Grey rer ners ~ FRAMEWORK ®& ACCOUNTING STANDARDS vs OY, 0) EDITION | Ea 2 aaa FINANCIAL REPORTING STANDARDS(PFRSs) ‘a } j | fi | ZEUS AVA SO Den else Us moaCONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS 2020 Edition BASED ON CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING and PHILIPPINE FINANCIAL REPORTING STANDARDS (PERSs) Nation’s Foremost CPA Review Inc. (NCPAR) 4F Pelizloy Centrum, Lower Session Road, Baguio City 2600, Philippines Mobile Number: (0917) 870 6962 Ook Nation's Foremost CPARThis book is intended for students taking up the CHED- required subject “Conceptual Framework and Accounting Standards." The Philippine Financial Reporting Standards (PFRSs) are highly technical. My aim in writing this book is to present | concepts in a manner that would make sense to all learners - CPA aspirants and non-CPA aspirants alike. As a future CPA, you need knowledge of PFRSs because you will be directly applying them | later on. As a future business professional, you also need knowledge of PFRSs because financial reporting standards are relevant to almost all accounting-related jobs. If you are aspiring to become a future business manager, the financial statements, which are the subject matter of the PFRSs, are your responsibility. The PERSs are voluminous. Accordingly, I have discussed only the most important concepts in the PFRSs. I have omitted journal entries - these are illustrated in higher accounting subjects. Moreover, this book is designed for a three-unit subject. As with all the books that I have written and co-written so far, this book is also a labor of love and it is dedicated to you, my dear reader. If later on you have queries, comments, or suggestions on how I can improve my work, I would be glad if you inform me. Here are my contact details: zeusvernonmillan@gmail.com and (0917) 870 6962. Good luck in your learning and best wishes in your journey through life......thank you for making me a part of it. Sincerely, Zeus vernon B. MillanDedicatiow To all my readers - you are the reason why I write. About the Author The author is a 6” Placer in the October 2006 CPA board examinations. He is a co-founder of, and a CPA reviewer at, Nation's Foremost CPA Review Inc. (NCPAR), a teacher, a father, a bass player and an entrepreneur.CONTENTS AT A GLANCE OVERVIEW OF ACCOUNTING CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING... PAS 1 PRESENTATION OF FINANCIAL STATEMENTS... PAS 2 INVENTORIES.......... PAS 7 STATEMENT OF CASH FLOWS. ...0-...- PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS... 184 PAS 10 EVENTS AFTER THE REPORTING PERIOD. PAS 12 INCOME TAXES PAS 16 PROPERTY, PLANT AND EQUIPMENT. PAS 19 EMPLOYEE BENEFITS... PAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE .......... vee. 262 PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES PAS 23 BORROWING COSTS. PAS 24 RELATED PARTY DISCLOSURES. PAS 26 ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS . 300 PAS 27 SEPARATE FINANCIAL STATEMENTS PAS 28 INVESTMENTS IN ASSOCIATES AND JOINT VENTURES .. PAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES. PAS 32 FINANCIAL INSTRUMENTS: PRESENTATION ........ PAS 33 EARNINGS PER SHARE... PAS 34 INTERIM FINANCIAL REPORTING ... PAS 36 IMPAIRMENT OF ASSETS... PAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS PAS 38 INTANGIBLE ASSETS ....)PAS 40 INVESTMENT PROPERTY ai — 423 PAS 41 AGRICULTURE. a isbn ase SR sinncbisieinis AQ PFRS 1 FIRST-TIME ADOPTION OF PHILIPPINE FINANCIAL REPORTING STANDARDS... Ga 1 ase SISTED 453 PFRS 2 SHARE-BASED PAYMENT ..sssssssosssusssssessrsesssseseenesreccsesreuevenesenes 473 PFRS 3 BUSINESS COMBINATIONS... 490 PFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS .. 502 PFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES ..515 PERS 7 FINANCIAL INSTRUMENTS: DISCLOSURES 521 PFRS 8 OPERATING SEGMENTS. w-. 529 PFRS 9 FINANCIAL INSTRUMENTS..... 