CONCEPTUAL ©} » FRAMEWORK AND ACCOUNTING STANDARDS 2018-2019 STCONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS PFRSs and PASs - Based 2018-2019 Edition MA. ELENITA BALATBAT CABRERA BBA MBA CPA CMA PRESENTLY. Academic and Business Consultant President and CEO, CLA Consultancy and Training Center, Inc FORMERLY. Vice Chairman, Professional Regulatory Board of Accountancy World Bank Consultant Dean, College of Business Administration, Lyceum University of the Philippines CPA Review Director & Reviewer, Professional Review and Training Center, Inc Professor of Accounting & Finance, UE, FEU, DLSU, CEU, St. Scholastica’s College ‘Audit Staff, SGV and Co, CPAs REYNALDO ROYO OCAMPO BSA CPA PRESENTLY President, Excel Professional Services ne. CPA Review Director, PRTCOPA Revidhj SEhoo! Facully Member. FEU r FORMERLY. Faculty Member, DLSU, San Beda Colage ‘Specialist, Banko Sentral ng Pilpines, Supervision and Examination Division Audit Associate, SGV and Co, CPAs GILBERT ANTHONY B. CABRERA BBA MBA CPA PRESENTLY. Chief Financial Officer, Food Retail Conglomerate, USA FORMERLY: Senior Auditor, SGV snd Co, CPAs ‘Accounting Instructor. University of Maryland, Robert Smith Schoo! of Business, UEPhilippine Copyright, 2018 by Ko rene MA..EL RA REYNALDO ROYO OCAMPO GILBERT ANTHONY B. CABRERA. Any copy of this book not bearing the signature of the author shall be considered as proceeding from an illegal source. ALL RIGHTS RESERVED oo77771 ISBN: 978-621-416-050-1 Published & Printed by: GIC ENTERPRISES & CO., INC. *Wational Book Development Board Registered 2017 CM. Recto Avenue, Sampaloc Manila, Philippinesii Preface Unit 1 Chapter Unit II Chapter Unit 111 Chapter Unit 1V Chapter Unit V Chapter Unit VI Glossary Contents in Brief AND CONCEPTUAL FRAMEWORK FOR ENT ENNIO JUNTING AND REPORTING v FINANCIAL ACCO! THE ENVIRONMENT OF FINANCIAL ACCOUNTING AND REPORTING L FRAMEWORK AND THEORETICAL STRUCTURE OF 2 CONCEPTUA! FINANCIAL ACCOUNTING AND REPORTING, PART | CONCEPTUAL FRAMEWORK AND THEORETICAL STRUCTURE OF FINANCIAL ACCOUNTING AND REPORTING, PART II PREPARATION OF FINANCIAL STATEMENTS; FINANCIAL INSTRUMENTS FRAMEWORK 4 PREPARATION OF FINANCIAL STATEMENTS 5. FINANCIAL INSTRUMENTS FRAMEWORK ACCOUNTING PRINCIPLES AND STANDARDS FOR FINANCIAL ASSETS 6 CASH AND CASH EQUIVALENTS; RECEIVABLES 7 INVESTMENT IN EQUITY SECURITIES, DEBT SECURITIES, DERIVATIVES AND SPECIAL PURPOSE FUNDS ACCOUNTING PRINCIPLES AND STANDARDS FOR NON-FINANCIAL ASSETS 8 INVENTORIES; INTANGIBLES; AGRICULTURAL ASSETS 9 PROPERTY, PLANT AND EQUIPMENT 10 INVESTMENT PROPERTY; EXPLORATION FOR AND EVALUATION ‘OF MINERAL RESOURCES ASSETS, NON-CURRENT ASSETS HELD FOR SALE ACCOUNTING PRINCIPLES AND STANDARDS FOR * LIABILITIES: FINANCIAL AND NON-FINANCIAL 1] LIABILITIES ACCOUNTING PRINCIPLES AND STANDARDS FOR OWNERS’ EQUITY; REVENUE AND EXPENSES 12 OWNERS’ EQUITY; REVENUE AND EXPENSES 3 Subject Index list of References 70 72 120 148, 150 17 196 198 235 262 285 287 318 320 347 357 362Learning Objectives Introduction Objective of Financial Reporting Accounting Information Users and Their Needs The Need to Develop Standards Development and Sources of Financial Reporting ‘Standards Accounting Variations Among Countries Implications of Differences in Accounting Among Nations Calls for Global Harmonization of Accounting Standards Accounting Standard-Setting in the Philippines Sources of Accounting Standards Rationale for the Adoption of International Financial Reporting Standards (IFRSs) ‘Standard-Setting Due Process Other Organizations Influencing Financial and Reporting Accounting Standards Financial Reporting Framework Major Challenges in Financial Reporting Environment ; Enhancing the Existing System of Financial Reporting . Ethics in the Accounting