FAR HO2 Underlying Assumptions

CONCEPTUAL FRAMEWORK Accounting Postulates. These are the basic notions

or fundamental premises on which the accounting
Complete Title: Conceptual Framework for
process is based.
Financial Reporting
Recent Version: 2018
A. Going Concern – Continuity Assumption.
- the accounting entity is viewed as
continuing in operation indefinitely.
BASIC CONCEPTS: - Foundation of cost principle.
Conceptual Framework is a summary of the terms Example:
and concepts that underlie the preparation and
presentation of FS. 1. The current and non-current
classification of assets and liabilities.
It is concerned with the Gen. Purpose FS including 2. Accrual of income and expenses and
consolidated FS. prepayments and unearned income.
The underlying theme of the Framework is decision 3. Depreciation of PPE, amortization of
usefulness or Usefulness of information in making intangible assets, depletion and etc.
economic decision.
B. Accrual Principle
- Addresses the recognition of income
and expenses as against the cash basis
Basic Purpose
principle.
To serve as a guide in developing future PFRSs - Income is recognized when earned
and in resolving accounting issues not directly rather than when received.
addressed by existing PFRS. - Expense is recognized when incurred
rather than when paid.
Heirarchy:
1. Specific Standard C. Accounting Entity Concept
2. Relative Standard - Viewed separately from its owners.
3. Conceptual Framework - Personal transactions of the owners
4. Other GAAP among themselves or with other entities
5. Accounting Literature are not recorded in the entity’s
accounting records.

D. Time Period Principle

Specific Purpose
 To assist FRSC
a. In developing future PFRSs and
reviewing existing PFRSs.
b. In promoting harmonization of
regulations, accounting standards and
procedures relating to the presentation
of FS in applying PFRSs.
 To assist FS Preparers – in applying
PFRSs
 To assist FS Users – in interpreting the
information in the FS.
 To assist Auditors – in forming an opinion
as to whether the FS conforms with PFRSs.
- Supports the Going concern
principle.
- The life of the entity is divided into series
of reporting periods.
- Accounting period: 12 months
- Calendar or Fiscal year
E. Monetary Unit Principle
- Accounting information should be
stated in a common measurement
basis to be useful, which is in the
Philippines it is Peso.
- this concept assumes that the
purchasing power of the peso is
regarded as constant.

Authoritative Status
The CF is not a PFRS and hence does not define
standard for any particular measurement or
disclosure issue.
Conflict? PFRS shall prevail over the CF.
***Note!! CF is not PFRS. It is not a standard.
CHAPTER 1: Objective of Financial Reporting Limitations of Financial Reporting
a. Gen. Purpose financial reports do not and
cannot provide all of the information that
Users of Financial Information
existing and potential investors, lenders and
 Primary Users – FS were primarily other creditors need.
addressed to them. b. … are not designed to show the value of
an entity but they provide information to
Primary Users Concern help the primary users estimate the value of
Investors Risk and Return of the entity.
Investment c. To a large extent, gen. purpose financial
reports are based on estimate and
Ability of the company to
judgment rather than exact depiction.
return the investments.

Ability of the company to pay

dividends.
Lenders & Other Liquidity and Solvency
Creditors CHAPTER 2: Qualitative Characteristic
Ability of the company to pay Qualitative Characteristics are the qualities or
its obligations. attributes that make financial accounting
information useful to the users.
***NOTE!!
ASSETS = LIABILITIES + EQUITY Fundamental Characteristics:
Lenders and Other Investors
Creditors  make the information useful to the users
They are the users that provide resources to the in making economic decisions.
company.  address the content or substance of
information.
 Other Users
 are relevance and faithful representation.
Other Users Concerns
Employees Stability and Profitability A. Relevance – capacity of information to
make a difference in a decision made by
Stability: if the company is users. Relevant information has the ff
unstable, there is chance that ingredients:
the company will not pay their
compensation. Predictive Value – the information can help
users increase the likelihood of correctly
Profitability: request of salary
predicting or forecasting outcome of events.
increase.
Customers Continuity
Confirmatory Value (Feedback) – the
Long-term relation between information enables users confirm or correct
customer and supplier. earlier expectations.
Government Regulatory
***NOTE!!
If the company is following For the information to be relevant, it must
regulations. Tax compliance. contain both predictive and confirmatory value.
Public Various
Materiality – is the omission or
misstatement of information causing to
Objective of Financial Reporting
influence the decision of the users
To provide financial information about the reporting
entity that is useful to existing and potential In the exercise of the judgment in
investors, lenders and other creditors in making determining the materiality, the ff factors
decisions about providing resources to the entity. may be considered:

Specific Objectives: (PAR) a. Relative Size of the item in relation to

A. To provide information useful in making
decisions about providing resources to the
entity.
B. … useful in assessing the prospects of
the future net cash flows to the entity.
C. … about entity resources, claims and
changes in resources and claims.
the total of the group to which the item
belongs.
b. Nature of the item.
***NOTE!!!
Materiality is NOT an ingredient of Relevance
but rather a specific aspect of relevance.

All material items are relevant, but not all

relevant items are material.
 B. Faithful Representation (Reliability) – the
information provides a true, correct and
complete depiction of the economic
phenomena that it purports to represent.
The ff are the ingredients:
a. Completeness
b. Neutrality (free from bias)
c. Free from Error
***NOTE!!!
Substance over form and conservatism (choose
the option that has least impact on the business)
are NOT ingredients of faithful representation
and are specific aspects only.
Enhancing Characteristics (VCUT):
 Qualities that enhances its usefulness.
 Address the form or presentation of
information.
A. Verifiability – different knowledge and
independent observers could reach
consensus, although not necessarily
complete agreement, that a particular
depiction is a faithful representation.
B. Comparability – an information is
comparable if it helps users identify
similarities and differences between sets of
information that are provided by:
a. A single entity but different periods
(Intra-comparability) –
b. Different entities in a single period (Inter-
comparability)
***NOTE!!
The focus of the CF is intra-comparability.
Although related, consistency and
comparability are not the same. Comparability
is the goal and consistency are the means of
achieving the goal.
C. Understandability – requires that financial
information must be comprehensible or
intelligible if it is to be useful.
***NOTE!!!
Complex matters cannot be eliminated.
D. Timeliness – having information available
to decision makers ion time to influence
their decisions.
Cost/Constraint
 Cost is a pervasive constraint on the
information that can be provided by financial
reporting.
 The benefit derived from the information
should exceed the cost incurred in obtaining
the information.
CHAPTER 3: The Financial Statements and the
Reporting Entity
The Financial Statements
The objective of the Gen. purpose FS is to provide
financial information about the reporting entity’s
assets, liabilities, equity, income and expenses
contained in the ff:
1. SF Position
2. SF Performance
3. Other Statements and Notes to FS (SCF,
SCE, Notes to FS)
FS are prepared for specific period of time or the
reporting period. FS also provide comparative
information for at least one preceding reporting
period.
The Reporting Entity
Reporting Entity is an entity who must or chooses
to prepare the FS and is NOT necessarily a legal
entity.
Few types of FS:
a. Consolidated – parent and subsidiary are
single reporting entity.
b. Unconsolidated/Individual – parent alone
provides the report.
c. Combined – reporting entity comprises of 2
or more entities not linked by parent-
subsidiary relationship.
CHAPTER 4: Elements of Financial Statements
These are the quantitative information that are
shown in the SFP and Statement of
Comprehensive income.
Statement of Financial Position (As of/as at)
ASSETS
A present economic resource controlled by the
entity as a result of a past event. An economic
resource is a right that has a potential to produce
economic benefits.
Characteristics:
a. The asset is controlled by the entity.
Control – the power to govern economic benefits
and restricting others to enjoy the benefit.
b. The asset is the result of a past transaction
or event.
c. The asset provides future economic
benefits.
***NOTE!!! Tangibility and ownership are not
essential characteristics of assets. Also, the
presence and absence of expenditure is not
necessary in determining the existence of
assets.
LIABILITIES
A present obligation of an entity arising from past
transaction or event, the settlement of which Is
expected to result in an outflow from the entity of
resources embodying economic benefits.
Characteristics:
a. The liability is the present obligation of a
particular entity.
b. Arises from past transactions or event.
c. The settlement of the liability requires an
outflow of economic resources embodying
economic benefits.
***NOTE!!! Identification of payee and certainty
of timing of settlement and amount of liability
are not essential characteristics of liabilities.
EQUITY (directly related to Assets; inversely
related to Liability)
The residual interest in the asset (net asset) of the
entity after deducting all of its liabilities.
INCOME
The increase in economic benefit during the acctg
period in the form of an inflow or increase of assets
or decrease in liability that results in increase in
equity, other than contribution from equity
participants.
***NOTE!!! Increase in equity other than owner
transactions.
Income encompasses both revenue (arises from
ordinary course of business and presented in the
FS at a gross amount) and gains (incidental or
peripheral operations and presented at net of direct
costs).
Statement of Comprehensive income: classified
into 2; profit or loss and other comprehensive
income (OCI).
GR: income is part of P/L unless it will be classified
as OCI, which are as follows;
a. Unrealized G/L on financial asset measured
at FVTOCI (Available for Sale Invstmt)
b. G/L from translating the FS of a foreign
operation. (ForEx translation gain or loss)
***NOTE!!! ForEx Transaction gain or loss is
presented in P/L)
c. Revaluation Surplus during the year.
d. Unrealized G/L from derivative contracts
designated as cash flow hedge.
e. Remeasurements of defined benefit plan
incldg. actuarial G/L on defined benefit
obligation.
***NOTE!!! There’s no such thing as actuarial gain
or loss on defined contribution plan.
EXPENSES (decrease in asset or increase in
liability)
