FINACC2 TOPIC2
strengthen accountability by reducing the
Conceptual Framework for Financial Reporting
The Conceptual Framework (or “Concepts
Statements”) is a body of interrelated objectives
and fundamentals. The objectives identify the
goals and purposes of financial reporting, and
the fundamentals are the underlying concepts
that help achieve those objectives. Conceptual
framework is a system of ideas and objectives
that leads to the creation of a consistent set of
rules and standards. Specifically in accounting,
the rules and standards set the nature, function
and limits of financial accounting and financial
statements.
The Conceptual Framework prescribes the
concepts for general purpose financial reporting.
Its purpose is to:
a. assist the International Accounting
Standards Board (IASB) in developing
Standards that are based on consistent
concepts;
b. assist preparers in developing consistent
accounting policies when no Standard applies
to a particular transaction or when Standard
allows a choice of accounting policy; and
c. assist all parties in understanding and
interpreting the Standards.
The Conceptual Framework is the underlying
theory for the development
of accounting standards and revision of
previously issued accounting standards. A
conceptual framework is like a constitution that
leads the accounting system. The Conceptual
Framework provides the foundation for the
development of Standards that:
a. promote transparency by enhancing the
international comparability and quality of
financial information.
b.
information gap between providers of capital
and the entity’s management.
c. contribute to economic efficiency by helping
investors to identify opportunities and risk
around the world, thus improving capital
allocation.
The use of a single, trusted accounting
language lowers the cost of capital and reduces
international reporting costs.
Status of the Conceptual Framework
The Conceptual Framework is not a standard. If
there is a conflict between a Standard and the
Conceptual Framework, the requirement of the
Standard will prevail. The authoritative status of
the Conceptual Framework is in the hierarchy of
guidance shown below:
Hierarchy of reporting standards
1. PFRSs (Philippine Financial Reporting
Standards)
2. Judgment
When making the judgment:
Management shall consider the following:
a. Requirements in other PFRSs dealing with
similar transactions.
b. Conceptual Framework
Management may consider the
following:
a. pronouncements issued by other
standard-setting bodies
b. Other accounting literature and
industry practices
Hierarchy of Reporting Standards
1.Philippine Financial Reporting Standards
(PFRSs)
2.In the absence of a PFRS that specifically
applies to a transaction or event, management
shall use its judgment in developing and applying
an accounting policy that results in information
that is relevant and reliable.
In making the judgment,
1.Management shall refer to, and consider the
applicability of, the following sources in
descending order:
a. The requirements in PFRSs dealing with
similar and related issues;
b. The Conceptual Framework
2. Management may also consider the
following:
a. Pronouncement of other standard-
setting bodies
b. Accounting literature and accepted
industry practices
The hierarchy guidance means that in the
absence of a PFRS that applies to a transaction,
management shall consider the applicability of
the Conceptual Framework in developing and an
accounting policy that results in useful
information.
To meet the objectives of general-purpose
financial reporting, a Standard sometimes
contains requirements that depart from the
Conceptual Framework. In such cases, the
departure is explained in the Basis for
Conclusions’ on that Standard.
The Conceptual Framework may be revised from
time to time based on the IASB’s experience of
working with it. However, revisions do not
automatically result in changes in the Standard –
not until after the IASB goes through its due