Environment The Role of the External Auditors Review Questions and ExercisesChapter 2 3 JAL FRAMEWORK AND AL STRUCTURE OF FINANCIAL ID REPORTING, PARTI CONCEPTU: THEORETIC: ACCOUNTING ANI Learning Objectives Introduction Purposes ofthe Conceptual Framework Gwomiew of the Conceptual Framework Scope of the Conceptual Framework Cheetve of General Purpose Financial Reporting Types of Useful Information Litations of General Purpose Financial Reporting Fundamental Qualitative Characteristics of Financial Information Applying the Fundamental Qualitaive Characteristics Enhancing Qualitative Characteristics Underlying Assumption: Going Concern Review Questions and Exercises CONCEPTUAL FRAMEWORK AND THEORETICAL STRUCTURE OF FINANCIAL ACCOUNTING AND REPORTING, PART I] Learning Objectives Financial Statements Objective of Financial Statements Users and Their Needs Elements of Financial Statements Recognition and Measurement Concepts Recognition and Derecognition of the Elements of Financial Statements Measurement of the Elements of Financial Statements Concepts of Capital and Capital Maintenance Concepts of Capital Concepts of Capital Maintenance Review Questions 36 37 40 40 41 42 54 SS 57 57 59 59 61 62 62 64 28 54Chapter Learning Objectives leneral-Purpose Financial St Purpose of Financial Statements Complete Set of Financial Statements Overall Considerations for i PERS and Fair Presentation Statements Structure and Content of Financial Statements ‘Statement of Financial Position Information to be presented Either in the Statement of Financial Position or in the Notes Statement of Profit or Loss and Other Comprehensive Income Statement of Changes in Equity ‘Statement of Cash Flows Disclosure of Accounting Policies Mlustrative Financial Statements of Financial Review Questions and Exercises FINANCIAL INSTRUMENTS FRAMEWORK Learning Objectives Introduction What is a Financial Instrument? What is a Financial Asset? ‘Non-Financial Assets What is a Financial Liability? What isan Equity Instrument? Recognition of Financial Assets and Financial Liabilities Financial Assets Classification Measurement Reclassification Derecognition Gains and Losses Financial Liabilities Classification 120 121 121 122 123 124 125 127 129 133 133 134 135 120136 Measurement Derecognition 137 Gains and Losses 138 ; 139 q Review Questions ACCOUNTING PRINCIPLES AND STANDARDS FOR UNIT IIT FINANCIAL ASSETS 148 Chapter 6 CASH AND CASH EQUIVALENTS, 150 RECEIVABLES Learning Objectives 150 Cash and Cash Equivalents 151 Components of Cash and Cash Equivalents 151 Recognition and Measurement of Cash 154 Receivables - 156 Classification: Trade; Non-Trade 156 Recognition of Accounts Receivable 157 Measurement 159 Initial Measurement 159 ‘Subsequent Measurement 159 Uncollectible or Impaired Accounts Receivables 159 Recognition of Expected Credit Losses 159 Notes Receivable 160 Recognition and Measurement of Short-Term Notes 161 Loans Receivable Impairment and Uncollectibility 162 Presentation and Disclosure Requirements of Receivables 163 164 Review QuestionsUNIT IV Chapter ACCOUNTING PRINCIPLES AND STANDARDS FOR c INVESTMENT IN EQUITY SECURITIES, DEBT SECURITIES, DERIVATIVES AND. SPECIAL PURPOSE FUNDS Learning Objectives Introduction Investment in Equity Securities Recognition Measurement Fair Value of an Asset” Transaction Costs Derecognition (Sale of Investment in Equity Securities) Reclassification Other Accounting Issues Relative to Investments in Equity Instruments Investment in Debt Securities Measurement Summary of Investment in Debt Securities Investment in Debt Securities: FA@AC (e.g., Investment in Bonds) Impairment Financial Statement Presentation Investment in Associates Identification of Associates Accounting for Investment in Associates