540 PERS 10 CONSOLIDATED FINANCIAL STATEMENTS .. PFRS 11 JOINT ARRANGEMENTS... PFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES. PFRS 13 FAIR VALUE MEASUREMENT PERS 14 REGULATORY DEFERRAL ACCOUNTS... PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS .. PFRS 16 LEASES .. PFRS 17 INSURANCE CONTRACTS .. REFERENCE..vii TABLE OF CONTENTS OVERVIEW OF ACCOUNTING. DEFINITION OF ACCOUNTING ... BASIC PURPOSE OF ACCOUNTING ACCOUNTING CONCEPTS... COMMON BRANCHES OF ACCOUNTING .. BOOKKEEPING AND ACCOUNTING. . ACCOUNTANCY ... FOUR SECTORS IN THE PRACTICE OF ACCOUNTANCY... ACCOUNTING STANDARDS .... Hierarchy of Reporting Standards .... Accounting standard setting bodies and other relevant organizations .... International Accounting Standards..... OTHER RELEVANT INTERNATIONAL ORGANIZATIONS . Move T0 IFRSS CHANGES IN REPORTING STANDARDS .. SUMMARY: .. CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING .... PURPOSE OF THE CONCEPTUAL FRAMEWORK. STATUS OF THE CONCEPTUAL FRAMEWORK SCOPE OF THE CONCEPTUAL FRAMEWORK THE OBJECTIVE OF FINANCIAL REPORTING... Primary users... Decisions about providing resources to the entity QUALITATIVE CHARACTERISTICS... Fundamental qualitative characteristics . Enhancing qualitative characteristics ... The Cost Constraint ..... FINANCIAL STATEMENTS ANO THE REPORTING ENTITY Reporting period.. Going concern assumption The reporting entity. THE ELEMENTS OF FINANCIAL STATEMENTS...viii Expenses RECOGNITION AND DERECOGNITION The recognition process. Recognition criteria. Derecognition .. Unit of account MEASUREMENT...... Measurement bases... Considerations when selecting a mensuirement basi Measurement of equity...... Cash-flow-based measurement techniques PRESENTATION AND DISCLOSURE... Presentation and disclosure as communication tools Presentation and disclosure objectives and principles Classification . CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE Capital maintenance adjustments. Summary: PAS 1 PRESENTATION OF FINANCIAL STATEMENTS ..... FINANCIAL STATEMENTS... COMPLETE SET OF FINANCIAL STATEMENT: GENERAL FEATURES OF FINANCIAL STATEMENTS. Additional Statement of financial position STRUCTURE AND CONTENT OF FINANCIAL STATEMENTS. ‘STATEMENT OF FINANCIAL POSITION... Presentation of statement of financial position. Current assets and Current liabilities Refinancing agreement Liabilities payable on demand. STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME... 127 Profit or loss... Other Comprehensive Income (oct Total Comprehensive Income.‘STATEMENT OF CHANGES IN EQUITY NOTES........ SUMMARY: .. PAS 2 INVENTORIES... INVENTORIES...... MEASUREMENT Cost FORMULAS, NET REALIZABLE VALUE (NRV) .. RECOGNITION AS AN EXPENSE ..... Discosures. SUMMARY: PAS 7 STATEMENT OF CASH FLOWS .. CLASSIFICATION OF CASH FLOWS... PRESENTATION .. DISCLOSURE... ‘SUMMARY: ... PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS... 184 184 187 189 e191 195 196 ACCOUNTING POLICIES CHANGES IN ACCOUNTING ESTIMATES. PAS 10 EVENTS AFTER THE REPORTING PERIOD ..... ADJUSTING EVENTS AFTER THE REPORTING PERIOD .-.. NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD .. PAS 12 INCOME TAXES... ACCOUNTING PROFIT AND TAXABLE PROFIT .. ACCOUNTING FOR DEFERRED TAXES. ACCOUNTING FOR CURRENT TAXES SUMMARY: .. PAS 16 PROPERTY, PLANT AND EQUIPMENT... RECOGNITION...... INITIAL MEASUREMENT oss sss0eSubsequent expenditures on recognized PPE ‘SUBSEQUENT MEASUREMENT... DERECOGNITION DISCLOSURE PAS 19 EMPLOYEE BENEFITS .... SHORT-TERM EMPLOYEE BENEFITS POsT-EMPLOYMENT BENEFITS Defined contribution plans. Defined benefit plans... . OTHER LONG-TERM EMPLOYEE BENEFIT: ‘TERMINATION BENEFITS .. SUMMARY: .. PAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE ... ACCOUNTING FOR GOVERNMENT GRANTS. i PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES273 FUNCTIONAL CURRENCY .. FOREIGN CURRENCY TRANSACTIONS Exchange Differences................ Translation of Financial Statements .. FOREIGN OPERATION .... PAS 23 BORROWING COSTS... CAPITALIZATION OF BORROWING COSTS... SPECIFIC BORROWING... GENERAL BORROWING... PAS 24 RELATED PARTY DISCLOSURES .. RELATED PARTIES ... DISCLOSURE... DEFINED CONTRIBUTION PLANS . DEFINED BENEFIT PLANS,PREPARATION OF SEPARATE FINANCIAL STATEMENTS .... PAS 28 INVESTMENTS IN ASSOCIATES AND JOINT VENTURES ......310 INVESTMENT IN ASSOCIATE....... APPLICATION OF THE EQUITY METHOD INVESTMENT IN JOINT VENTURE . SUMMARY: .. PAS 29 FINANCIAL REPORTING ECONOMIES.. CORE PRINCIPLE ....... sass RESTATEMENT OF FINANCIAL STATEMENTS .. PAS 32 FINANCIAL INSTRUMENTS: PRESENTATION. FINANCIAL INSTRUMENTS PRESENTATION ........ COMPOUND FINANC! TREASURY SHARES... a INTEREST, DIVIDENDS, LOSSES AND GAINS .. OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY... SUMMARY: PAS 33 EARNINGS PER SHARE .. BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE. PRESENTATION SUMMARY: PAS 34 INTERIM FINANCIAL REPORTING . PERIODS FOR WHICH INTERIM FINANCIAL STATEMENTS ARE PRESENTED..... 367 RECOGNITION AND MEASUREMENT .. PAS 36 IMPAIRMENT OF ASSETS.. CORE PRINCIPLE .. IDENTIFYING AN ASSET THAT MAY BE IMPAIRED ... MEASURING RECOVERABLE AMOUNT... RECOGNIZING AND MEASURING AN IMPAIRMENT LOSS .... INSTRUMENTS... PAS 27 SEPARATE FINANCIAL STATEMENT: Sexii CASH-GENERATING UNITS AND GOODWILL REVERSAL OF IMPAIRMENT LOSS . SUMMARY: . PAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS... PROVISIONS .... CONTINGENT LIABILITIE: CONTINGENT ASSETS ... MEASUREMENT... RESTRUCTURING .. Disclosure PAS 38 INTANGIBLE ASSETS... 397 402 INTANGIBLE ASSET. 404 RECOGNITION... 407 INITIAL MEASUREMENT 407 | Subsequent expenditures 412 | ‘SUBSEQUENT MEASUREMENT. Amortization IMPAIRMENT... DERECOGNITION .. DIscLosure . SUMMARY: .. PAS 40 INVESTMENT PROPERTY .... | | | INITIAL MEASUREMENT .... ‘SUBSEQUENT MEASUREMENT. TRANSFERS ... 431 DERECOGNITION... 432 DISCLOSURE... 434 Summat PAS 41 AGRICULTURE.. BIOLOGICAL ASSET... AGRICULTURAL PRODUCE .. MEASUREMENT... GOVERNMENT GRANTS Disctosure... ootxiii SUMMARY: ....ssseeees PFRS 1 FIRST-TIME ADOPTION OF PHILIPPINE FINANCIAL REPORTING STANDARDS .. First PRS FINANCIAL STATEMENTS ... RECOGNITION AND MEASUREMENT. RETROSPECTIVE APPUCATION... PRESENTATION AND DISCLOSURE . SUMMARY: PFRS 2 SHARE-BASED PAYMENT... RECOGNITION... EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS. Employee share option plans... CASH-SETTLED SHARE-BASED PAYMENT TRANSACTIONS .. Employee share appreciation rights (SARs). CHOICE BETWEEN EQUITY-SETTLED AND CASH-SETTLED. Counterparty has the right of choice. Entity has the right of choice SUMMARY: .. mee i PFRS 3 BUSINESS COMBINATIONS.. BUSINESS COMBINATION ... ACCOUNTING FOR BUSINESS COMBINATION Recognizing and measuring goodwil SUMMARY: . PFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS.. CLASSIFICATION AS HELO FOR SALE MEASUREMENT... CHANGES TO A PLAN OF SALE DISCONTINUED OPERATION: PRESENTATION OF DISCONTINUED OPERATIONS. PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION... ‘SUMMARY PFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES... wave 515xiv EXEMPTION FROM HIERARCHY OF REPORTING STANDARDS UNDER PAS 8, INITIAL MEASUREMENT ......- ‘SUBSEQUENT MEASUREMENT... 51g PFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES. SIGNIFICANCE OF FINANCIAL INSTRUMENTS .... crete NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS... 525 PFRS 8 OPERATING SEGMENTS... CORE PRINCIPLE... OPERATING SEGMENTS REPORTABLE SEGMENTS... MANaGeMent appRoact AGGREGATION CRITERIA... QUANTITATIVE THRESHOLDS SUMMARY: PFRS 9 FINANCIAL INSTRUMENTS... INITIAL RECOGNITION... CLASSIFICATION OF FINANCIAL ASSETS Business model ... Contractual cash flow characteristic MEASUREMENT OF FINANCIAL ASSETS.. RECLASSIFICATION IMPAIRMENT DERECOGNITION CLASSIFICATION OF FINANCIAL LIABILITIES MEASUREMENT OF FINANCIAL LIABILITIES, SUMMARY: PFRS 10 CONSOLIDATED FINANCIAL STATEMENTS... + 546 Exposure or rights to variable returns Ability to use power to affect investor's returns ACCOUNTING REQUIREMENTS «sss. NON-CONTROLLING INTERESTS (NCI PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS Summary:PERS 16 LEASES xv PFRS 11 JOINT ARRANGEMENTS... JOINT ARRANGEMENT ... ‘TYPES OF JOINT ARRANGEMENT JOINT OPERATIONS JOINT VENTURES .. PRESENTATION IN STATEMENT OF FINANCIAL POSITIO| PARTICIPANT TO A JOINT ARRANGEMENT WITH NO JOINT CONTROL. SUMMARY: .... PFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES ... SUMMARY OF MINIMUM DISCLOSURES UNDER PFRS 12... PFRS 13 FAIR VALUE MEASUREMENT... FAIR VALUE... REQUIREMENTS ON FAIR VALUE MEASUREMENT... VALUATION TECHNIQUES ....