CONCEPTUAL FRAMEWORK

 A complete, comprehensive and single document promulgated by the IASB.

 A system of ideas and objectives that lead to the creation of a consistent set of rules
and standards. Specifically in accounting, the rule and standards set the nature, function
and limits of financial accounting and financial statements.

 An attempt to provide an overall theoretical foundation for accounting which will guide
standard setters, preparers and users of financial information in the preparation and
presentation of statements.

 Concerned with general purpose financial statements including consolidated financial

statements.
 PURPOSE OF THE CONCEPTUAL
FRAMEWORK
 To assist the Board to develop IFRS based on consistent concepts, resulting in financial
information that is useful to investors, lenders and other creditors.
 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.
 To assist the FRSC in its review and adoption of International Accounting Standards.
 To assist users of financial statements in interpreting the information contained in the
financial statements.
 To assist auditors in forming an opinion as to whether financial statements conform with
Philippine GAAP.
 To provide information to those interested in the work of the Financial Reporting Standards
council in the formulation of PFRS.
 SCOPE OF THE CONCEPTUAL
FRAMEWORK
1. OBJECTIVE OF FINANCIAL REPORTING
2. QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

3. UNDERLYING ASSUMPTION

4. ELEMENTS OF FINANCIAL STATEMENTS

5. RECOGNITION PRINCIPLE

6. MEASUREMENT BASIS OF FINANCIAL ELEMENTS

7. CONCEPT OF CAPITAL
 OBJECTIVE OF FINANCIAL
REPORTING
The overall object of financial reporting is “ to
provide financial information about the reporting
entity that is useful to existing and potential
investors, lenders and other creditors in making
decisions about providing resources to the entity.
 QUALITATIVE CHARACTERISTICS
OF FS
1. RELEVANCE
- The capacity of information to make a difference in a decision made by users.
- Requires that the financial information should be related or pertinent to the economic
decision.
- However it is affected by its nature and materiality.

Major Ingredients of Relevant Information

• Predictive Value – when it can help users increase the likelihood

of correctly predicting or forecasting outcome of events.

• Confirmatory Value – it provides feedback about previous

evaluations, and enables users confirm or correct earlier
expectations.
  MATERIALITY
- “ doctrine of convenience”
- “ subquality” of relevance based on nature and magnitude of the item to
which the information relates.
- The CF does not specify a uniform quantitative threshold for materiality or
predetermine what could be material in a particular situation.
- Depends on its relative size rather than absolute size.

2. FAITHFUL REPRESENTATION

- Financial Reports represents economic phenomena or transactions in words and numbers.

- Actual effects of the transaction shall be properly accounted for and reported in the financial
statements.
1. Completeness

2. Neutrality

3. Free from Error

ENHANCING QUALITATIVE CHARACTERISTICS
 COMPARABILITY
- Enables users to identify and understand similarities in, and difference among
items.
 VERIFIABILITY
- Different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a
faithful representation.
 TIMELINESS
- Having information available to decision makers in time to be capable of
influencing their decisions.
 UNDERSTANDABILITY
- Classifying, characterizing and presenting information clearly and concisely
makes it understandable.
 UNDERLYING ASSUMPTION
 GOING CONCERN
- Means that the accounting entity is viewed as continuing in operation
indefinitely in the absence of evidence to the contrary.
 ACCOUNTING ENTITY
- The business is separate from the owners, managers and employees who
constitute the business. Therefore transactions of the said individuals
should not be included as transactions of the business.
 TIME PERIOD
- Financial reports are to be prepared for one year or a period of twelve
months.
 MONETARY UNIT
a. Quantifiability Of the Peso
b. Stability Of the Peso
 ELEMENTS OF FINANCIAL STATEMENTS
Elements of Financial Position
 ASSET
- A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the
entity. Its classification can be current or non-current.
 LIABILITY
- A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic benefits.
 EQUITY
- Residual interest in the assets of the entity after deducting all its liabilities.

Elements of Financial Performance

 INCOME/ REVENUE
- Increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or
decrease of liabilities that result in increases in equity, other than those relating to distribution to equity participants.
 EXPENSES
- Decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or
incurrence of liabilities that result in decreases in equity, other than those relating to contributions from equity
participants.
 RECOGNITION PRINCIPLE
 Recognition - Is a term which means the process of reporting an asset, liability, income or
expense on the face of the financial statements of an entity.

Four Recognition Principle

 Asset Recognition Principle
- Asset is recognized in the statement of financial position when it is probable that future economic benefits will flow
to the entity and the asset has a cost or value that can be measured reliably.
 Liability Recognition Principle
- Liability is recognized in the statement of financial position when it is probable that an outflow of resources
embodying economic benefits will be required for the settlement of present obligation and the amount of the obligation
can be measured reliably.
 Income Recognition Principle
- The basic principle is that “income shall be recognized when earned.
 Expense Recognition Principle
- Expenses are recognized in the income statement when it is probable that a decrease in the future economic
benefits related to a decrease on economic benefits can be measured reliably.
 MEASUREMENT BASIS OF FINANCIAL
STATEMENTS

Measurement is the process of determining the

monetary amounts at which the elements of the
financial statements are to be recognized and carried
in the balance sheet and income statement. This
involves the selection of the particular basis of
measurement.
(a) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair
value of the consideration given to acquire them at the time of their acquisition. Liabilities are
recorded at the amount of proceeds received in exchange for the obligation, or in some
circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to
be paid to satisfy the liability in the normal course of business.
(b) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to
be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the
undiscounted amount of cash or cash equivalents that would be required to settle the obligation
currently.
(c) Realizable (settlement) value. Assets are carried at the amount of cash or cash equivalents
that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at
their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to
be paid to satisfy the liabilities in the normal course of business.
(d) Present value. Assets are carried at the present discounted value of the future net cash inflows
that the item is expected to generate in the normal course of business. Liabilities are carried at the
present discounted value of the future net cash outflows that are expected to be required to settle
the liabilities in the normal course of business.
 CONCEPT OF CAPITAL
A. a financial concept of capital
 A financial concept of capital is whereby the capital of the entity is linked t the net assets,
which is the equity of the entity.
 When a financial concept of capital is used, a profit is earned only if the financial amount of
the net assets at the and of the period is greater than the net assets at the beginning of the
period, adjusted of course for any distributions paid to the owners during the period, or any
equity capital raised.
B. a physical concept of capital
 A physical concept of capital is one where the capital of an entity is regarded as its
production capacity, which could be based on its units of output.
 When a physical concept of capital is used, a profit is earned only if the physical production
capacity (or operating capability) of the entity at the end of the period is greater than the
production capacity at the beginning of the period, adjusted for any distributions paid to
the owners during the period, or any equity capital raised.