The decrease in economic benefit during the acctg
period in the form of outflow or decrease in asset
and increase in liability that results in decrease in
equity other than distribution to equity participants.
CHAPTER 5: Recognition and Derecognition
Recognition: the process of reporting an asset,
liability, income or expense on the face of the FS of
the entity.
Recognition Criteria:
a. It meets the definition of assets, liability,
equity, income or expense
b. Recognizing it would provide useful
information
The recognition of an item may not provide useful
information if:
a. It is uncertain whether an asset or liability
exists
b. An asset or liability exists but the probability
of an inflow or outflow of economic benefit is
low.
REMINDERS!!
 Recognition criteria only applies to assets,
liabilities, income and expense. There is no
Equity Recognition Principle/Criteria
because it is a residual interest.
 Application of the matching principle
(matching the cost to its related revenue).
 Expenses are incurred in conformity with
the 3 applications of the matching principle,
namely:
a. Cause and effect association/ Strict
matching – examples: warranty
expense, cost of goods sold, sales
commission
b. Systematic and Rational Allocation –
based on cost allocation over the
number of years benefitting from that
cost. Example: Depreciation and
amortization
c. Immediate Recognition – recognize
the expense because you have already
earned it. Example: Casualty Losses
Derecognition is the OPPOSITE of recognition. It
is the removal of a previously recognized asset or
liability from the entity’s statement of financial
position.
Derecognition occurs when the item no longer
meets the definition of an asset or liability.
On derecognition, the entity:
 a. Derecognizes the assets or liabilities that CHAPTER 7: Presentation and Disclosure
have expired or have been consumed,
collected, fulfilled or transferred and Information about assets, liabilities, equity, income
and expenses is communicated through
recognized any resulting income and
presentation and disclosure in the FS.
expenses.
b. Continues to recognize any assets or Effective communication makes information more
liabilities retained after the derecognition. useful. Effective communication requires:
***NOTE!!! Not all transfers require derecognition 1. Focusing on presentation and disclosure
(ex. Consignment of goods). You will only objectives and principles rather than on
derecognize if you transfer control. rules.
2. Classifying information by grouping similar
items and separating dissimilar items.
3. Aggregating information in a manner that it
is not obscured either by excessive detail or
CHAPTER 6: Measurement
by excessive summarization.
Measurement is the process of determining the
***NOTE!!!
monetary amounts at which the elements of the
financial statements are to be recognized and Classification – sorting of assets, liabilities, equity,
carried in the SFP and I/S. income or expense with similar nature, function and
measurement basis for presentation and disclosure
The framework acknowledges that a variety of purposes.
measurement bases are used today to different
degrees and in varying combinations in FS - Classes.
including:
Aggregation – adding together of assets, liabilities,
 Historical Cost – based on the transaction equity, income or expenses that have shared
price of the element at the time of characteristics and are included in the same
recognition. classification.
HC of Asset= Consideration Paid +
Transaction Cost - Classes that are combined together.
HC of Liability= Consideration Received - Classification and aggregation are key concepts to
Transaction Cost effectively communicate the information contained
on FS so that it will not be excessively
 Current Value – measures the element detailed/summarized.
updated to reflect the conditions at the
measurement date.
a. Fair Value – price that would be
received to sell an asset or paid to
transfer a liability in an orderly CHAPTER 8: Concepts of Capital and Capital
transaction bet. market participants. FV Maintenance
is not an entity specific measurement.
Concepts of Capital
b. Value in use –PV of the cash flows or
other economic benefits, that an entity Financial Cap Physical Cap
expects to derive from the use of an Concepts Invested Productive
asset and from its ultimate disposal. money or capacity of the
Fulfillment Value is the PV of the cash purchasing entity.
flows or other economic resources that power (most
an entity expects to be obliged to known type of
transfer as it fulfills a liability. cap.)
Adopted by Yes No
***NOTE!!! Value in use (Assets) and Fulfillment most entities?
Value (Liability) are both an entity-based Measurement Historical Cost Current Cost
measurement.
***NOTE!!! HC has transaction costs, while VIU Capital Maintenance Approach: means that net
and Ful-V has no transactions costs. income occurs only after the capital used from the
beginning of the period is maintained.
c. Current Cost – cost of an equivalent
asset/liability at the measurement date, ***NOTE!!! The net income is derived from the
comprising the consideration that would movement of net assets. If the equity increases, net
be paid/received at the measurement income also increases or there is net income.
date plus transaction costs incurred on
Net changes in Equity XX
that date.
Less: Addtn’l Invsmt by owners (XX)
Add: Withdrawals and distribution XX
to owners
Comprehensive Income XX
Less: OCI (XX)
Add: Other Comprehensive Loss XX
P/L or Net income XX