-sessse FAIR VALUE HIERARCHY...... FAIR VALUE MEASUREMENT OF NON-FINANCIAL ASSET! SUMMARY: PFRS 14 REGULATORY DEFERRAL ACCOUNTS SCOPE... SUMMARY OF PRINCIPLES UNDER PFRS 14 ....... PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS .. REVENUE RECOGNITION .. Step 1: Identify the contract with the customer..... Step 2: Identify the performance obligations in the contract .622 Step 3: Determine the transaction price .. é Step 4; Allocate the transaction price to the performance obligations ... Step 5: Recognize revenue when (or as) the entity satisfles 3 a performance obligation CONTRACT COSTS.. PRESENTATION .. DisctosurE Summary: sseesersersees 646)xvi Lease IDENTIFYING A LEASE LEASE TERM . ACCOUNTING FOR LEASES BY LESSEE Recognition exemptions Separating the components of a contract Presentation.. Disclosure. ACCOUNTING FOR LEASES BY LESSO! Indicators of a finance lease: Inception and Commencement of lease... Finance Lease.. Operating Lease.. 674 Lease of land and building 175 Subleases .. 76 Presentation. Disclosure. ‘SALE AND LEASEBACK TRANSACTIONS .. ‘SUMMARY:...... PERS 17 INSURANCE CONTRACTS......... INSURANCE CONTRACT RECOGNITION... INITIAL MEASUREMENT, Fulfillment cash flows Contractual service margin. ‘SUBSEQUENT MEASUREMENT 693 ONEROUS CONTRACTS ..... 94 PREMIUM ALLOCATION APPROACH 95 REINSURANCE CONTRACTS HELD. 696 INVESTMENT CONTRACTS WITH DISCRETIONARY PARTICIPATION FEATURES . 698 MODIFICATION OF AN INSURANCE CONTRACT 199 DERECOGNITION PRESENTATION SUMMARY: REFERENCE ....Overview of Accounting 1 Overview of Accounting Learning Objectives 1. Define accounting and state its basic purpose. 2. Explain the basic concepts applied in accounting. 3. State the branches of accounting and the sectors in the practice of accountancy. 4. Explain the importance of a uniform set of financial reporting standards, Definition of Accounting Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.” - (America Association of Accountants) Three important activities included in the definition of accounting 1. Identifying 2. Measuring 3. Communicating Identifying Identifying is the process of analyzing events and transactions to determine whether or not they will be recognized. > Recognition refers to the process of including the effects of an accountable event in the statement of financial position or the statement of comprehensive income through a journal entry. Only accountable events are recognized (ie, journalized), An accountable event is one that affects the assets, liabilities, equity, income or expenses of an entity. It is also known as economic activity, which is the subject matter of accounting. Only economicee activities are emphasized and recognized in accounting. Sociological and psychological matters are not recognized. Non-accountable events are not recognized but discloseg only in the notes, if they have accounting relevance. Disclosure only in the notes is not an application of the recognition process, a, non-accountable event that has an accounting relevance may be recorded through a memorandum entry. Types of events or transactions 1. External events — are events that involve an entity and another external party. Types of External events i. Exchange (reciprocal transfer) - an event wherein there is a reciprocal giving and receiving of economic resources or discharging of economic obligations between an entity and an external party. Examples: sale, purchase, payment of liabilities, receipt of notes receivable in exchange for accounts receivable, and the like. ii, Non-reciprocal transfer - is a “one way” transaction in that the party giving something does not receive anything in return while the party receiving does not give anything in exchange. Examples: donations, gifts or charitable contributions, payment of taxes, imposition of fines, theft, provision of capital by owners *, distributions to owners ‘ and the like. 1 FASB Accounting Standards Codification (ASC) 845 iii. External event other than transfer — an event that involves changes in the economic resources or obligations of a" entity caused by an external party or external source