they have a Jeng-term involvement with or are dependent on the entity. Governments and their agencies ‘Governments and their agencies are interested in the allocation ‘of resources a‘:4 therefore the activities of the entity. ‘These users require ‘information to regulate the activities of ‘the entity, détermine taxation policies and as a basis for i income-and similar statistics. lic i affect members of the public in a variety of ways. For example, entities make substantial contribution to the economy in many ways including the number of people ‘they employ and their patronage of local suppliers. Financial statements may assist the public by providing ‘formation about the trend and the range of its activities. 381Scope of Revised Conceptual Framework Objective of financial reporting Qualitative characteristics of useful financial information Financial statements and reporting entity Elements of financial statements Recognition and derecognition Measurement Presentation and disclosure Concepts of capital and capital maintenance OBJECTIVE OF FINANCIAL REPORTING SAAT OE The objective of financial reporting forms the foundation of the Conceptual Framework. The overall objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders.and other creditors in making decisions about providing resources to the entity. The objective of financial reporting is the "why", purpose or goal of accounting. Financial reporting is the provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the effectiveness of the entity's management. The principal way of providing financial information to external users is through the annual financial statements. However, financial reporting encompasses not only financial statements but also other information such as financial highlights, summary of important financial figures, ‘analysis of financial statements and significant ratios. Financial reports also include nonfinancial information such as description of major products and a listing of corporate officers and directors. 32Target users Financial reporting is directed primarily to the existing and _ potential ‘investors, lenders and other creditors which compose the primary user group. ‘The reason is that existing and potential investors, lenders and other creditors’ have the most critical and immediate need for information in financial reports. _ As a matter of fact, the primary users of financial information _ are the parties that provide resources to the entity. Moreover, information that meets;the needs of the specified ' ary users is likely to meet the needs of other users such as ‘employees, customers, governments and their agencies. management of a reporting entity is also interested i in ial information about the entity. ver, management need not rely on-general purpose neial reports because it is able to obtain or access litional financial information internally. ecific objectives of financial reporting overall objective of financial reporting is to provide ation useful fot decision making. Conceptual Framework places more emphasis on the nce of providing information néeded to assess the ent stewardship of the entity's economi¢ resources. , the specific objectives of financial reporting are: To provide information useful in making decisions about _ providing resources to the entity. To provide information useful in assessing the cash flow _ prospects of the entity. a To provide information about entity resources, claims and _ changes in resources and claims. 33Economic decisions Existing and potential investors. need general purpose financial reports.in order to enable them in making decisions whether -to'buy, sell or hold equity investments. Existing and potential lenders and other creditors need general purpose financial reports in‘order to enable them in making decisions whether to provide or settle loans and other forms of credit. Assessing cash flow prospects *- Decisions by existing and potential investors about buying, selling or holding equity instruments depend on the returns that they expect from an investment, for example, dividends. Similarly, decisions by existing and potential lenders and other creditors about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. Consequently, financial reporting should provide information useful in assessing the amount, timing and uncertainty of prospects for future net cash inflows to the entity. Economic resources and claims General purpose financial reports provide information about the financial position of a reporting entity. Financial position is information about the entity's economic. resources and the claims against the reporting entity. The economic resources are the assets and the claims are the liabilities and equity of the entity. In other words, the financial position comprises the assets, liabilities and equity of an entity at a particular moment in time. 34Information about the nature and amounts of an entity's economic resources and claims can help users identify the entity's financial strength and weakness. Otherwise stated, information, about financial position can help users to assess the entity's liquidity, solvency and the need for additional financing. Liquidity is the availability of cash in the near future to cover currently maturing obligations. _ Solvency is the availability of cash over a long term to meet _ financial commitments when they fall due. _ Information about priorities and payment requirements of existing claims can help-users to predict how future cash flows will be distributed among those with a claim against the reporting entity. Changes in economic resources and claims General purpose financial reports also provide information about the effects of transactions and other events that change _ the economic resources and claims. Changes in economic resources and claims result from financial performance and from other events or transactions, ‘such as issuing debt or equity instruments. 3 The financial performance of an entity comprises revenue, ‘expenses and net income or loss for a period of time.’ In other words, financial performance is the level of income earned by the entity through the efficient and effective usé of its resources. ‘The financial performance of an entity is also known as results _ of operations and is portrayed in the income statement and _ statement of comprehensive income. 35Usefulness of financial performance Information about financial performance helps users to understand the return that the entity has produced on the economic resources. Information about the return the entity has produced provides an indication of how well management: has discharged its responsibilities to make efficient and effective use of the entity's economic resources. Information about past financial performance is usually helpful in predicting the future réturns on the entity's economic resources. Information .about financial performance during a. period is useful is assessing the entity's abil‘ty to generate future cash inflows from operations, Accrual accounting The financial performance of the entity must be measured using the accrul basis of accounting. Accrual accounting depicts the effects of transactions and other events and circumstances on an entity's economic resources and claims in the periods in which those effects occur even if the resulting cash receipts and payments occur in a different period. In other. words, under’ the accrual basis, the effects. of transactions and other events are recognized when they occur and not as cash is received or paid. Simply stated, accrual accounting means that income is recognized when earned. regardless of when received and expense is recognized when incurred regardless of when paid. Information about financial performance measured in accordance with accrual accounting provides a better basis for assessing past and future performance than information solely about cash receipts and payments during a period. 36tations of financial reporting General purpose financial reports.do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. Primary users need to consider pertinent information from other sources, for example, general economic conditions, political events ‘and industry outlook. General purpose financial reports are not designed to show the value of an entity but the reports provide information to help the primary users estimate the value of the entity. General purpose financial reports are intended to provide common inforniation to users and cannot accommodate every request for information. To a large extent, general purpose financial reports are based on estimate and judgment rather than exact depiction. gement stewardship ormation about how efficiently and effectively management discharged its responsibility to use the entity's economic purces helps users to assess management stewardship of € resources. «, n information is also useful for predicting how gement will use the entity's economic resources in periods. < ee, the information can be useful for assessing the entity's pects for future net cash flows. example, management can decide not to dispose or sell stments when prices are declining in order to avoid ed. losses. 87QUESTIONS 1. What is the meaning of‘ Conceptual Framework? 2. What are the purposes of the Revised Conceptual Framework? 3. Explain the authoritative status of the Conceptual Framework. 5 4. Explain the primary users and their information needs. 5. Exiga the other users and their information needs. 6. What is the scope of the Revised Conceptual Framework? 7. Explain financial reporting. 8, What is the overall objective of financial reporting? 9. What are the specific objectives of financial sreporting? 10. Explain financial position. 11. Explain liquidity and solvency. 12. Explain financial performance. 18. Explain accrual accounting. 14. Explain management stewardship of the entity's economic resources. 15. What are the limitations of financial reporting? 38PROBLEMS _ Problem 2-1 Multiple choice (IFRS) 4. Which is true about the Conceptual Framework? a. The Conceptual Hrameworl is not a Standard. b. The Conceptual Framework describes the-concepts for general purpose financial -reporting. In ease. of conflict, the requirements of the IFRS revail over the Conceptual Framework. dk of these statements are true. 2 Which is not a purpose of Conceptual Framework? a. To assist the IASB in developing IFRS. . b. To assist preparers to develop consistent accounting policy when no Standard applies to a particular transaction or when Standard allows a choice of accounting policy. c. To assist all parties to understand and interpret the Standards. : d. To assist regulatory agencies in issuing rules and regulations for a particular industry. 3. What is the authoritative status of the Framework? a The Conceptual: Framework has the highest level of authority. z b. In the absence of a standard or an interpretation, the Conceptual Framework shall be followed. c. In the absence of a standard or an interpretation, management shall consider the Conceptua Framework in developing and applying an accountin: poly ae results in information that is relevant an reliable. _ 4@ The Conceptual Framework. applies only, when the ; IASB develops new standards. _ 4 The Conceptual Framework is intended to establish a GAAP in financial FORGERY: b. ane meaning of "present fairly in accordance with ce. The objectives and concepts for use in developing standards of financial sou na ne reporting. ~ d. The hierarchy of sources of G, 5 _ 5. The underlying theme of the Conceptual Framework is a Decision usefulness b. Understandability ec. Timéliness da. Comparability 39Problem 2-2 Multiple choice (IAA) 1. A Conceptual Framework should a. b. c d. Lead to uniformity of financial statements Eliminate alternative accounting principles. Guide multinational entities in developing GAAP. Define the basic objectives, terms and concepts. 2. Which of the following is nota benefit associated with the Conceptual Framework? a. b. c.g d. A Conceptual Framework should increase users! understanding arid confidence. in financial reporting. Pratical problems should be more quickly solvable. A coherent set of accounting standards should result. Business entities will aoe far less assistance from accountants. 3. Which is not true about the Conceptual Framework? a. b. ee The Conceptual Framework should be a basis for standard setting. The Conceptual Framework should allow practical problems to be solved more qui 5B The Conceptual Framework should be based on -. fundamental truth derived from law d. The Conceptual Framework should increase users’ understanding and confidence in financial reporting. 4. Which is not a purpose of the Conceptual Framework? a. b. c. d. To provide definitions of key terms and fundamental concepts: To provide specific guidelines for resolving situations not covered by existing accounting standards. To assist accountants in selecting among alternative accounting and reporting methods. To assist the International Accounting Standards Board in the standard-setting process. 5. Which is not a purpose of the Conceptual Framework? a. b. ¢c, To enable the accountancy profession to solve more aaeely emerging practical problems. ‘0 provide a foundation from which to build more useful financial accounting standards. To enhance comparability of financial statements across entities. To assist the Board of Accountancy to promulgate rules and regulations affecting the accountancy professioin. © 402-3 Multiple choice (ACP) s Users of financial reports include which of the following? _@ Creditors ° & Creditors and government agencies © Creditors and unions’ a Creditors, government agencies and unions ‘The primary users of financial information include Existing and potential investors Existing and potential lenders and other creditors User group such as employees, customers, governments and their agenciés, and the public Existing and potential investors, lenders and other creditors P pep : Which group is not among, the external users for whom Gmancial statements are prepared? e Customers _& Suppliers « Employees : _ @ All of these are external users of financial statements Which of the following is an internal user of financial information? 2 Board of Directors _& Shareholder ec Bondholder. _ @ Creditor with long-term contract These users require information on risk and return _ provided by their investment. 2 Investors &. Employees ec. Lenders da Customers 416. These users are interested in information about the profitability and stability of the entity in order to assess the ability of entity to provide.remuneration, retirement benefits and employment ‘opportunities. a. Customers b. The public c. Governments and their agencies d. Employees 7. These users are interested in information that enables them to assess whether their loans, the related-interest thereon, and other amounts owing to them will be-paid when due. a. Lenders and other creditors b.:. Borrowers c. Trade creditors d. Owners 8. These users are interested. in information about the continuance of an entity, especially when they have a long-term involvement with or are dependent on the entity. a. Customers b. Employees c. Trade unions d. Suppliers 9. These users are interested in information in order to regulate the activities of an entity, determine taxation policies and provide a basis for national statistics. a. Governments and their agencies b. Major organization of users c. Bureau of Internal Revenue d. Department of Finance 10. These users need information on trends and recent developments where an entity makes a substantial contribution to the local economy providing employment and using local suppliers. The public Governments and their agencies Finance entities Private entities me op 422-4 Multiple choice (LAA) ‘The overall objective of. financial reporting is to provide _ information = That is useful for decision making. & About assets, liabilities and equity of an entity. _ About financial performance during a period. @. That allows owners to assess management performance. rimary focus of financial reporting has been on g the needs of which of the following groups? _@ Management Existing and potential investors, lenders and other creditors : e National taxing authorities @ Independent CPAs § The primary objective of financial reporting is to provide information to @ Management & Capital providers © Regulatory body _@ Government nich is an objective of financial reporting? = To provide information useful in making investing F and credit decisions. , & To provide information useful to management. _© To provide information about the potential users. To provide information about ways to solve internal and external conflicts about the entity. ich is an objective of financial reporting? _® To provide information useful to management in making decisions. _& To provide information that clearly portrays __ nonfinancial transactions. x © To provide information useful to assess the amount, 4 timing, and uncertainty of prospective cash receipts. a To provide information that excludes claims against ‘ the resources. 436. An objective of financial reporting is to provide 10. Be op Information about:the investors in the-entity. Information about the liquidation value. Information useful in assessing cash flow prospects. Information that will attract new investors. Assessing cash flow prospects is interpreted to mean a. b. ei d; In measuring financial performance, accrual accounting Cash basis accounting is preferred over accrual basis. Information about the financial effects of cash receipts and cash payments is generally considered the best indicator of ability to generate favorable cash flows. Over the long run, trends in revenue and expenses are generally more meaningful than trends in cash receipts and disbursenients. All of the choices are correct regarding assessing cash flow prospects. is used because a. b. c. d. Cash flows are considered less important. It provides a better indication of ability to generate cash flows than cash basis. It recognizes revenue when cash is received. it is one of the implicit assumptions. The most useful information in predicting future cash flows is Bop Information about.current cash flows Current earnings based on accrual accounting Information regarding the accounting policies used Information regarding the results obtained by using a wide variety of accounting policies The accrual basis of accounting is most useful for Poop Determining the amount of income tax liability. Predicting the short-term financial performance. Predicting the long-term financial performance. Determining the amount of dividends to be declared. 44Problem 2-5 Multiple choice (AICPA Adapted) 1. The objective of financial reporting is based on a. b. a d. The need for conservatism Reporting on management stewardship Generally accepted accounting principles The needs of the users of the information 2. Which statement is not true about financial reporting? a. b. ies d. Financial reporting shall proyide information about resources, claims and changes in resources. Financial reporting shall not provide infermation useful in evaluating management stewardship. Financial reporting shall provide information useful in investment, credit and similar decision. Financial reporting ‘shall provide information useful in assessing cash flow prospects. 3. Which is not an objective of financial reporting? a. b. c d. To provide information about assets and claims against the assets To provide information useful in assessing sources and uses of cash To provide. information useful in lending and investing decisions To previa information about the liquidation value of an entity. 4, Financia} reporting pertains to information about a. b. C. d. Individual bysiness entities, rather than to industries or an economy or to members of society as consumers. industries; rather than to individual entities or an economy or ‘ta'meinbers of society as consumers. Individual business entities, industries and an economy as a whole, rather than to members of society. An'economy and to members of society as consumers, rather than to individual entities or industries. 5. Financial reporting provides information about eee Entity performance and management performance Management performance but not entity performance patty performance but not management performance Neither entity performance nor managemewit performance. 45