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CONCEPTUAL FRAMEWORK
& ACCOUNTING STANDARDS
MODULE 1.1: STANDARD-SETTING BODIES, THE

ACCOUNTING PROFESSION, AND THE CONCEPTUAL
FRAMEWORK FOR FINANCIAL REPORTING
Overview of Accounting
Learning Objectives
Define accounting and state its basic purpose.
Explain the basic concepts applied in accounting.
State the branches of accounting and the sectors in
the practice of accountancy.
Explain the importance of a uniform set of financial
reporting standards.
CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

2
Definition of Accounting
Accounting is “the process of identifying, measuring, and
communicating economic information to permit informed judgment
and decisions by users of information.”
(American Association of Accountants)

3
Three important activities
1. Identifying - the process of analyzing events and transactions to
determine whether or not they will be recognized. Only accountable
events are recognized.
2. Measuring - involves assigning numbers, normally in monetary terms,
to the economic transactions and events.
3. Communicating - the process of transforming economic data into
useful accounting information, such as financial statements and other
accounting reports, for dissemination to users.

4
Types of Events
1. External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and receiving
b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that involves changes in
the economic resources or obligations of an entity caused by an
external party or external source but does not involve transfers of
resources or obligations.
2. Internal events – events that do not involve an external party.

d. Production – the process by which resources are transformed into
finished goods.
e. Casualty – an unanticipated loss from disasters or other similar events.
5
Measurement
The several measurement bases used in accounting include, but not
limited to, the following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
The most commonly used is historical cost. This is usually combined
with the other measurement bases. Accordingly, financial statements
are said to be prepared using a mixture of costs and values.
6
Valuation by fact or opinion
When measurement is affected by estimates, the items measured are said to be
valued by opinion.
When measurement is unaffected by estimates, the items measured are said to
be valued by fact.

7
Basic purpose of accounting
The basic purpose of accounting is to provide information about economic
activities intended to be useful in making economic decisions.

8
Types of accounting information
classified as to users’ needs
General purpose accounting information - designed to meet the
common needs of most statement users. This information is
governed by the Philippine Financial Reporting Standards (PFRSs).
Special purpose accounting information - designed to meet the

specific needs of particular statement users. This information is
provided by other types of accounting, e.g., managerial
accounting, tax basis accounting, etc.

9
Basic Accounting Concepts
Double-entry system – each accountable event is recorded in two parts – debit
and credit.
Going concern - the entity is assumed to carry on its operations for an
indefinite period of time.
Separate entity – the entity is treated separately from its owners.
Stable monetary unit - amounts in the financial statements are stated in
terms of a common unit of measure; changes in purchasing power are ignored.
Time Period – the life of the business is divided into series of reporting periods.

10
Basic Accounting Concepts - Continuation
Materiality concept – information is material if its omission or
misstatement could influence economic decisions.
Cost-benefit – the cost of processing and communicating information
should not exceed the benefits to be derived from it.
Accrual Basis of accounting – effects of transactions are recognized
when they occur (and not as cash is received or paid) and they are
recognized in the accounting periods to which they relate.

11
Historical cost concept – the value of an asset is determined on the basis of
acquisition cost.
Concept of Articulation – all of the components of a complete set of financial
statements are interrelated.
Full disclosure principle – financial statements provide sufficient detail to disclose
matters that make a difference to users, yet sufficient condensation to make the
information understandable, keeping in mind the costs of preparing and using it.
Consistency concept – financial statements are prepared on the basis of accounting
policies which are applied consistently from one period to the next.
12
Consistency concept – financial statements are prepared on the basis of

accounting policies which are applied consistently from one period to the
next.
Matching – costs are recognized as expenses when the related revenue is
recognized.
Residual equity theory – this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is “Assets –
Liabilities – Preferred Shareholders’ Equity = Ordinary Shareholders’
Equity.”
13
Fund theory – the accounting objective is the custody and
administration of funds.
Realization – the process of converting non-cash assets into cash or
claims for cash.
Prudence (Conservatism) – the inclusion of a degree of caution in the
exercise of the judgments needed in making the estimates required
under conditions of uncertainty , such that assets or income are not
overstated and liabilities or expenses are not understated.
14
Common branches of accounting
Financial accounting - focuses on general purpose financial statements.

Management accounting – focuses on special purpose financial reports for
use by an entity’s management.
Cost accounting - the systematic recording and analysis of the costs of
materials, labor, and overhead incident to production.
Auditing - the process of evaluating the correspondence of certain
assertions with established criteria and expressing an opinion thereon.

