CONCEPTUAL FRAMEWORK OF ACCOUNTING
(2018)
Effectivity Date - effective for annual periods beginning on
or after 1 January 2020, with earlier application permitted
I. Nature and Authoritative Status
It deals with the concepts used in the preparation and
presentation of financial statements. These are guidelines
to set the rules / standards. The Conceptual Framework is
not a PFRS1. It does not define standards for any particular
measurement or disclosure issue. However, when
developing an accounting policy in the absence of a
standard or an Interpretation that specifically applies to an
item, an entity’s management is required to refer to, and
consider the applicability of, the concepts in the
Framework. Nothing in the Framework overrides any
specific PFRS. In case of conflict, PFRS prevails over the
Framework.
- underlying theory for the development and revision of
accounting standards
- document that contains concepts for general purpose
financial reporting and underlie in the preparation and
presentation of financial statements
II. Purpose
The 2018 purpose of the Framework is to:
1. To assist the Board in the development of existing
and future accounting standards based on
consistent concepts, resulting in information that
is useful to investors, lenders and other creditors.
2. To assist preparers of financial reports to develop
consistent accounting policies for transactions or
other events when no Standard applies or a
Standard allows a choice of accounting policies.
3. To assist all parties to understand and interpret
Standards.
The 2010 purpose of the Framework is to:
1. Assist FRSC in developing GAAP and its review and
adoption of existing International Financial
Reporting Standards (IFRS).
2. Assist preparers of financial statements in
application of PFRS
3. Assist auditors in forming an opinion as to whether
FS conforms to GAAP
4. Assist users in interpreting the FS
5. Provide interested parties with information about
PFRS formulation by FRSC.
III. Scope of Conceptual Framework
FAR 001: Conceptual Framework of Accounting
2010 Conceptual Framework
1. C oncept of capital and capital maintenance
2. O bjective of Financial Reporting
3. Q ualitative Characteristics
4. E lements of Financial Statements
5. R eporting Entity
2018 Conceptual Framework
1. The objective of general-purpose financial
reporting
2. Qualitative characteristics of useful 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
A. Objective of General-Purpose Financial Reporting
- The “why” of accounting (first level: purpose of
accounting)
Overall Objective: to provide information that is useful for
decision-making
.. to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and
other creditors in making decisions relating to providing
resources to the entity..
In order to achieve, users need information about:
- entity’s economic resources, claims against the entity
and changes in those resources and claims
- how efficiently and effectively management has used
the entity’s economic resources (STEWARDSHIP).
Users of Financial Information
1. Primary users
- Existing and potential investors
- Lenders and other creditors
2. Other users
- Employees
- Customers
- Government
- Suppliers
- Public
B. Qualitative Characteristics
R elevance: capacity to influence
decision-maker
FUNDAMENTAL
(content)
F aithful Representation: actual
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Aljon J. Roque, CPA, MBA
 effects of the
transactions shall be
properly accounted for
and reported in the
financial statements.
Ingredients of relevance: predictive value (forecasting);
confirmatory value (feedback)
Ingredients of faithful representation: completeness;
neutrality; free from error
V erifiability (consensus)
C omparability
(intracomparability)
ENHANCING (intercomparability)
(presentation)
U nderstandability
(comprehensible)
T imeliness (communicated early
enough to users)
(a) Materiality-a practical rule stating that strict adherence
to GAAP is not required when the items are not significant
enough to affect the evaluation, decision and fairness of
financial statements. This is the entity-specific aspect of
relevance.
FACTORS OF MATERIALITY: relative size and nature of the
item.
(b) Substance over Form – inherent characteristic of faithful
representation wherein substance of a transaction is being
presented rather than its legal form.
(c) Conservatism/Prudence- desire to exercise care and
caution when dealing with uncertainties
ASSETS & INCOME – not overstated;
LIABILITIES & EXPENSE – not understated
(d) Consistency – implicit in comparability. Comparability is
the goal, consistency is the key to achieve the goal.
(e) Cost constraint on financial information. The benefit
derived from the information should exceed the cost
incurred in obtaining the information.
C. Financial Statements and the Reporting Entity
This chapter states the following:
FAR 001: Conceptual Framework of Accounting
- objective of financial statements
- sets out the going concern assumption
- FS are prepared for a specific period of time
- provide comparative information and under
certain circumstances forward-looking
information
- definition of reporting entity and boundary
Objective of Financial Statements: to provide information
about a reporting entity’s assets, liabilities, equity, income
and expenses.
- Statement of financial position
- Statement of financial performance
- Other statements and notes
REPORTING ENTITY: an entity that is required or chooses to
prepare financial statements
1. Consolidated FS – parent and and subsidiary
2. Combined FS – 2 or more affiliated entities other
than parent and subsidiary
3. Unconsolidated FS – parent only (otherwise
known as separate FS)
D. Elements of Financial Statements
Financial Position [Assets, Liabilities and Equity]
Financial Performance [Income (includes revenue
and gains) and Expenses (includes losses)]
2010 Conceptual Framework
Asset – resource controlled by the entity as a result of past
events and from which future economic benefits are
expected to flow to the entity
Liability - present obligation of the entity arising from past
events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic
benefits
2018 Conceptual Framework
Asset - a present economic resource controlled by the
entity as a result of past event. An economic resource is a
right that has the potential to produce economic benefit.
Liability - a present obligation of the entity to transfer
economic resource as a result of past events.
Equity – the residual interest in the assets of the entity
after deducting all of its liabilities
Income – Increases in assets or decreases in liabilities that
result in increases in equity, other than those relating to
contributions from holders of equity claims
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Aljon J. Roque, CPA, MBA
Expenses - Decreases in assets or increases in liabilities that (b) if a duty or responsibility is conditional on a
result in decreases in equity, other than those relating to particular future action that the entity itself may
contributions from holders of equity claims take—the entity has an obligation if it has no
practical ability to avoid taking that action.

