conceptual framework

1. Chapter I: The Accountancy Profession.
Accounting – identifying (analytical), measuring (technical)
and communicating (formal) component.
Identifying – process is the recognition or nonrecognition
of business activities.
Measuring – assigning of peso amounts
Historical cost, fair value, present value, realizable value,
current cost and inflation-adopted costs.
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.
Communicating process of preparing and distributing
accounting reports to potential users.
Types of Events
External Events – involve external party.
a) Exchange – giving and receiving
b) Nonreciprocal “one way” transaction
c) External event other than transfer – events involve
changes in the economic resources or obligations.
Internal Events – do not involve external party.
a) Production – resources are transformed into finished
goods.
b) Casualty – unanticipated loss from disasters/other
similar events.
Basic Purpose of Accounting
To provide information about economic activities intended to
be useful in making economic decisions.
Types of accounting information classified as to users’
needs
 General purpose accounting information – meet the
common needs of most statement users. Governed by
PFRS.
 Special purpose accounting information – designed to
meet the specific needs of particular statement users.
Basic Accounting Concepts
 Double-entry system
 Going concern – assumed to carry on its operation for
an indefinite period of time.
 Separate entity – treated separately from its owners
 Stable monetary unit – common unit of measure;
changes in purchasing power are ignored
 Time period – life of the business is divided into series
of reporting periods.
 Materiality concept – material if its
omission/misstatement could influence economic
decisions.
 Cost-benefit – processing and communicating info
should not exceed the benefits to be derived from it.
 Accrual basis of accounting – effects of transaction are
recognized when they occur
 Historical cost concept – value of an asset is determined
on the basis of acquisition cost.
 Full disclosure principle – provide sufficient detail to
disclose matters that make a difference to users.
 Consistency concept – accounting policies which are
applied consistently from one period to the next.
 Matching – costs are recognized expenses when the
related revenue is recognized.
 Residual equity theory – OE= Assets – Liability –
Preferred Shareholders Equity
 Fund theory – custody and administration of funds
 Realization – converting non-cash assets into cash
 Prudence – (conservatism) exercise of the judgement
needed on making estimates
 Financial Accounting – focus on general purpose FS
 Management Accounting – special purpose financial
reports for use by an entity’s management.
 Auditing – evaluating the correspondence of certain
assertions
 Tax accounting – preparation of tax returns and
rendering tax advice.
 Government accounting – accounting for the
government and instrumentalities.
Four Sectors in the Practice of Accountancy
1. Pubic Accountancy
2. Commerce and Industry
3. Education/Academe
4. Government
Accounting Standards in the Philippines
PFRS standards and interpretation adopted by FRSC:

2. 1. PFRS
2. PAS
3. Interpretation
Chapter II: Conceptual Framework
a) Assist the IASB
b) Assist preparers in developing consistent accounting
policies
c) Assist all parties in understanding and interpreting the
Standards.
 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.
 Forms the foundation of the Conceptual Framework
Primary Users – cannot demand information directly from
reporting entities.
a) Existing and potential investors
b) Lenders and other creditors
Only the common needs of primary users are met by the FS.
(I) Fundamental qualitative characteristics – make
information useful to users.
(I) Relevance
a) Predictive value
b) Feedback value
Materiality – entity-specific aspect
(2) Faithful representation
a) Completeness
b) Neutrality
c) Free from error
(II) Enhancing qualitative characteristics – enhance the
usefulness of information
(I) Comparability
(II) Verifiability
(III) Timeliness
(IV) Understandability
Relevance
 Information is relevant if it can affect the decision of
users.
 Relevant information has the ff:
a) Predictive Value – used in making predictions.
b) Confirmatory Value – confirming past predictions.
 Materiality – “entity-specific” aspect of relevance.
Faithful Representation
Means the information provides true, correct and complete
depiction of what it purports to represent.
a) Completeness all info necessary for users to
understand the phenomenon being depicted is provided.
b) Neutrality – info is selected/presented w/o bias
c) Free from error – no errors in the description and in the
process.
Enhancing Qualitative Characteristics
(I) Comparability – identifying similarities and differences
between sets of information.
(II) Verifiability – diff users could reach consensus as to
what the info purports to represent.
(III) Timeliness – info is avail to users in time to be able to
influence their decisions.
(IV) Understandability – users are expected to have:
a) Reasonable knowledge of business activities
b) Willingness to analyze the info diligently
Financial Statements and the Reporting Entity
Objective and scope of FS
Provide financial info about the reporting entity’s assets,
liabilities, equity, income and expenses that is useful in
assessing:
a. Entity’s ability to generate future net cash inflows; and
b. Management’s stewardship over economic resources.
Financial Statements and the Reporting Entity
Reporting period – FS are prepared for a specific period of
time (i.e. reporting period) and include comparative
information for at least one preceding reporting period.
Going Concern
FS 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 required/chooses to prepare FS and is not
necessarily a legal entity.
Elements of FS
a. Asset – 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.
b. Liability – present obligation of the entity to transfer an
economic resource as a result of past events.
c. Equity – residual interest in the assets of the entity after
deciding all its liabilities.
d. Revenue – Increase in asset, decrease in liab and
increase it OE
e. Expenses – decreases in asset/increase liab and
decrease OE
Recognition and Derecognition
The recognition process

3. Recognition is the process of including in the statement of
Financial Position the statements of Financial Performance
an item that meets the definition of one FS.
Recognition criteria
An item recognized if:
a. It meets the definition of an asset, liab, equity,
income/expense and
b. Recognizing it would provide useful information
Relevance
The recognition of an item may not provide relevant
information if;
a. It is uncertain whether an asset or liability exists; or
b. An asset/liab exists, but the probability of an inflow or
outflow of economic benefits is low.
Faithful representation
The level of measurement uncertainty and other factors can
affect an item’s faithful representation, but not necessarily
its relevance.
Measurement uncertainty
Derecognition
Removal of a previously recognized asset/liab from the
entity’s statement of Financial Position.
Unit of account
Right or the group of rights
Measurement Bases
1) Historical cost
2) Current value
Fair value
Value in use and fulfillment value
Fair value – price that would be received to sell an
asset, or paid to transfer a liability.
Value in Use – pertains to the asset
Fulfillment Value – pertains to the liability
3) Current Cost
Entry value vs Exit value