process of amending a Standard.
Scope of the Conceptual Framework
The Conceptual Framework is concerned with
general purpose financial reporting. General
purpose financial reporting involves the
preparation of general-purpose financial
statements.
The Conceptual Framework provides the
concepts that underline purpose financial
statements reporting with regard to the
following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial
information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
Objective of Financial Reporting
The objective of general-purpose financial
reporting is to provide financial information
about the reporting entity that is useful to
existing and potential investors, lenders and
other creditors in making decision about
providing resources to the entity.
This objective is the foundation of the
Conceptual framework. All the other aspects of
the Conceptual Framework revolve around this
objective.
Primary users
The objective of financial reporting refers to the
following, so called the primary users.
1. Existing and potential investors
2. Lenders and other creditors
The users cannot demand information directly
from the reporting entity and must rely on
general purpose financial reports for much of
their financial information needs. Accordingly,
they are the primary users to whom general
purpose reports are directed to.
Lenders refer to those who extended loans (e.g.
banks), while other creditors refer to those who
extended other forms of credit (e.g. suppliers).
General purpose financial reporting (or simply
financial reporting) deals with providing
information that caters to the common needs of
the primary users.
Other users, such as the entity’s management,
regulators, and the general public, may find
general purpose financial reports useful.
However, such reports are not primary directed
to these users. General purpose financial reports
do not directly show the value of a reporting
entity. However, they provide information the
helps users in estimating the value of an entity.
Providing useful information requires making
estimates and judgments. The Conceptual
Framework establishes the concepts underlie
those estimates and judgments.
Entity-value is a concept of current market value
of an individual asset or liability. Entity-value is
defined as the difference between the market
value of the entity including the item and the
market value of the entity excluding the item.
Decision about providing resources to the entity
The primary users’ decision about providing
resources to the entity involve decision on:
a. buying, selling or holding equity and debt
instruments (investments).
b. providing or settling loans and other forms
of credit.
c. exercising voting or similar rights that could
influence management’s action relating to the
use of the entity’s economic resources.
These decisions depend on the
investor/lender/other creditor’s expected
returns (e.g., investment income or repayment
of loan). Expectations about returns, in turn,
depend on assessment of the entity’s
(i) prospects for future net cash flows and
(ii) management stewardship.
To make these assessments, investors, lenders
and other creditors need information on:
a. the economic resources of the entity, claims
against the entity and changes in those
resources and claims; and
b. how efficiently and effectively the entity’s
management has utilized the entity’s
economic resources.
Information on Economic resources, Claims, and
Changes
General purpose financial reports provide
information on a reporting entity’s:
a. Financial position – information on
economic resources (assets)and claims
against the reporting (liabilities and equity).
b. Changes in economic resources and claims
– information on financial performance
(income and expenses) and other
transactions and events that lead to changes
in financial position.
Collectively, these are referred to under the
Conceptual Framework as the economic
phenomena.