Financial Statement Presentation Investment in Derivative Instruments Nature of Derivatives Examples of Derivatives Special Purpose Funds Review Questions NON-FINANCIAL ASSETS 8 INVENTORIES; INTANGIBLES; AGRICULTURAL ASSETS Learning Objectives Inventories Introduction Classification of Inventories Measurement of Inventories 171 172 173 173 174 174 175 175 175 176 178 178 178 180 180 181 181 181 182 182 182 183 185 187 198 199 199, 200 200 171 196 198Chapter 9 ‘Exclusions from Inventory Costs Net Realizable Value Intangible Assets ‘Nature of Intangible Assets Recognition Criteria Initial Measurement ‘Subsequently Incurred Costs iiangible Assets with Indefinite Useful Lives Impairment of! “Intangible Assets Other Than Goodwill Agricultural Assets Recognition ‘Measurement Gains and Losses Government Grants Review Questions PROPERTY, PLANT AND EQUIPMENT Learning Objectives Introduction Nature Classification Recognition Measurement at Initial Recognition Components / Elements of Cost Valuation of Specific Property, Plant, and Equipment Items Equipment Land Improvements Leasehold Improvements Natural Resources Bearer Plants Recording Acquisitions of Property, Plant and Equipment Subsequent Expenditures Measurement after Recognition Depreciation, Depletion and Impairment Revaluation / Impairment Review Questions 205 207 209 209 212 213 213 215 216 216 217 218 219 219 220 235 236 236 238 239 239 242 243 243 244 244 244 245 246 248 249 251 252 253 235Sings Investment Property ae Accounting for Investment Property Recognition : Measurement at Initial Recognition Exclusions from Capitalized Cost Measurement Subsequent to Initial Recognition Fair Value Model ‘4 Cost Model Disposal of Investment Property Exploration for and Evaluation of Mineral . Resources Assets Measurement of Exploration and Evaluation Assets Financial Statement Presentation Noncurrent Assets held for Sale and Discontinued Operations Classification of Noncurrent Assets (or Disposal Groups) as Held for Sale or as Held ‘for Distribution to Owners Measurement of Noncurrent Assets or (Disposal Groups) Classified as Held for Sale Recognition of Impairment Losses and Reversals Other Considerations Discontinued Operations: Presentation and Disclosure Review Questionsx ACCOUNTING PRINCIPLES AND STANDARDS oury FOR LIABILITIES: FINANCIAL AND NON-FINANCIAL 245 Chapter 1 LIABILITIES 287 Learning Objectives 287 Liability Defined 288 Characteristics of a Liability 288 Recognition of Liabilities 289 Measurement Bases: 289 Classification of Liabilities 290 Principal Categories of Financial Liabilities 291 Measurement of Financial Liabilities 293 Subsequent Measurement of Financial Liabilities 204 Reclassification of Financial Liabilities 294 Derecognition of Financial Liabilities 294 Current / Non-Current Distinction 294 Examples of Current Financial Liabilities 295 Examples of Current Non-Financial Liabilities 298 Measurement of Non-Current or Long -Term Liabilities 302 Nature of Non-Current Liability 303 Bonds Payable 303 Bond Prices 305 Accounting for Bond Interest 306 Review Questions 308 UNIT VI ACCOUNTING PRINCIPLES AND STANDARDS FOR OWNERS’ EQUITY; REVENUE AND EXPENSES 318 Chapter 12 OWNERS’ EQUITY; REVENUE AND. EXPENSES 320 Learning Objectives 320 Nature of Owners’ Equity 321 Concepts of Capital 321 Concepts of Capital Maintenance 322 Fundamentals of Corporate Equity Accounting 322 Contributed Capital Accounting for Share Issuance and Related Transactions 324 Issuance of Share Capital for Cash 325: Reverse Share Split Rights Issues/Warrants Retained Earnings Nature of Retained Earnings ; Entries to Retained Earnings Account Accounting for Revenue Accounting for Expenses Review Questions Glossary of Key Terms Subject Index List of References