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 5: Financial Statements and the Reporting Entity (Continuation)

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 20 Read Lessons from books and handouts
September 21 A. Measurement Bases of Elements of Online discussion
September 22 Financial Statements Accomplish the drills and exercises
September 23 B. Presentation and Disclosure Submission of Assessments
September 24 Requirements of Financial Participate in the scheduled Quiz
Statements
C. Concepts of Capital and Capital
Maintenance

Learning
Outcome:
1. Explain the different criteria for recognition of elements of financial
statements and the bases for their measurement
2. Explain the concepts of derecognition of assets and liabilities
3. Elaborate on how an entity communicate financial information through
presentation and disclosure of financial statements
4. Discuss the concepts of capital and capital maintenance

ACCT 1013 – Conceptual Framework and Accounting Standards | 1

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LEARNING CONTENT

And the next lesson will be how we are going to

measure them.

Question: Can you record an event without even knowing how much it is worth?

Answer: Let’s find out.

Measurement – what is it?

https://www.slideshare.net/saadman672/deegan-fat4e-pptch05-51413508

There are two general

measurement basis:
1) Historical cost
2) Current Value

• Fair value
• Value in Use
• Fulfillment Value
• Current Cost

Historical cost

ACCT 1013 – Conceptual Framework and Accounting Standards | 2

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Historical cost measures provide monetary information about assets, liabilities and related income and expenses,
using information derived, at least in part, from the price of the transaction or other event that gave rise to them.
Unlike current value, historical cost does not reflect changes in values, except to the extent that those changes
relate to impairment of an asset or a liability becoming onerous.

(download Link: https://library.croneri.co.uk/cch_uk/iast/miscconceptualfram2018-201803#toc-7

The historical cost of an asset is updated over time to depict, if applicable:

(a) the consumption of part or all of the economic resource that constitutes the asset (depreciation or
amortization);

(b) payments received that extinguish part orset;

all of the as

(c) the effect of events that cause part or all of the historical cost of the asset to be no longer recoverable
(impairment); and

(d) accrual of interest to reflect any financing component of the asset.

The historical cost of a liability is updat ed over time to depict, if applicable:

(a)fulfilment of part or all of the liability, for example, by making payments that extinguish part or all of the
liability or by satisfying an obligation to deliver goods;

(b)the effect of events that increase the value of the obligation to transfer the economic resources needed to
fulfil the liability to such an extent that the liability becomes onerous. A liability is onerous if the historical cost
is no longer sufficient to depict the obligation to fulfil the liability; and

(c)accrual of interest to reflect any financing component of the liability.

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What is amortized cost?

Amortized cost is an investment classification category and accounting method which requires financial assets
classified under this method to be reported on balance sheet at their amortized cost which equals their initial
acquisition amount less principal repayment plus/minus amortization of discount/premium (if any) .

What is amortized loan cost?

An amortized loan is a type of loan that requires the borrower to make scheduled, periodic payments
that are applied to both the principal and interest. An amortized loan payment first pays off the interest
expense for the period; any remaining amount is put towards reducing the principal amount

Example: A motor vehicle to be used for business operations was acquired through bank financing Under
the car dealer’s promotional offer of zero downpayment. The rate of interest over 5 years is 36.83%. Every
month for 60 months, the business will have to pay equal monthly installments until the obligation is fully paid.
Computation of Amortization:

Amount of Loan 1,200,000.00

Multiplied by Interest rate +1 1.3683
Total Amortized Cost 1,641,960.00
Breakdown:
Principal 1,200,000.00
Interest 441,960.00

Monthly Payments
(1,641,960/60) 27,366.00
x 60 months 60

Total payments over 60 months 1,641,960.00

Applying historical cost, the motor vehicle should be recorded at P1,641,960 and reduced monthly by the
amount of amortization.

Current value

Current value measures provide monetary information about assets, liabilities and related income and expenses,
using information updated to reflect conditions at the measurement date. Because of the updating, current values of
assets and liabilities reflect changes, since the previous measurement date, in estimates of cash flows and other
factors reflected in those current values the current value of an asset or liability is not derived, even in part, from the
price of the transaction or other event that gave rise to the asset or liability.

Current value measurement bases include:

ACCT 1013 – Conceptual Framework and Accounting Standards | 4
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(a) Fair value

(b) Value in use for assets and Fulfilment value for liabilities; and

(c) Current cost

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date.

Fair value reflects the perspective of market participants

– participants in a market to which the entity has
access. The asset or liability is measured using the same
assumptions that market participants would use when pricing
the asset or liability if those market participants act in their
economic best interest.

Value in use and fulfilment value

Value in use is the present value

of the cash flows, or other
economic benefits that an entity
expects to derive from the use of
an asset and from its ultimate
disposal.

Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be obliged
to transfer as it fulfils a liability. Those amounts of cash or other economic resources include not only the amounts to
be transferred to the liability counterparty, but also the amounts that the entity expects to be obliged to transfer to
other parties to enable it to fulfil the liability.

Value in use and fulfillment value reflect entity-specific assumptions rather than assumptions by market
participants

Current cost

ACCT 1013 – Conceptual Framework and Accounting Standards | 5

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The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that
date.

The current cost of a liability is the consideration that would be received for an equivalent liability at the
measurement date minus the transaction costs that would be incurred at that date.

Current cost, like historical cost, is an entry value: it reflects prices in the market in which the entity would
acquire the asset or would incur the liability. Hence, it is different from fair value, value in use and fulfilment
value, which are exit values. However, unlike historical cost, current cost reflects conditions at the
measurement date.

When the value of the asset is sensitive to market factors or other risks, the most relevant information is
provided by measuring the asset or liability at fair value, .if such can be directly observable, or value in use or
current cost if the value cannot be directly observed.

Entry values and Exit values

Are measurement bases on date of measurement subsequent to acquisition or
incurrence, disposal or settlement.
are measurement bases on the date of acquisition.

The diagram below summarizes the Measurement Bases of Accounting

Measurement Information Provided by the Measurement Entry or Exit
Basis Basis Value?
Historical Cost Asset Entry
Historical cost, including transaction cost, to the extent
unconsumed (or uncollected) and recoverable. It
includes interest accrued on any financing component.
Liability
Consideration received (net of transaction cost) for
taking on the unfulfilled part of the liability, increased by
excess of estimated cash outflows over consideration
received. It includes interest accrued on any financing
component.

Fair Value (Market The price that would be received to sell an asset,or paid Exit
Participant to transfer a liability, in an orderly transaction between
Assumptions) market participants at the measurement date. It
excludes any potential transaction cost on sale or
transfer.

Value in Use/ Asset Exit

Fulfillment Value
Present value of future cash flows from the continuing
(Entity-Specific
use of the asset and from its disposal, net of transaction
Assumptions)
costs on disposal.
Liability

ACCT 1013 – Conceptual Framework and Accounting Standards | 6

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 Present value of future cash flows that will arise in
fulfilling the liability, including future transaction costs.

Asset Entry
Consideration that would be given to acquire an
equivalent asset at measurement date plus transaction
costs. It reflects the current age and condition of the
Current Cost asset.
Liability
Consideration that would be received to incur an
equivalent liability at measurement date minus
transaction costs.

The issue here is that the equity is defined as “residual after deducting liabilities from assets” and therefore
total carrying amount of equity is not measured directly.

Instead, it is measured exactly by the formula:

• Total carrying amount of all assets, less

• Total carrying amount of all liabilities.

PRESENTATION AND DISCLOSURE REQUIREMENTS OF FINANCIAL STATEMENTS

The main aim of presentation and disclosures is to provide an effective communication tool in the financial
statements.

Effective communication of information in the financial statements requires:

• Focus on objectives and principles of presentation and disclosure, not on the rules;
• Classify or Group similar items and separate dissimilar items;
• Aggregate information, but do not provide unnecessary detail or the opposite – excessive
aggregation to obscure the information.

The Framework discusses classification of assets, liabilities, equity, income and expenses in a greater detail
with describing offsetting, aggregation, distinguishing between profit or loss and other comprehensive
income and other related areas.

