UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
Academic Year 2021-2022

ONLINE LEARNING MODULE

ACCT 1013- Conceptual Framework and Accounting Standards

Lesson 4: Financial Statements and the Reporting Entity

REMINDERS:

 Lessons will be uploaded every Monday, and submission will be every Friday of the week.
 Comply with all requirements (written outputs, projects/performance tasks examinations and the like.)
 Turn in learning tasks on time to avoid backlogs.
 For this week, the following shall be your guide for the different lessons and tasks that you need to
accomplish. Be patient, read them carefully before proceeding to the tasks expected of you.

Date Topics Activities or Tasks

September 13 Read Lessons from books and handouts
September 14 A. The Reporting Entity Online discussion
September 15 B. Elements of the Financial Statement Accomplish the drills and exercises
September 16 C. Recognition and Derecognition of Submission of Assessments
September 17 Elements of Financial Statements Participate in the scheduled Quiz

Learning 1. Explain the concept of a reporting entity

Outcome: 2. Define elements of financial statements
3. Explain the different criteria for recognition of elements of financial
statements and the bases for their measurement
4. Explain the concepts of derecognition of assets and liabilities

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 LEARNING CONTENT

Financial Statements and the Reporting Entity

Such information is
provided in the:
OBJECTIVE OF GENERAL PURPOSE FINANCIAL
STATEMENTS is to provide FINANCIAL INFORMATION A. Statement of
Financial Position
about the reporting entity’s ASSETS, LIABILITIES, EQUITY,
B. Statement of
INCOME AND EXPENSES that is USEFUL IN ASSESSING:
Financial
A. The entity’s prospects for future net cash inflows; and Performance
B. Management’s stewardship over economic resources C. Other Statements
and Notes
Reporting Entity
- is one that is required, or chooses, to prepare financial statements, and is not necessarily a legal entity.
- It can be a single entity or a group or a combination of two or more entities.

Parent- an entity that controls another entity

Subsidiary- an entity being controlled by the parent

Consolidated Financial Statements- if a reporting entity comprises both the Parent and its
Subsidiaries.
- Parent and Subsidiaries are viewed as a single reporting entity.
- Enables users to better assess the Parent’s prospects for future cash flows

Unconsolidated Financial Statements- if the reporting entity is the parent alone.

- Presented in addition to consolidated financial statements when a parent is required or chooses to do
so

Combined Financial Statements- if a reporting entity comprises two or more entities that are not all linked by
a parent-subsidiary relationship.

Reporting period- when a financial statements are prepared for a specified period of time and provide
information on assets, liabilities and equity of an entity.

Comparative information- are provided in order to help users of financial statements evaluate changes or trends
in the financial statements of an entity for at least one preceding reporting period.

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Forward looking information- Financial statements are designed to provide information about past events.
However, information about future transactions may be included in the financial statements only if:
a. It relates to a past information presented in the financial statements and
b. Is deemed useful to users of financial statements

Going concern assumption- Financial Statements are normally prepared on the assumption that the entity has
neither the intention nor need to end its operations in the foreseeable future.
- If not the case, the entity’s financial statements are prepared on another basis

The Elements of Financial statements

1. Assets- is a present economic resource controlled by the entity as a result of past events.

Is a right that has the potential to

produce economic benefits.

The definition of asset has the following three aspects.

a. Right Rights that correspond to an obligation of another

party

Right that do not correspond to an obligation of another

party.

A right normally arise from law, contract or similar means. However, right could also arise by
creating a “know-how” that is not a public domain or through constructive obligation created by
another party.

b. Potential to produce economic benefits

An economic resource can produce economic benefit for the entity in many ways. For example, the
asset may be:
- Sold, leased, transferred or exchange for other assets
- Used singularly or in combination with other asset to produce goods or provide services
- Used to enhance the value of other assets
- Used to promote efficiently and cost savings; or
- Used to settle a liability

c. Control- means the entity has the exclusive right over the benefits of an asset and the ability to prevent
others from accessing those benefits.
- Normally stems from legally enforceable rights
- Physical possession is not always necessary for control to exist
ACCT 1013 – Conceptual Framework and Accounting Standards | 3
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 2. Liability- is a present obligation of the entity to transfer an economic resource as a result of past events.
The definition of liability has the following three aspect:

Legal Obligation- an obligation that results from a contract,

a. Obligation legislation, or other operation of law

Constructive obligation- an obligation that results from an

entity’s actions that create a valid expectation on others that the
entity will accept and discharge certain responsibilities.

- is a duty or responsibility that an entity has no practical ability to avoid.