ASSETS
E. RECOGNITION AND DERECOGNITION
2010 Conceptual 2018 Conceptual
Framework Framework Recognition - The process of capturing for inclusion in the
resource present economic resource statement of financial position or the statement of financial
controlled by entity -same- performance an item that meets the definition of an asset,
from past event -same- a liability, equity, income or expenses
future economic benefit -none-
flow to the company -none-  Relevance
- probability of economic benefits
 separate definition of an economic resource – to - uncertainty of existence
clarify that an asset is the economic resource, not
the ultimate inflow of economic benefits.  Faithful representation
 stresses that asset is not physical objects but as - Measurement uncertainty
sets of rights - Recognition inconsistency (acctg mismatch)
 deletion of ‘expected’ flow – it does not need to be - Presentation and Disclosure
certain, or even likely, that the economic benefit
Derecognition - The removal of all or part of a recognised
will arise.
asset or liability from an entity’s statement of financial
 A low probability of economic benefits might
position
affect recognition decisions and the measurement
of the asset - Asset – when an entity loses control
- Liability – when an entity has no longer the
LIABILITIES
present obligation
2010 Conceptual 2018 Conceptual
Framework Framework
F. MEASUREMENT – process of quantifying the elements
present obligation present obligation recognised in the financial statements
from past event -same-
future settlement to transfer economic
(a) Historical Cost – the price (value) to acquire an asset or
outflow of eco benefit resources
incur a liability

 separate definition of an economic resource – to - Asset (depreciation/amortisation, settlement,

clarify that a liability is the obligation to transfer
the economic resource, not the ultimate outflow
of economic benefit
 deletion of ‘expected’ flow – with the same
implications as set out above for an asset
 introduction of the ‘no practical ability’ to avoid’
criterion to the definition of obligation
NO PRACTICAL ABILITY TO AVOID
Obligation – a duty or responsibility that an entity has no
practical ability to avoid.
(a) if a duty or responsibility arises from the entity’s
customary practices, published policies or specific
statements—the entity has an obligation if it has
no practical ability to act in a manner inconsistent
with those practices, policies or statements.
impairment and accrual of interest)
- Liability (satisfying an obligation to pay/to deliver
goods, inflation, accrual of interest)
(b) Current Value – provides information updated to reflect
conditions at the measurement date
1. Fair Value - 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
2. Value in Use (for asset) – present value of cash flows
that an entity expects to derive from the use of an asset and
from its ultimate disposal
3. Fulfilment value (for liabilities) - present value of cash
flows that an entity expects to be obliged to transfer as it
fulfils its liability
4. Current Cost - reflects the current amount that would be:
- paid to acquire an equivalent asset
- received to take on an equivalent liability

 Relevance
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FAR 001: Conceptual Framework of Accounting FINANCIAL ACCOUNTING AND REPORTING
Aljon J. Roque, CPA, MBA
 - characteristics of the asset or liability (i.e.
variability of cash flows, sensitivity of the value to
mkt factors)
- contribution to future cash flows (i.e. whether
cash flow is direct or indirect; nature of business
activities)
(a) Financial Concept (most common)- a profit is earned
only if the financial aemount of ending net assets exceeds
beginning net assets, excluding any contributions from and
distributions to owners during the period. This concept is
based on HISTORICAL COST concept.

 Faithful representation
- Measurement inconsistency (acctg mismatch)
- Measurement uncertainty
G. PRESENTATION AND DISCLOSURE
- The framework discusses concepts that determine
what information is included in the financial
statements and how that information should be
presented and disclosed.
(b) Physical Concept- a profit is earned only if the physical
productive capacity (operating capability) at the end of
period exceeds the physical productive capacity at
the beginning of the period, excluding any contributions
from and distributions to owners during the period. This
concept requires the adoption of CURRENT CONCEPT as the
basis of measurement.

- The statement of statement of comprehensive

income is newly described as "statement of
financial performance", however, the framework
does not specify whether this statement should
consist of a single statement or two statements, it
only requires that a total or subtotal for profit or
loss must be provided.

- The statement of profit or loss is the primary

source of information about an entity’s financial
performance for the reporting period

- In principle, all income and expenses are classified

and included in the statement of profit or loss

- In exceptional circumstances, the Board may

decide to exclude from the statement of profit or
loss income or expenses arising from a change in
current value of an asset or liability and include
those income and expenses in OCI
The Board may make such a decision when doing
so would result in the statement of profit or loss
providing more relevant information or a more
faithful representation

H. Concepts of Capital and Capital maintenance

Financial Performance Determinants

a. transaction approach : traditional preparation of
an income statement
b. capital maintenance: the concept of capital
maintenance provides the linkage between the concepts of
capital and concepts of profit since it provides the point of
reference by which profit is measured.

TWO CAPITAL MAINTENANCE CONCEPTS:

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FAR 001: Conceptual Framework of Accounting FINANCIAL ACCOUNTING AND REPORTING
Aljon J. Roque, CPA, MBA