15
Common branches of accounting
Tax accounting - the preparation of tax returns and rendering of tax
advice, such as the determination of tax consequences of certain
proposed business endeavors.
Government accounting - refers to the accounting for the government
and its instrumentalities, placing emphasis on the custody of public
funds, the purposes for which those funds are committed, and the
responsibility and accountability of the individuals entrusted with those
funds.
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Four sectors in the practice of accountancy
1. Practice of Public Accountancy - involves the rendering of audit or
accounting related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in the
private sector in a position which involves decision making requiring
professional knowledge in the science of accounting and such
position requires that the holder thereof must be a CPA.

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Four sectors in the practice of accountancy
3. Practice in Education/Academe – employment in an educational institution

which involves teaching of accounting, auditing, management advisory services,
finance, business law, taxation, and other technically related subjects.
4. Practice in the Government – employment or appointment to a position in an
accounting professional group in the government or in a government–owned
and/or controlled corporation where decision making requires professional
knowledge in the science of accounting, or where civil service eligibility as a CPA is
a prerequisite.
18
Accounting standards in the
Philippines
Philippine Financial Reporting Standards (PFRSs) are Standards
and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

19
The need for reporting standards
Entities should follow a uniform set of generally acceptable reporting
standards when preparing and presenting financial statements
The term “generally acceptable” means that either:
a. the standard has been established by an authoritative accounting rule-
making body; or
b. the principle has gained general acceptance due to practice over time
and has been proven to be most useful.

20
Conceptual Framework for Financial Reporting
Learning Objectives
State the purpose, status, and scope of the Conceptual Framework.
State the objective of financial reporting.
Identify the primary users of financial statements.
Explain briefly the qualitative characteristics of useful information and how they are
applied in financial reporting.
Define the elements of financial statements and state their recognition criteria and
their derecognition.
State the measurement bases used in financial reporting.
CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 21
Purpose of the Conceptual Framework
The Conceptual Framework prescribes the concepts for general
purpose financial reporting. Its purpose is to:
a. assist the International Accounting Standards Board (IASB) in
developing Standards that are based on consistent
concepts;
b. assist preparers in developing consistent accounting policies
when no Standard applies to a particular transaction or
when a Standard allows a choice of accounting policy; and
c. assist all parties in understanding and interpreting the
Standards.
Status of the Conceptual Framework
The Conceptual Framework is not a PFRS. When

there is a conflict between the Conceptual
Framework and a PFRS, the PFRS will prevail.
In the absence of a standard, management shall
consider the Conceptual Framework in making its
judgment in developing and applying an accounting
policy that results in useful information.

Scope of the Conceptual Framework
The Conceptual Framework is concerned with general purpose financial
reporting. General purpose financial reporting involves the preparation of
general purpose financial statements. The Conceptual Framework provides the
concepts regarding the following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial 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

Objective of general purpose financial reporting
The objective of general purpose financial

reporting is to provide financial information about
the reporting entity that is useful to primary users in
making decisions about providing resources to the
entity.
The objective of general purpose financial reporting
forms the foundation of the Conceptual Framework.


Primary Users
Primary users – are those who cannot demand information
directly from reporting entities. The primary users are:
(a) Existing and potential investors
(b) Lenders and other creditors.
Only the common needs of primary users are met by the

financial statements.

Qualitative Characteristics
I. Fundamental qualitative characteristics

(1) Relevance
(a) Predictive value
(b) Feedback value
 Materiality – entity-specific aspect of relevance
(2) Faithful representation
(a) Completeness
(b) Neutrality
(c) Free from error

Qualitative Characteristics
II. Enhancing qualitative characteristics

(1) Comparability
(2) Verifiability
(3) Timeliness
(4) Understandability

Fundamental vs. Enhancing
The fundamental qualitative characteristics are the
characteristics that make information useful to users.
The enhancing qualitative characteristics are the characteristics
that enhance the usefulness of information

Relevance
Information is relevant if it can affect the decisions of users.
Relevant information has the following:
a. Predictive value – the information can be used in making
predictions
b. Confirmatory value – the information can be used in
confirming past predictions
Materiality – is an ‘entity-specific’ aspect of relevance.

Faithful Representation
Faithful representation means the information provides a true,
correct and complete depiction of what it purports to represent.
Faithfully represented information has the following:
a. Completeness – all information necessary for users to
understand the phenomenon being depicted is provided.
b. Neutrality – information is selected or presented without
bias.
c. Free from error – there are no errors in the description and
in the process by which the information is selected and
applied.
Enhancing Qualitative Characteristics
1. Comparability – the information helps users in identifying
similarities and differences between different sets of information.
2. Verifiability – different users could reach consensus as to what the
information purports to represent.
3. Timeliness – the information is available to users in time to be
able to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.