- is always owed to another party.

b. Transfer of an economic resource

An obligation to transfer an economic resource may be an obligation to:
- Pay cash, deliver goods or render services
- Exchange assets with another party on unfavorable terms
- Transfer assets if a specified uncertain future event occurs, or
- Issue a financial instrument that obliges the entity to transfer an economic resources

c. Present obligation as a result of past events- exist when:

- The entity has already obtained economic benefits or taken an action ; and
- As a consequence, the entity will or may have to transfer an economic resource that it would not
otherwise have had to transfer

*Executory contracts- is a contract that is equally unperformed- neither party has fulfilled any of its
obligation, or both parties have partially fulfilled their obligation to an equal extent.

3. Equity- is the residual interest in the assets of the entity after deducting all its liabilities.

4. Income- is increases in assets, or decreases in liabilities, that result in increase in equity other than those
relating to contributions from holders of equity claims.

5. Expenses- are decreases in assets, or increases in liabilities, that result in decrease in equity other than
those relating to distributions from holders of equity claims.

NOTE: Items 1, 2 and 3 are the components/elements of the “Entity’s Financial Position, while
item 4 and 5 are components/elements of the “Entity’s Financial Performance”.

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Recognition and Derecognition

Recognition- is the process of including in the statement of financial position or the statement of financial
performance an item that meets the definition of one of the financial statement elements (assets, liabilities, equity,
income, expenses).
- It involves recording the item in words and in monetary amount and including that amount in the
totals of either of those statements.

Carrying amount- the amount in which an asset, a liability or equity is recognized in the statement of financial
position.

Note: a recognition of an element requires a recognition or derecognition of another element.

(Be mindful of the Accounting Equation…Asset=Liability+Equity)

Recognition Criteria
An item is recognized if:
a. It meets the definition of an asset, liability, equity, income or expenses; and
b. Recognizing it would provide useful information(relevant and faithfully represented information)

Note: Cost-benefit principle and professional judgment are required when deciding whether to recognize
an item in the financial statements. Items that do not meet the definition of an asset or liability may still
need to disclose in the notes. In such case, the item is referred to as unrecognized asset or
unrecognized liability.

Measurement Uncertainty
- An asset or liability must be measured for it to be recognized. Often, measurement requires estimation
and thus subject to measurement uncertainty.(ex: Contingency)
- The use of reasonable estimate estimates is an essential part of financial reporting and does not
necessarily undermine the usefulness of information.

Derecognition- the removal of a previously recognized asset or liability from the entity’s statement of financial
position.
- Occurs when an item no longer meet the definition of an asset or liability, such as when the entity loses
control of all or part of the asset, or no longer has a present obligation for all or part of the liability.

ACCT 1013 – Conceptual Framework and Accounting Standards | 5

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On derecognition, the entity:
a. Derecognizes the assets or liabilities that have expired or have been consumed, collected, fulfilled or
transferred, and recognizes any resulting income and expenses.
b. Continues to recognize any asset or liability retained after the recognition. No income or expense is
normally recognized in the retained component unless there is a change in its measurement basis. After
derecognition, the retained component becomes a unit of account separate from the transferred
component.

-Asset or liability to which recognition criteria and

measurement concepts are applied.

- can be an account title(Cash), a group of similar

assets( Property, Plant and Equipment), or a group
of assets and liabilities(Cash generating Unit).

*Derecognition is not appropriate if the entity retains substantial control of a transferred asset. In such case, the
entity continues to recognize the transferred assets and recognizes any proceeds received from the transfer as a
liability. If partial transfer, the entity derecognizes only the transferred component and continues to recognize the
retained portion.

REFERENCES:

Textbook:
Empleo, P. and Robles, N. (2019). The Philippine Financial Reporting Reporting (Conceptual Framework and
Accounting Standards). Mandaluyong City: Millennium Books, Inc.
Millan, Z. (2020). Conceptual Framework & Accounting Standards. 4F Pelizloy Centrum, Lower Session
Road, Baguio City. Bandolin Enterprise Publishing and Printing.

References:
1. Cabrera, E, et al. (2018). Conceptual Framework and Accounting Standards. Manila: GIC
Enterprises
2. Valix, C, et al. (2019). Conceptual framework and accounting standards. Manila: GIC Enterprises
& Co., Inc.
3. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
4. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
5. Financial Reporting Standard Council (2017). Philippine Financial Reporting Standards. PICPA
6. Valencia, E. and Roxas, G. (2017), Basic Accounting. Baguio City: Valencia Educational Supply
7. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I. GIC Enterprises & Co., Inc., Manila

Electronic Resource:
1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-
1/
2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics

ACCT 1013 – Conceptual Framework and Accounting Standards | 6

This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced
nor transmitted in any form, in whole or in part, without expressed written permission.
 4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html
7. International Financial Reporting Standards. www.ifrs.org
8. International Accounting Standards. www.iasplus.com/en/standards/ias

ASSESSMENTS:

PARTICIPATION (for recitation purposes)

DRILLS/ ACTIVITIES/ APPLICATION

EVALUATION (Quiz)

ASSIGNMENT

ACCT 1013 – Conceptual Framework and Accounting Standards | 7

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