The Conceptual Framework uses the term

'economic phenomena’ to refer to information
about an entity's economic resources, claims
against the entity and the effects of transactions
and other events and conditions that change
those resources and claims.

Economic resources and Claims

Information about the nature and amounts of an

entity’s economic resources and claims can help
users to identify the entity’s financial strengths
and weaknesses.

That information can help users in assessing the

entity’s:

a. Liquidity and solvency;

b. Needs for additional financing and how

successful it is likely to be in obtaining that
financing; and

c. Management’s stewardship on the use of

economic resources.

Liquidity refers to an entity’s ability to pay short-

term obligations, while solvency refers to an
entity’s ability to meet its long-term obligations.

Changes in economic resources and claims
Changes in economic resources and claims result
from:
a. financial performance (income and
expenses); and
b. other events and transactions.
The purpose of the conceptual framework binds
the concepts of general-purpose financial
reporting.
The conceptual framework, whose revised
edition was issued by IASB and became effective
in March 2018, is composed of eight chapters
that cover the following:
1. The Objective of General Purpose Financial
Reporting – forms the foundation of the
conceptual framework.

Other aspects of the conceptual framework

below flow logically from the objective.
2. The Qualitative Characteristics of Useful
Financial Information – identify the types of
information that are likely to be most useful to
the existing and potential investors, lenders, and
other creditors for making decisions about the
reporting entity on the basis of the financial
information.
3. Financial Statements and the Reporting Entity
Financial Information – is information provided
in general purpose financial statements, which
are a particular form of general-purpose financial
report that provides information about the
reporting entity’s economic resources, claims
against the entity, and changes in those
resources and claims that meet the definitions of
the elements of financial statements.
4. The elements of Financial Statements – As
defined in the conceptual framework, these are
(a) assets, liabilities, and equity, which relate to a
reporting entity’s financial position, and (b)
income and expenses, which relate to a reporting
entity’s financial performance. These elements
are linked to the economic resources, claims, and
changes in economic resources and claims.
5. Recognition and Derecognition – mean the
inclusion in the statement of financial position or
the statement(s) of financial performance an
item that meets the definition of one of the
elements of financial statements and the
removal in those financial statements an item
that no longer meets the definition of an
accounting element.
reporting entity about assets, liabilities, equity,
income, and expenses representing and
disclosing information in its financial statements.
8. The Concept of Capital and Capital
Maintenance – Under the financial concept of
capital, which is adopted by most entities in
preparing their financial statements such as
invested money or invested purchasing power, it
is synonymous with net assets or equity of the
entity. The frame is also used as a guide in
developing future and improving current
accounting standards.
Types of information provided by accounting:
1. Quantitative information – information
expressed in numbers, quantities or units.
2. Qualitative information – information
expressed in words or descriptive form.
Qualitative information is found in the notes to
financial statements as well as on the face of the
other financial statements.
3. Financial information – information expressed
in money. Financial information is also
quantitative information because monetary
amounts are normally express in numbers.

6. Measurement – is closely related to the

process of recognition. It refers to quantifying
the elements that are recognized and
derecognized items in monetary terms. It can be
classified into initial and subsequent
measurements. This requires the selection of a
measurement basis. A measurement basis is an
identified feature of an item being measured.