Presentation and disclosure objectives and principles

To facilitate effective communication of information in financial statements, when developing presentation and
disclosure requirements in Standards a balance is needed between:

(a) giving entities the flexibility to provide relevant information that faithfully represents the entity’s assets,
liabilities, equity, income and expenses; and

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(b) requiring information that is comparable, both from period to period for a reporting entity and in a
single reporting period across entities .

Effective communication in financial statements is also supported by considering the following principles:

(a) entity-specific information is more useful than standardized descriptions, sometimes referred to as
“boilerplate”; and

(b) duplication of information in different parts of the financial statements is usually unnecessary and can
make financial statements less understandable.

Classify or Group similar items and separate dissimilar items;

Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics
for presentation and disclosure purposes. Such characteristics include – but are not limited to – the nature of the
item, its role (or function) within the business activities conducted by the entity, and how it is measured.

Sample of a classified balance sheet is shown below

https://efinancemanagement.com/financial-accounting/classified-balance-sheet

Classification of assets and liabilities

Classification is applied to the unit of account selected for an asset or liability. However, it may sometimes be
appropriate to separate an asset or liability into components that have different characteristics and to classify those
ACCT 1013 – Conceptual Framework and Accounting Standards | 8
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components separately. That would be appropriate when classifying those components separately would enhance
the usefulness of the resulting financial information. For example, it could be appropriate to separate an asset or
liability into current and non-current components and to classify those components separately.

Classification of equity

To provide useful information, it may be necessary to classify equity claims separately if those equity claims have
different characteristics.

Similarly, to provide useful information, it may be necessary to classify components of equity separately if some of
those components are subject to particular legal, regulatory or other requirements. For example, in some
jurisdictions, an entity is permitted to make distributions to holders of equity claims only if the entity has sufficient
reserves specified as distributable. Separate presentation or disclosure of those reserves may provide useful
information.

Classification of income and expenses

Classification is applied to:

(a) income and expenses resulting from the unit of account selected for an asset or liability; or

(b) components of such income and expenses if those components have different characteristics and are
identified separately. For example, a change in the current value of an asset can include the effects of value
changes and the accrual of interest. It would be appropriate to classify those components separately if doing
so would enhance the usefulness of the resulting financial information.

Profit or loss and other comprehensive income

Income and expenses are classified and included either:

(a) in the statement of profit or loss; or

(b) outside the statement of profit or loss, in other comprehensive income.

The statement of profit or loss is the primary source of information about an entity’s financial performance for the
reporting period. That statement contains a total for profit or loss that provides a highly summarized depiction of the
entity’s financial performance for the period. Many users of financial statements incorporate that total in their analysis
either as a starting point for that analysis or as the main indicator of the entity’s financial performance for the period.
Nevertheless, understanding an entity’s financial performance for the period requires an analysis of all recognized
income and expenses – including income and expenses included in other comprehensive income – as well as an
analysis of other information included in the financial statements.

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CONCEPTS OF CAPITAL and CAPITAL MAINTENANCE
The conceptual framework
mentions two concepts of
capital, namely:

a) Financial Concept, and

b) Physical Concept

The choice of appropriate

concept depends upon users’
needs.

https://www.slideshare.net/iactglobal/certification-and-training-in-international-financial-reporting-standards-ifrs

The financial performance of an entity is determined using two approaches:

1. Transaction approach is the traditional preparation of income statement

2. Capital maintenance approach means that net income occurs only after the capital used from the
beginning of the period is maintained. Net income is the amount that
an entity can distribute to its owners as return on investment.

The conceptual framework considered two concepts of capital maintenance:

• Financial capital maintenance - is the traditional concept based on historical cost and
adopted by most entities. Financial capital is the monetary amount of the net assets contributed
by the shareholders plus the amount of increase in net assets as a result of earnings retained by
the company.

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 • Physical capital maintenance – is the quantitative measure of the physical productive
capacity to produce goods and services. This concept requires that assets be measured at
current cost rather than historical cost

The Framework points out that it can be appropriate to measure some components of equity directly (e.g.
share capital), but it is not possible to measure total equity directly.

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
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

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