but does not involve transfers of resources or obligations. ealExamples: changes in fair values and price levels, obsolescence, technological changes, vandalism, and the like. 2 e 2, Internal events ~ are events that do not involve an external party Types of Internal events i. Production - the process by which resources are transformed into finished goods. Examples: conversion of raw materials into finished products, production of farm products, and the like. ii. Casualty — an unanticipated loss from disasters or other similar events. Examples: loss from fire, flood, and other catastrophes Measuring Measuring involves assigning numbers, normally in monetary terms, to the economic transactions and events. Several measurement bases are used in accounting which include, but not limited to, historical cost, fair value, present value, realizable value, current cost, and sometimes inflation- adjusted costs. The most commonly used is historical cost. This is usually combined with the other measurement bases. Accordingly, financial statements are said to be prepared using a mixture of costs and va iues. Costs include historical cost and current cost while values include the other measurement bases. Valuation by fact or opinion The use of estimates is essential Thus, financial statements are sai opinion. When measurement is affected by estimates, the items measured ’are said to be valued by opinion. Examples: a. Estimates of uncollectible amounts of receivables. | in providing relevant information. id to be a mixture of fact and5 ee SE b. Depreciation and amortization expenses, which are Affects | by estimates of useful life and residual value. 4 ¢. Estimated liabilities, such as provisions. a. Retained earnings, which is affected by various estimates of Income and expenses When measurement is unaffected by estimates, the measured are said to be valued by fact. Examples: a. Ordinary share capital valued at par value b. Land stated at acquisition cost © Cash measured at face amount items Communicating Communicating is the process of transforming economic data into useful accounting information, such as financial statements and other accounting reports, for dissemination to users. It also involves interpreting the significance of the _ processed information. The communicating process of accounting involves three aspects: 1. Recording ~ refers to the process of systematically committing into writing the identified and measured accountable events in the journal through journal entries. 2. Classifying — involves the grouping of similar and interrelated items into their respective classes through postings in the ledger. 3. Summarizing — putting together or expressing in condensed form the recorded and classified transactions and events. This includes the preparation of financial statements and other accounting reports. Interpreting the processed information involves thé computation of financial statement ratios. Some regulatory bodies such as the Bangko Sentral ng Pilipinas (BSP), require certail financial ratios to be disclosed in the notes to financial statements. ae_Overview of Accounting 5 Basic purpose of accounting The basic purpose of accounting is to provide information that is useful in making economic decisions. Various sources of information are used when making, economic decisions and the financial statements are only one of those sources. Other sources may include current events, industry publications, internet resources, professional advices, expert systems, etc. Economic entities use accounting to record economic activities, process data, and disseminate information intended to be useful in making economic decisions. An economic entity is a separately identifiable combination of persons and property that uses or controls economic resources to achieve certain goals or objectives. An economic entity may either be a: a. Not-for-profit entity - one that carries out some socially desirable needs of the community or its members and whose activities are not directed towards making profit; or b. Business entity ~ one that operates primarily for profit. Economic activities are activities that affect the economic resources (assets) and obligations (liabilities), and consequently, the equity of an economic entity. Economic activities include: 1. Production - the process of converting economic resources into outputs of goods and services that are intended to have greater utility than the required inputs. 