Conceptual Framework

{ Underlying Assumptions and Qualitative characteristics

Conceptual Framework
• is a summary of the terms and
concepts that underlie the preparation
and presentation of financial
statements for external users.
• Provides an overall theoretical
foundation
 Nothing in this Conceptual
Framework overrides any specific
Philippine Financial Reporting
Standards
Scope of Conceptual Framework
1. Objective of financial reporting
2. Qualitative characteristics of useful financial
information
3. Definition, recognition and measurement of
the elements of financial statements
4. Concepts of capital and capital maintenance.
Underlying Assumptions
Underlying Assumptions
• are the basic notions or fundamental
premises on which the accounting
process is based.
• also known as postulates.
1. Going Concern
2. Separate entity/Accounting entity
3. Time period
4. Monetary unit
 the only assumption mention in
the conceptual framework
1. Going Concern Assumption
• The business is assumed to continue for
an indefinite period of time.
• The opposite is “Liquidating
Concern”, the business intends to end
its operation of if it has no other choice
but to do so.

Going Concern Liquidating Concern

2. Separate Entity Concept
• The business is viewed as a separate person distinct
from its owner(s).
• Only the transaction of the business are recorded in
the books of accounts.

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 2. Separate Entity Concept
(WHY?)
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PERSONAL TRANSACTIONS BUSINESS TRANSACTIONS

This concept is necessary so that the financial

performance and financial position can be measured
properly and can objectively measure if the business is
really earning profits or it has the ability to do so.
3. Time Period
• The life of the business is divided into
series of reporting period.
• Calendar year: January 1 to December 31
• Fiscal year: Covers 12 months but does
not start on January 1. (Example: July 1,
2019 to June 30, 2020)
4. Stable Monetary Unit
• Assets, liabilities, equity, income and
expenses are stated in terms of a
common unit of measure, which is the
Philippine Peso.
Qualitative Characteristics
Qualitative Characteristics
• Are the qualities or attributes that make
financial accounting information useful
to the users.
• Conceptual framework classified it into:
1. Fundamental Qualitative
Characteristics
2. Enhancing Qualitative Characteristics
Fundamental Qualitative Characteristics
•RELEVANCE
Predictive Value
Confirmatory Value
•Faithful Representation
Completeness
Neutrality
Free from error
Information must be both relevant and
faithfully represented for it to be useful.
Materiality Concept
• An item is considered material if its
omission or misstatement could
influence economic decisions.
• Materiality is a matter of Professional
Judgement and is based on size and
nature of an item being judged.
Prudence (Conservatism)
• Some degree of caution when exercising
judgments needed in making accounting
estimates under conditions of
uncertainty.

“Expect for the worst!”

Full Disclosure Principle
• The information communicated to the
users should be
sufficient to disclose the matters that
make a difference to users
Sufficient to make the information
understandable, keeping in mind the
costs in preparing them
Enhancing Qualitative Characteristics
•Verifiability
•Comparability
•Understandability
•Timeliness
Cost-benefit
• The costs of processing and
communicating information should not
exceed the benefits to be derived from
the information’s use.

Cost < Benefits

Consistency Concept
• This concepts requires a business to
apply accounting policies consistently,
and present information consistently,
from one period to another.
Concepts related to Reporting
Historical Cost Concept
• Assets are initially recorded at their
acquisition cost.
You acquired a printing
machine for your business.
You bought it for a
discounted price.
What price should be
recorded?

Regular price: P400,000

Discounted price: P350,000
Matching
• Some costs are initially recognized as
assets and charged to expenses only
when the related revenue (sale) is
recognized.
Samsung S10 Only the cost of
Cost P40,000 Samsung S10
Selling Price P50,000 (P40,000) will
be recorded as
Iphone XR MAX expense!
Cost P80,000
Selling Price P85,000
Accrual Basis of Accounting
• Economic Events are recorded in the
period (time) they occur rather than at
the point in time when they affect cash.
Sold: August 1, 2019
Payment: October 1, 2019
What date should the SALE be recorded?
August 1, 2019
Rental used: December 2019
RENT Payment: November 2019
What date should the EXPENSE be
recorded?
December 2019