7. Presentation and Disclosure – is the act of

communicating financial information of the

Relevance in accounting means the information
we get from the accounting system will help the
end-users to take important decisions. End users
can be either internal or external stakeholders.
Internal stakeholders include managers,
employees, and business owners. By external
stakeholders, we mean investors, lenders etc.
Therefore, relevance in accounting indicates the
capacity of influencing the end-users of the
financial statement in their decision-making
process.
Finally, relevance in accounting also means that
it should be useful for the decision-making
process for the end users. For example,
companies could report the current salary of the
employees in an understandable and timely
manner, but this doesn’t make this information
relevant to an investor.
In financial statements, the information which is
useful for the end-user and based on that if the
user can take appropriate action, then that
information is known as relevance in accounting.
The end-user can be internal such as a manager
or top executive or can be an external user such
as a creditor or potential investor.
A piece of information is relevant if it provides an
actionable insight or can make a difference in the
decision making of the end-user. In accounting,
this relevant information may be useful for both
business managers or outsiders. This information
may be seen in the company’s financial
statements or the investor presentation.
For the information to be relevant to users, it
must provide details about past events, and it
should have the power to enable the users to
predict future scenarios so that users can take
appropriate decisions. Also, relevant information
can include some adjustments which were
missed in past reports, and by seeing these
corrections or adjustments, the user can change
his decision.
Ex. A company is looking to raise debt for future
growth.
For that purpose, potential creditors check the
financial statements of the company. If by
looking at financial statements, creditors can
assume that company is in a better position to
pay back the debt, and also growth opportunity
is good then creditors can choose the amount of
debt and interest rate on debt. Based on this
financial information, the company’s CFO also
estimates the interest rate on debt and then
based on the discussion with creditors final
interest rate can be decided.
Examples:
If a company wants to take a loan from a bank,
then the bank will want to know first whether the
company will be able to pay them back the loan
with interest. Therefore, the company's financial
statements should be relevant for the bank in
making its decision regarding granting a loan to
the company.
The controller of a business chooses to add
information to the financial statement
disclosures regarding the cash flows being
generated by its newest retail stores. This
information is relevant to the decisions of the
investment community, because it clarifies for
them how well the entity is performing.
Predictive value means that the information can
be used to predict future outcomes.
The financial information itself does not need to
be a prediction or a forecast but can be
interpreted by users to allow them to make their
own predictions. Predictive value refers to the
fact that quality financial information can be
used to base predictions, forecasts, and
projections on.
Financial analysis and investors can use past
financial statements to chart performance trends
and make predictions about future performance
and profitability.
For example, current year revenue information
could be used as the basis to predict revenue in
future years.
Predictive value – Provides predictive power
regarding possible future events.
Predictive value refers to the fact that quality
financial information can be used to base
predictions, forecasts, and projections on.
Financial analysts and investors can use past
financial statements to chart performance trends
and make predictions about future performance
and profitability.
Therefore, accounting information is relevant if it
can provide helpful information about past
events and help in predicting future events or in
taking action to deal with possible future events.
For example, a company experiencing a strong
quarter and presenting these improved results to
creditors is relevant to the creditors’ decision-
making process to extend or enlarge credit
available to the company.
Confirmatory value – Provides information
about past events. Confirmatory value means
that the information provides feedback on
previous evaluations (i.e. it allows users to
confirm or change their opinion on such
evaluations).
Confirmatory value: Information has confirma-
tory value if it confirms the validity of prior
expectation or correcting them according to the
prior evaluations. The outcomes will be same as
past expected if the information has confirmed
past expectation while the outcome can be
changed if correcting in past expectations specific information becomes material. In order
occurred. to provide a faithful representation and relevant
financial information, materiality level should be
For example, the same current year revenue
established so as to detect material
information indicated could be compared with
misstatement to avoid incomplete, biased, or not
revenue predictions which had been made in
free from error in financial reporting
prior years to correct or improve processes that
information. Thus, materiality allows a company
were used to make those previous predictions.
to ignore selected accounting standards, while
As you can see, the predictive value and
also improving the efficiency of accounting
confirmatory value of financial information are
activities.
interrelated.
The dividing line between materiality and
Confirmatory value is one of the qualitative
immateriality has never been precisely defined;
features required in any accounting or financial
there are no guidelines in the accounting
information, which helps the users to verify and
standards. Material items are considered as
confirm the assessments or predictions made
those items whose inclusion or exclusion results
earlier. This characteristic enables that provided
in significant changes in the decision making for
information becomes relevant for making sound
users of business information. It also refers to
decisions.
the relative size of an amount.
This information is usually included in the
For instance, a P20,000 will be likely be
management, discussion, and analysis' segment
immaterial for a large corporation with a net
of the financial statements. By providing
income of P900.000.
feedback about past events or transactions, the
users can check or also change their relative FAITHFUL REPRESENTATION
expectations.
Faithful representation means the numbers and
description match what really existed or
happened. The financial reports must not only
represent relevant economic activity but there
must be agreement between a measurement
and the economic activity or item that is being
measured.

● Information must faithfully represent the

substance of what it purports to represent

Materiality ● A faithful representation is, to the maximum

extent possible, complete, neutral, and free
Determining whether financial information is from error
relevant involves considering materiality.
Materiality can be explained as the level of an ● A faithful representation is affected by level
omission or misstatement of financial reporting of measurement uncertainty.
information which could influence the decision
Faithful representation is the concept that
of users. Materiality depends on the size and
financial statements be produced that accurately
nature of the item judged in the light of the
reflect the condition of a business.
surrounding circumstances. It is hard to
determine a consistent quantitative at which
For example, if a company reports in its balance
sheet that it had P1,200,000 of accounts
receivable as of the end of June, then that
amount should indeed have been present on
that date. The level of measurement uncertainty
may affect the faithful representation.
Measurement of uncertainty arises when a
measure cannot be determined directly by
observing prices in an active market and must be
estimated. One factor affecting the relevance of
financial information is the level of measurement
uncertainty. Measurement uncertainty arises
when a measure for an asset or a liability cannot
be observed directly and must instead be
estimated.
Measurement uncertainty is different from both
outcome uncertainty and existence uncertainty.
a. outcome uncertainty arises where there is
uncertainty about the amount or timing of any
inflow or outflow of economic benefits that will
result from an asset or liability.
b. existence uncertainty arises when it is
uncertain whether an asset or liability exists.
The assertion of completeness is an assertion
that the financial statements are thorough and
include every item that should be included in the
statement for a given accounting period.
COMPLETENESS deals with whether all
transactions and accounts that should be in the
financial statements are included. For example,
management asserts that all purchases of goods
and services are included in the financial
statements.
Similarly, management asserts that notes
payable in the balance sheet include all such
obligations of the entity. Although the probability
of court decision against the company is low, the
nature of litigation and potential liability in the
event of an adverse verdict must be disclosed in
the financial statements to enable users to assess
the possible impact of the contingent event on
the company's future profitability and stability.
Neutral – The degree to which information is
free from bias.
Note that there are subjectivity and estimation
involved in financial statements, therefore
information cannot be truly “neutral.
Information contained in the financial
statements must be free from bias. It should
reflect a balanced view of the affairs of the
company without attempting to present them in
a favored light. Information may be deliberately
biased or systematically biased.
Deliberate bias occurs where circumstances and
conditions cause management to intentionally
misstate the financial statements.
Examples:
Managers of a company are provided with a
bonus on the basis of reported profit. This might
tempt management to adopt accounting policies
that result in higher profits rather than those that
better reflect the company’s performance in line
with GAAP. A company is facing serious liquidity
problems. Management may decide to window
dress the financial statements in a manner that
improves the company’s current ratios in order
to hide the gravity of the situation.
Free from error means there are no errors and
inaccuracies in the description of the
phenomenon and no errors made in the process
by which the financial information was
produced. (no inaccuracies and omissions). That
does not mean no inaccuracies can arise,
particularly in case of making estimates.
Faithful representation, however, does not imply
total freedom from error nor perfectly accurate
in all respect. This is because a number of
financial reporting measures involve estimates of
various types that incorporate management’s
judgment. For example, management must
estimate the amount of uncollectible accounts.
A representation of that estimate can be faithful
if the amount is described clearly and accurately
as being an estimate, the nature and limitations
of the estimating process are explained, and no
errors have been made in selecting and applying
an appropriate process for developing the
estimate.
Comparability is the degree to which accounting
standards and policies are consistently applied
from one period to another. Financial statements
that are comparable, with consistent accounting
standards and policies applied throughout each
accounting period, enable users to draw
insightful conclusions about the trends and
performance of the company over time. In
addition, comparability also refers to the ability
to easily compare a company’s financial
statements with those of other companies.
Comparability is the level of standardization of
accounting information that allows the financial
statements of multiple organizations to be
compared to each other. This is a fundamental
requirement of financial reporting that is needed
by the users of financial statements. Information
that is measured and reported in a similar
manner for different companies is considered
comparable.
Verifiability is the extent to which information is
reproducible given the same data and
assumptions.
For example, if a company owns equipment
worth P100,000 and told an accountant the
purchase cost, salvage value, depreciation
method, and useful life, the accountant should
be able to reproduce the same result.
Verifiability means that it should be possible for
an organization's reported financial results to be
reproduced by a third party, given the same facts
and assumptions. Using measurement bases that
result in measures that can be independently
corroborated either directly (e.g., by observing
prices) or indirectly (e.g., by checking inputs to a
model) enhances verifiability.
Consistency using same measurement bases for
the same items, either from period to period
with in a single entity (intra-comparability or
within a single period across different entities
(inter-comparability) makes the financial
statements more comparable. A change is
appropriate if the results in more relevant
information. Explanatory information should be
disclosed to enable users of financial statements
to understand the effect of the change.
Timeliness is how quickly information is available
to users of accounting information. The less
timely (thus resulting in older information), the
less useful information is for decision-making.
Timeliness matters for accounting information
because it competes with other information.
For example, if a company issues its financial
statements a year after its accounting period,
users of financial statements would find it
difficult to determine how well the company is
doing in the present.
Understandability is the degree to which
information is easily understood. In today’s
society, corporate annual reports are in excess of
100 pages, with significant qualitative
information. Information that is understandable
to the average user of financial statements is
highly desirable. It is common for poorly
performing companies to use a lot of jargon and
difficult phrasing in their annual report in an
attempt to disguise the underperformance.
Understandability is the concept that financial
information should be presented so that a reader
can easily comprehend it. This concept assumes
a reasonable knowledge of business by the
reader but does not require advanced business
knowledge to gain a high level of
comprehension.
CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE
Financial statements are most commonly
prepared in accordance with the nominal
financial capital maintenance concept. Other
concepts may be more appropriate in order to
meet the objective of providing information that
is useful for making economic decisions although
there is presently no consensus for change. This
Framework has been developed so that it is
applicable to a range of concepts of capital and
capital maintenance.
Concepts of Capital
a. Financial concept
A financial concept of capital is adopted by most
enterprises in preparing their financial
statement.
Under a financial concept of capital, such as
invested money or invested purchasing power,
capital is synonymous with the net assets or
equity of the enterprise.
A financial concept of capital should be adopted
if the users of financial statements are primarily
concerned with the maintenance of nominal
invested capital or the purchasing power of
invested capital.
b. Physical concept
Under a physical concept of capital, such as
operating capability, capital is regarded as the
productive capacity of the enterprise based on,
for example, units of output per day. If the main
concern of users is with the operating capability
of the enterprise, a physical concept of capital
should be used.
Under a financial concept of capital, such as
invested money or invested purchasing power,
capital is synonymous with the net assets or
equity of the enterprise. A financial concept of
capital should be adopted if the users of financial
statements are primarily concerned with the
maintenance of nominal invested capital or the
purchasing power of invested capital.
Concepts of Capital Maintenance
a. Financial capital maintenance
Under this concept, a profit is earned only if the
financial (or money) amount of the net assets at
the end of the period exceeds the financial (or
money) amount of net assets at the beginning of
the period, after excluding any distributions
from, owners during the period.
b. Physical capital maintenance
Under this concept, a profit is earned only if the
physical productive capacity (or operating
capacity) of the enterprise (or the resources or
funds needed to achieve that capacity) at the end
of the reporting period exceeds the physical
productive capacity at the beginning of the
period, after excluding any distributions to, and
contributions from owners during the period.
--- Story ---
Manong magbabalut sells balut. One morning,
Manong had P100. Manong used that amount to
buy balut, cook the balut and sell them. At the
end of the day, Manong had P240.
Question 1: If Manong uses the financial capital
maintenance concept (measured in nominal
monetary units) how much profit did Manong
earned? Assume Manong did not eat any of his
baluts.
Answer: P140 (P240 net assets end, less P100 net
assets beginning)
Question 2: What if Manong ate one balut
costing P10, how much is the profit?
Answer: P150 ( P240 net assets, end. plus P10
distribution to owner less P100 nets asset beg.)
Question 3: If Manong uses financial capital
maintenance concept (measured in units of
constant purchasing power). How much profit
did Manong earned.
Answer: Coming soon! It is to early for to discuss
this. For now, just ask Manong Mababalut when
you see him.
Conceptual Framework
Third Level – Recognition, Measurement and
Disclosure Concepts, the “how” or
implementation.
I. Assumptions.
1. Economic Entity
The economic entity assumption is an
accounting principle that separates the
transactions carried out by the business from its
owner. It can also refer to the separation
between various divisions in a company. Each
unit maintains its own accounting records
specific to the business operations.
2. Going Concern
The going concern principle is the assumption
that an entity will remain in business for the
foreseeable future. Conversely, this means the
entity will not be forced to halt operations and
liquidate its assets in the near term at what may
be very low fire-sale prices.
3. Monetary Unit
The monetary unit assumption states that a
company must record its business transactions in
Philippine peso. It also provides a consistent
method of comparing the results of one
company with those of another.
4. Periodicity
The periodicity assumption states that an
organization can report its financial results within
certain designated periods of time. This typically
means that an entity consistently reports its
results and cash flows on a monthly, quarterly, or
annual basis.
5. Accrual
Accrual assumption. Transactions are recorded
using the accrual basis of accounting, where the
recognition of revenues and expenses arises
when earned or used, respectively.
When transactions are recorded in the books of
accounts as they occur even if the payment for
that particular product or service has not been
received or made, it is known as accrual-based
accounting.
II. Principles
1. Measurement
Measurement is the process of determining the
monetary amounts at which the elements of the
financial are to be recognized and carried in the
statement of financial position and income
statement.
The money measurement concept states that a
business should only record an accounting
transaction if it can be expressed in terms of
money.
This means that the focus of accounting
transactions is on quantitative information,
rather than on qualitative information.
There are four measurement bases or financial
attributes, namely;
a. Historical cost is the amount of cash or
cash equivalent paid, or the fair value of the
consideration given to acquire an asset at the
time of acquisition. This is also known as
“past exchange price.”
b. Current cost is the amount of cash or cash
equivalent that would have to be paid if the
same or equivalent asset was acquired
currently. Also known as “current purchase
exchange price”.
c. Realizable value is the amount of cash or
cash equivalent that could currently be
obtained by selling the asset in an orderly
disposal.
d. Present value is the discounted value of
the future net cash inflows that the asset is
expected to generate in the normal course of
business.
2. Revenue Recognition
The revenue recognition principle, a feature of
accrual accounting, requires that revenues are
recognized on the income statement in the
period when realized and earned—not
necessarily when cash is received.
3. Expense Recognition
The expense recognition principle is a
fundamental principle of accounting
that business expenses should be recognized in
the same period as the revenues associated with
those expenses (and vice versa). This is also
called the matching principle and is the most
basic tenet of accrual accounting.
4. Full Disclosure
The full disclosure concept is an a counting
principle that requires management to report all
relevant information about the company’s
operations to creditors and investors in the
financial statements and footnotes. In other
words, GAAP requires that management tell
external users material information about the
company that they can use to base their decision
on.
III. Constraint
Constraints permit a company to modify GAAP
without reducing the usefulness of the reporting
information. In the field of accounting, when
reporting the financial statements of a
company, accounting constraints are
boundaries, limitations, or guidelines.
1. Cost
The cost of providing information must be
weighed against the benefits that can be derived
from using it. The costs and benefits constraint,
also called the cost-effectiveness constraint, is
pervasive throughout the framework.
Companies must spend time and money to
provide financial statements.
To be more specific, Costs can constrain the
range of information when providing financial
reporting on the grounds that the companies
must "collect, process, analyze and disseminate
relevant information“ which need time and
money.
2. Materiality
Companies need to consider materiality when
providing financial information. Particularly,
companies must disclose the material
information which can influence the financial
performance and some immaterial information
can be excluded.
For example, a company owns P10 million net
assets and therefore a default of customer with
P1,000 is immateriality and in contrast if the
amount of default is P2 million, which can
influence the financial decisions and thus means
material.
However, there are also some small items which
can transfer net profit to net loss and these items
can be considered as material items. In order to
judge whether the information is material or not,
companies can be based on some materiality
process.
3. Conservatism Principle
When preparing financial statements,
all transactions that have uncertainties need to
be conservative in view so that property and
income do not appear excessively in the financial
statements.
Example, Closing stock, Purchase price P5,000
and Market value P3,000.
Now, according to the principle of conservatism,
the assets will be accounted for at the lowest
price between market value and purchase price.
4. Industrial Practice
Due to the diversity of the business, the financial
statements have to be prepared despite
deviating from the recognized accounting
principles.
That is, special accounting is approved for a
particular specialty business organization, and
that company prepares its final financial
statements according to that particular affiliate
account. For example, special accounting
methods have been specified for the service
providers (Railway, Bank-Insurance, etc.)
DONE AND DUSTED.