Financial statements and the Reporting entity
Objective and scope of financial statements

The objective of general purpose financial statements is to
provide financial information about the reporting entity’s assets,
liabilities, equity, income and expenses that is useful in
assessing:
a. the entity’s ability to generate future net cash inflows; and
b. management’s stewardship over economic resources.

Reporting period
Financial statements are prepared for a specific period of time
(i.e., the reporting period) and include comparative information
for at least one preceding reporting period.
Going concern
Financial statements are normally prepared on the assumption
that the reporting entity is a going concern, meaning the entity
has neither the intention nor the need to end its operations in
the foreseeable future.
Reporting entity
A reporting entity is one that is required, or chooses, to prepare financial statements, and is not
necessarily a legal entity. It can be a single entity or a group or combination of two or more
entities.

Elements of Financial Statements

Asset
Asset is “a present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce
economic benefits.” (Conceptual Framework 4.3 & 4.4)

Three aspects in the definition of an asset
1. Right – asset refers to a right, and not necessarily to a physical
object, e.g., the right to use, sell, lease or transfer a building.
2. Potential to produce economic benefits – the right has a
potential to produce economic benefits for the entity that are
beyond the benefits available to all others. Such potential need
not be certain or even likely – what is important is that the right
already exists and that, in at least one circumstance, it would
produce economic benefits for the entity.
3. Control – means the entity has the exclusive right over the
benefits of an asset and the ability to prevent others from
accessing those benefits.
Liability
Liability is “a present obligation of the entity to transfer an economic resource as
a result of past events.” (Conceptual Framework 4.26)

Three aspects in the definition of a liability
1. Obligation – An obligation is “a duty or responsibility
that an entity has no practical ability to avoid.” (CF
4.29) An obligation can be either legal obligation or
constructive obligation.
2. Transfer of an economic resource – the obligation
has the potential to require the transfer of an
economic resource to another party. Such potential
need not be certain or even likely – what is important
is that the obligation already exists and that, in at
least one circumstance, it would require the transfer
of an economic resource.
Three aspects …… liability (continuation)
3. Present obligation as a result of past events – A
present obligation exists as a result of past events
if:
a. the entity has already obtained economic
benefits or taken an action; and
b. as a consequence, the entity will or may have to
transfer an economic resource that it would not
otherwise have had to transfer.
(Conceptual Framework 4.43)

Executory contracts
An executory contract “is a contract that is equally unperformed –
neither party has fulfilled any of its obligations, or both parties have
partially fulfilled their obligations to an equal extent.” (CF 4.56)
An executory contract establishes a combined right and obligation to
exchange economic resources.
The contract ceases to be executory when one party performs its
obligation.
If the entity performs first, the entity’s combined right and obligation
changes to an asset.
If the other party performs first, the entity’s combined right and
obligation changes to a liability.

Equity
“Equity is the residual interest in the assets of the entity after deducting all its liabilities.” (Conceptual
Framework 4.63)
Equity equals Assets minus Liabilities

Income and Expenses
Income
Income is “increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from
holders of equity claims.” (Conceptual Framework 4.68)
Expenses
Expenses are “decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those relating to distributions
to holders of equity claims.” (Conceptual Framework 4.69)

Recognition & Derecognition
The recognition process
Recognition is the process of including in the statement of financial
position or the statement(s) of financial performance an item that
meets the definition of one of the financial statement elements (i.e.,
asset, liability, equity, income or expense). This involves recording
the item in words and in monetary amount and including that
amount in the totals of either of those statements.

Recognition criteria
An item is recognized if:
a. it meets the definition of an asset, liability, equity, income or
expense; and
b. recognizing it would provide useful information, i.e., relevant
and faithfully represented information.

Relevance
The recognition of an item may not provide relevant information if,
for example:
a. it is uncertain whether an asset or liability exists; or
b. an asset or liability exists, but the probability of an inflow or
outflow of economic benefits is low. (Conceptual Framework
5.12)
However, the presence of one or both of the foregoing does not
automatically lead to the non-recognition of an item. Other factors
should also be considered.
Faithful representation
The level of measurement uncertainty and other factors can affect an item’s faithful
representation, but not necessarily its relevance.
Measurement uncertainty
Measurement uncertainty exists if the asset or liability needs to be estimated. A high level
of measurement uncertainty does not necessarily lead to the non-recognition of an asset
or liability if the estimate provides relevant information and is clearly and accurately
described and explained.
However, measurement uncertainty can lead to the non-recognition of an asset or a
liability if making an estimate is exceptionally difficult or exceptionally subjective.
Derecognition
Derecognition is the removal of a previously recognized asset or
liability from the entity’s statement of financial position.
Derecognition occurs when the item ceases to meet the
definition of an asset or liability.

Unit of account
Unit of account is “the right or the group of rights, the obligation

or the group of obligations, or the group of rights and
obligations, to which recognition criteria and measurement
concepts are applied.” (Conceptual Framework 4.48)

Measurement bases
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost

Historical cost
The historical cost of:
a. an asset is the consideration paid to acquire the asset plus transaction costs.
b. a liability is the consideration received to incur the liability minus transaction
costs.
Historical cost is updated over time to depict the following:
Depreciation, amortization, or impairment of assets
Collections or payments that extinguish part or all of the asset or liability
Unwinding of discount or premium when the asset or liability is measured at
amortized cost

Fair value
Fair value is “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.” (Conceptual
Framework 6.12)

Value in use and fulfilment value
Value in use is “the present value of the cash flows, or other

economic benefits, that an entity expects to derive from the use
of an asset and from its ultimate disposal.” (Conceptual
Framework 6.17)
Fulfilment value is “the present value of the cash, or other
economic resources, that an entity expects to be obliged to
transfer as it fulfils a liability.” (Conceptual Framework 6.17)

Current cost
The current cost of:
a. an asset is “the cost of an equivalent asset at the
measurement date, comprising the consideration that would
be paid at the measurement date plus the transaction costs
that would be incurred at that date.”
b. a liability is “the consideration that would be received for an
equivalent liability at the measurement date minus the
transaction costs that would be incurred at that date.”
(Conceptual Framework 6.21)
Entry values vs. Exit values
Current cost and historical cost are entry values (i.e., they
reflect prices in acquiring an asset or incurring a liability),
whereas fair value, value in use and fulfilment value are exit
values (i.e., they reflect prices in selling or using an asset or
transferring or fulfilling a liability).

Considerations when selecting a
measurement basis
When selecting a measurement basis, it is important to consider the
following:
a. The nature of information provided by a particular measurement
basis
b. The qualitative characteristics, the cost-constraint, and other
factors

Measurement of Equity
Total equity simply equal to difference between the total assets
and total liabilities.
Different measurement bases used, total equity cannot be

expected to be equal to the entity’s market value.
Equity is generally positive, although some of its components

can be negative.

Presentation and Disclosure
Effective communication requires:
a. focusing on presentation and disclosure objectives and
principles rather than on rules.
b. classifying information by grouping similar items and
separating dissimilar items.
c. aggregating information in a manner that it is not obscured
either by excessive detail or by excessive summarization.

Presentation and disclosure objectives and
principles
The objectives are specified in the Standards.
The principles include:
a. the use of entity-specific information is more useful
that standardized descriptions, and
b. duplication of information is usually unnecessary.

Classification
Classifying means combining similar items and separating
dissimilar items.
Offsetting of assets and liabilities is generally not appropriate.
Classification of income and expenses

Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income.

Aggregation
Aggregation is “the adding together of assets, liabilities, equity,
income or expenses that have shared characteristics and are
included in the same classification.” (Conceptual Framework
7.20)

Concepts of Capital and Capital
Maintenance
Financial concept of capital – capital is regarded as the invested
money or invested purchasing power. Capital is synonymous
with equity, net assets, and net worth.
Physical concept of capital – capital is regarded as the entity’s

productive capacity, e.g., units of output per day.

Order of presentation of disclosures in the Notes
1. Statement of compliance with PFRSs;
2. Summary of significant accounting policies applied;
3. Supporting information for items presented in the other
financial statements; and
4. Other disclosures.

End of Module 1.1
Source: Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan)
2022 edition

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CONCEPTUAL FRAMEWORK

& ACCOUNTING STANDARDS

MODULE 1.1: STANDARD-SETTING BODIES, THE

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

2. Internal events – events that do not involve an external party.

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

Special purpose accounting information - designed to meet the

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

Consistency concept – financial statements are prepared on the basis of

Financial accounting - focuses on general purpose financial statements.

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

3. Practice in Education/Academe – employment in an educational institution

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN)

The Conceptual Framework is not a PFRS. When

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 23

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 24

The objective of general purpose financial

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 25

Only the common needs of primary users are met by the

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 26

I. Fundamental qualitative characteristics

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 27

II. Enhancing qualitative characteristics

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 28

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 29

Materiality – is an ‘entity-specific’ aspect of relevance.

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 30

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Objective and scope of financial statements

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CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 42

Equity equals Assets minus Liabilities

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 43

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CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 45

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 46

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 49

Unit of account is “the right or the group of rights, the obligation

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 50

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 51

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CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 53

Value in use is “the present value of the cash flows, or other

CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 54

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CONCEPTUAL FRAMEWORK & ACCTG. STANDARDS (BY: ZEUS VERNON B. MILLAN) 57

Different measurement bases used, total equity cannot be

Equity is generally positive, although some of its components

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