2. Exchange - the process of trading resources or obligations for other resources or obligations. 3. Consumption - the process of using the final output of the production process. 4. Income distribution - the process of allocating rights to the use of output among individuals and groups in society. 5. Savings - the process of setting aside rights to present consumption in exchange for rights to future consumption. 6. Investment - the process of using current inputs to increase the stock of resources available for output as opposed to immediately consumable output.a | Types of information provided by accounting | 1. Quantitative information - information expressed in number, quantities, or units. : 2. Qualitative information — information expressed in words oy descriptive form. Qualitative information is found in the Notes, to financial statements as well as on the face of the othe | financial statements. 3. Financial information - information expressed in money, Financial information is also quantitative information because monetary amounts are normally expressed in numbers. Types of accounting information classified as to users’ needs 1. General purpose accounting information - designed to meet the common needs of most statement users. This information is provided under financial accounting. General purpose information is governed by generally accepted accounting principles (GAAP) represented by the Philippine Financial Reporting Standards (PFRSs). 2. Special purpose accounting information - designed to meet the specific needs of particular statement users. This information is provided by other types of accounting other than financial accounting, e.g., managerial accounting, tax basis accounting. Sources of information in financial statements Information in the financial statements is not obtained exclusively from the entity’s accounting records. Some are obtained from external sources. For example, fair value measurements, resolutions of uncertainties, future lease payments, and contractual commitments are only a few of the information presented in the financial statements that are derived from external sources. Accounting as science and art 1. Asa social science, accounting is a body of knowledge which has been systematically gathered, classified and organized. lalOverview of Accounting Z 2. Asa practical art, accounting requires the use of creative skills and judgment Accounting as an information system Accounting identifies and measures economic activities, processes information into financial reports, and communicates these reports to decision makers, Accounting as a language of business Accounting is often referred to as a “language of. business” because it is fundamental to the communication of financial information. Creative and Critical thinking in accounting The practice of accountancy requires the exercise of creative and critical thinking. a. Creative thinking involves the use of imagination and insight to solve problems by finding new relationships (ideas) among items of information. It is most important in identifying alternative solutions. b. Critical thinking involves the logical analysis of issues, using inductive or deductive reasoning to test new relationships to determine their effectiveness. It is most important in evaluating alternative solutions. Creative skills and judgment are exercised in problem solving. The following are the steps in problem solving: 1. Recognizing a problem 2. Identifying alternative solutions 3. Evaluating the alternatives 4. Selecting a solution from among the alternatives 5. Implementing the solution Accounting Concepts Accounting concepts refer to the principles upon which the process of accounting is based. The term “accounting concepts” is used interchangeably with the following terms: