Conceptual Framework and

Qualitative Characteristics of Useful Financial Information

These characteristics are attributes that make the

Accounting Standards information in financial statements useful to
Objective of financial reporting
investors, creditors, and others.

The objective of financial reporting forms the In deciding which information to include in financial
foundation of the Conceptual Framework. statements, the objective is to ensure that the
information is useful to the users in making economic
The overall objective of financial reporting is to decisions.
provide financial information about the reporting
entity that is useful to existing and potential investors, Under the Conceptual Framework for Financial
lenders, and other creditors in making decisions about Reporting, qualitative characteristics are classified
providing resources to the entity. into “fundamental” and “enhancing” qualitative
characteristics:
The objective of financial reporting is the “why”,
purpose or goal of accounting. ☼ Fundamental- relate to the content or substance
of financial information
Specific Objectives of Financial Reporting
☼ Enhancing- Relate to the presentation or form of
Accordingly, the specific objectives of financial financial information
reporting are: Fundamental Qualitative Characteristics

♥ To provide information useful in making o Relevance: capacity of the information to

decisions about providing resources to the entity. influence a decision
♥ To provide information useful in assessing the o Faithful Representation: figures must watch
cash flow prospects of the entity what really existed or happened
♥ To provide information about entity resources, 1. Relevance
claims, and changes in resources and claims. - Information in financial statements is relevant
Limitations of Financial Reporting when it is capable of making a difference in the
decisions made by the users.
◊ General purpose financial reports do not and Ingredients of relevance:
cannot provide all of the information that ◌ Predictive Value- information cam help
existing and potential investors, lenders and users increase the likelihood of correctly
other creditors need. These users need to predicting or forecasting the outcome of
consider pertinent information from other certain events.
sources, for example, general economic ◌ Feedback Value- Information can help users
conditions, political events, and industry
confirm or correct earlier expectations.
outlook.
◊ General purpose financial reports are not ** Note that the predictive and confirmatory roles
designed to show the value of an entity, but the of information are interrelated.
reports provide information to help the primary
users estimate the value of the entity.
◊ General purpose financial reports are intended to
provide common information to users and
cannot accommodate every request for
information.
◊ To a large extent general purpose financial
reports are based on estimate and judgment
rather than exact depiction.
Materiality represent the phenomena that it purports to
represent.
☼ Information is material if omitting, misstating or
obscuring it could reasonably be expected to Ingredients of Faithful Representation

influence the economic decisions that primary ♥ Complete

users make on the basis of those statements ◊ A complete depiction includes all
which provide financial information about a information necessary for a user to
specific reporting entity. understand the phenomenon being depicted,
☼ A practical rule when items are not Significant including all necessary descriptions and
enough to affect the evaluation, decision, and explanations.
fairness ◊ Also known as Principle of Full/Adequate
☼ Is an entity-specific aspect of relevance based Disclosure
on the nature or magnitude, or both, of the items
to which the information relates in the context of
an individual entity’s financial report.
☼ Also known as the “Doctrine of Convenience”
When is an Item Material?
- No Strict or Uniform Rule
- Dependent on good judgement, professional
expertise, and common sense
- If omission or misstatement would influence the
decision of the user.
- Depends on Relative Size rather than Absolute
Size ♥ Neutral
Factors of Materiality ◊ A neutral depiction is without bias in the
selection or presentation of financial
a. Size- relation to the total group to which the information.
item belongs ◊ A neutral depiction is not:
b. Nature- Inherently Material regardless of size
☼ Slanted
*It is important to note that materiality, though ☼ Weighted
frequently associated and discussed with the previous ☼ Emphasized
topics, is not referred to as an ingredient of relevance ☼ De-emphasized
under the Framework. ☼ Otherwise manipulated
2. Faithful Representation To increase the probability that financial
- Financial reports represent economic information will be received favourably or
phenomena in words and numbers. To be useful, unfavourably by users
financial information must not only represent ♥ Free from error
relevant phenomena, but it must also faithfully ◊ Means there are no errors or omissions in the
description of the phenomenon
◊ The process used to produce the reported
information has been selected and applied with
no errors in the process.
☼ Free from error does not mean a perfectly
accurately in all aspect due to estimates.
Supplementary concepts of Fundamental characteristics Verifiability helps assure users that information
faithfully represents the economic phenomena it
purports to represent. Verifiability means that
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
Enhancing qualitative characteristics decisions. Quarterly or Interim Reports enhances
Timeliness to Financial Information. The Older the
Comparability, verifiability, timeliness and
Information the Less Useful Except When assessing
understandability are qualitative characteristics that
Trends
enhance the usefulness of information that is relevant
and faithfully represented. Understandability- financial information must be:
Clear and Concise, Presented & expressed with
terminologies intended users readily understands
Note: Users must have “Reasonable knowledge of
business & economic activities”, otherwise seek
guidance from Advisors
Cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that

can be provided by financial reporting.
Reporting financial information imposes costs, and it
is important that those costs are justified by the
Comparability is the qualitative characteristic that benefits of reporting that information.
enables users to identify and understand similarities
in, and differences among items.

General objective of Financial Statements

FINANCIAL STATEMENTS provide information

about economic resources of the reporting entity,
claims against the entity and changes in the economic The reporting period is the period when financial
resources and claims. statements are prepared for general purpose financial
reporting. Financial statements may be prepared on
The financial statements provide financial
an interim basis, for example, three months, six
information about an entity's assets, liabilities, equity,
months, or nine months.
income, and expenses useful to users of financial
statements in: Interim financial statements are not required but
optional.
- Assessing future cash flows to the reporting
entity. However, financial statements must be prepared on
- Assessing management stewardship of the an annual basis or a period of twelve months.
entity's economic resources.
Types of Financial Statements Underlying Assumption (Postulates)
The Revised Conceptual Framework recognizes three Accounting assumptions are the basic notions or
types of financial statements: fundamental premises on which the accounting
◊ Consolidated Financial Statements- These are process is based. Accounting assumptions are also
the financial statements prepares when the known as postulates. These serve as a foundation or
reporting entity comprises both the parent and bedrock of accounting to avoid misunderstanding but
its subsidiaries. rather enhance the understanding and usefulness of
◊ Unconsolidated Financial Statements- These are the financial statements. 
the financial statements prepared when the The Conceptual Framework for Financial Reporting
reporting entity is the parent alone. mentions ONLY ONE ASSUMPTION, that is
◊ Combined Financial Statements- These are GOING CONCERN.
financial statements when the reporting entity
comprises two or more entities that are not Going concern means financial statements presume
linked by a parent and subsidiary relationship. that an enterprise will continue in operation
indefinitely or if that presumption is not valid,
Reporting Entry
disclosure and a different basis of reporting are
A reporting entity is an entity that is required or required. Its foundation is the COST PRINCIPLE
chooses to prepare financial statements. (assets are recorded at COST).

The reporting entity can be a single entity or a portion NOTE: If there is evidence that the entity would
of an entity or can comprise more than one entity. experience large losses or subject for termination,
GOING CONCERN IS ABANDONED
A reporting entity is not necessarily a legal entity.
The Accrual accounting, founding on the going
Accordingly, the following can be considered a concern assumption, depicts the effects of
reporting entity: transactions and other events and circumstances on a
◌ Individual corporation, partnership, or reporting entity’s economic resources and claims in
proprietorship the periods in which those effects occur, even if the
◌ The parent alone resulting cash receipts and payments occur in a
◌ The parent and its subsidiaries as single reporting different period.
entity
◌ Two or more entities without parent and
subsidiary relationship as a single reporting
entity.
◌ A reportable business segment of an entity.
Reporting Period
The illustration below shows changes in economic Monetary Unit
resources and claims as reflected by accrual basis and
This assumption pertains to (1) quantifiability of the
compared with cash basis of accounting:
peso and (2) stability of the peso. Quantifiability of
Inherent assumptions of financial statements the peso means that the elements of the financial
statements should be stated under one unit of measure
Accounting Entity or Separate Entity
which is the Philippine Peso. Stability of the peso
Concept means that the purchasing power of the peso is stable
This assumption means that the entity is or constant and that instability is insignificant and
therefore ignored. Stability is also an amplification
separate from the owners, managers and
of the going concern assumption, that adjustments are
employees who constitute the entity. unnecessary to account for nominal pesos only and
Personal transactions of owners shall not be not for constant pesos.
allowed to distort the financial statements of Elements of Financial Statements (FS)
the entity.
Refers to the quantitative information reported in the
Q: What is a "Single Economic Entity"? statement of financial position and income statement

A: This is where a Parent and Subsidiary “Building Blocks” from which FS are constructed
(PS) Relationship exists. With the use of the Elements of FS financial effects
can be grouped into classes according to
o PS Relationship consolidates their
characteristics
Financial Statements
o Consolidation, however, does not Classification of Elements
eliminate the legal boundary Elements directly related to the measurement of
segregating the affiliated entities financial position:
o Accounting will continue to be done
1. Asset- a resource controlled by the enterprise as
separately for each entity a result of past events and from which future
Time Period economic benefits are expected to flow to the
enterprise.
This assumption requires that the indefinite life of an 2. Liability- A present obligation of the enterprise
entity is subdivided into accounting periods, usually arising from past events, the settlement of which
of equal length or time-period, for the purpose of is expected to result in an outflow from the
preparing financial statements. The “one-year” enterprise of resources embodying economic
period is traditionally the accounting period. benefits.
The accounting period may be: 3. Equity- the residual interest in the assets of the
entity after deducting all of the liabilities.
☼ Calendar year - A twelve (12) – month period
that ends on December 31 Elements directly related to the measurement of
☼ Natural business year - A twelve (12) – month financial performance:
period that ends on any month when the 4. Income- increases in economic benefits during
business at its lowest or slack season the accounting period in form of inflows or
☼ Fiscal Year - A Twelve (12) - month period that enhancements of assets or decreases of liabilities
starts from any other month than January that result in increase in equity, other than those
☼ Interim Period - business period within an relating to contributions from equity
accounting period. These are financial reports participants.
prepared at any date even if the 12-month period 5. Expense- decreases in economic benefits during
is not yet due. (weekly, monthly, quarterly or the accounting period in the form of outflows or
semi-annual)
 depletions of assets or incurrence of liabilities ◊ Ability for DIRECT USE
that result in decreases in equity, other than ◊ Ability to enforce LEGAL RIGHTS
those relating to distributions to equity ◊ Future Economic Benefits will flow directly or
participants. indirectly to the entity
RECOGNITION OF THE ELEMENTS OF THE FS
Liability Recognition Principle
The Reporting of an asset, liability, income, or
A liability is recognized in the statement of financial
expense on the face of the financial statements of an
position when it is probable that an outflow of
entity
resources embodying economic benefits will result
Recognition Principles from the settlement of a present obligation and the
amount at which the settlement will take place can be
Recognition is the process of incorporating in the measured reliably.
financial statements an item that meets the definition
of an element and satisfies the following criteria for The (3) aspects on the Definition of Liabilities
recognition:
1. Present Obligation- a duty or responsibility that
It is probable that any future economic benefit an entity has no practical ability to avoid.
associated with the item will flow to or from the Types of Obligation
enterprise; and The item's cost or value can be ♥ Legal Obligation- Obligations may be legally
measured with reliability. enforceable as a consequence of a binding
contract or statutory requirements
Asset Recognition Principle
♥ Constructive Obligation- Arise from normal
An asset is recognized in the statement of financial business practice, custom and a desire to
position when it is probable that the future economic maintain good business relations or act in an
benefits will flow to the enterprise and the asset has a equitable manner
cost or value that can be measured reliably. 2. Transfer an economic resource- Another term of
Three (3) aspects on the Definition of Assets
Settlement of Liability
Examples of ways to settle liability
1. Rights ☼ Payment of Cash
☼ Transfer of Non-Cash Assets
☼ Provision of Services
☼ Replacement of the obligation with
another obligation
☼ Conversion of Obligation to Equity
3. Result of Past Event- A present obligation exists
as a result of past events only if.
2. Future Economic Benefit- it is probable that ◊ The entity has already obtained economic
future economic benefits will flow to the entity benefits and
*Probable = Change is MORE LIKELY than less ◊ As a consequence, the entity will transfer
likely economic resource

**Future economic benefit does not need to be

certain but only necessary that the right already exists
even if probability is low. An asset is recognized in
the statement of financial position when it is probable
that the future economic benefits will flow to the
enterprise and the asset has a cost or value that can be
measured reliably.
3. Control- There is control when;
 Income Recognition Principle Expense Recognition Principle
Income is recognized in the when an increase in Expenses are recognized when a decrease in future
future economic benefits related to an increase in an economic benefits related to a decrease in an asset or
asset or a decrease of a liability has arisen that can be an increase of a liability has arisen that can be
measured reliably. This means, in effect, that measured reliably. This means, in effect, that
recognition of income occurs simultaneously with the recognition of expenses occurs simultaneously with
recognition of increases in assets or decreases in the recognition of an increase in liabilities or a
liabilities
POINT OF SALE
o Legal title to the goods passes to the buyer “the
risk & rewards” of ownership at point of sale
o It is usually the point of delivery.

EXPECTATIONS to the POINT OF SALE

1. Installment Method
decrease in assets.
◌ Revenue is recognized at the point of collection
◌ Revenue = Gross Profit Rate x Collections Matching Principle
2. Cost Recovery Method
◌ Revenue is recognized at the point of collection  It requires that cost and expenses incurred in
◌ Collections are applied first to cost of earning a revenue shall be reported in the same
merchandise sold period
3. Percentage of Completion Method  There must be a Cost in earning a Revenue
◌ Contract Revenue and Contract Cost associated “NO PAIN, NO GAIN”
with construction contract shall be recognized as Application of Matching Principle
revenue and expenses, respectively
4. Production Method ◌ Cause and Effect Association - Expense is
◌ Revenue is recognized at the point of production recognized when Revenue is Recognized
◌ Applicable to Agricultural, forest and mineral Examples:
products  Cost of Merchandise Inventory
Other Income Recognition
 Doubtful Accounts
 Warranty Expense
a. Interest Revenue  Sales Commission
o Revenue is Recognized on ◌ Systematic and Rational Allocation -
a TIME Proportion basis that takes into Expensed by Allocating over the
account the EFFECTIVE YIELD on the PERIODS benefited
asset Examples:
b. Royalties  Depreciation
o Accrual = Based on AGREEMENT  Amortization
c. Dividends  Allocation of Prepayments
o Upon Declaration ◌ Immediate Recognition - Cost Incurred is
d. Installation Fees Expense outright because.
o Stage of Completion 1. NO future economic Benefit
e. Subscription Revenue 2. Cease to qualify as an asset
o Straight Line Basis over the Subscription Examples:
Period  Administrative & Selling Expenses
f. Admission  Loss from Disposal of Asset
o When the Event Takes Place DERECOGNITION
g. Tuition Fees
o The Period in Which Tuition is Provided
The Revised Conceptual Framework introduced the  Transfer a liability
term derecognition.
in an orderly transaction between market participants
Derecognition is defined as the removal of all or part at the measurement date.
of a recognized asset or liability from the statement of
financial position. Hierarchy or best evidence of fair value
Derecognition of an asset normally occurs when the
entity loses control of all or part of the asset.  Level 1 -INPUTS
Derecognition of a liability occurs when the entity o Quoted Price in an active
no longer has a present obligation for all or part of the market for Identical Assets
liability. *Active Market – transactions take place
with sufficient regularity and volume
MEASUREMENT OF THE ELEMENTS of the
FS  Level 2 -OBSERVABLE INPUTS
o Quoted Price in an active
Measurement involves assigning monetary amounts
at which the elements of the financial statements market for Similar Assets or
are to be recognized and reported. o Quoted Price in an inactive market for Similar
Assets or Identical
The Revised Conceptual Framework mentions two  Level 3 - UN-OBSERVABLE INPUTS
categories, including: o Assets Developed by the entity using BEST
AVAILABLE INFORMATION from
1. Historical Cost - Also known as “Past entity’s own data
Purchase Exchange Price” & it is the Most
Commonly Adopted 2. Current Value 
◌ The Amount of:
 Also known as "Current Purchase
A. Cash or Cash Exchange Price"
Equivalent PAID or RECEIVED  Current Value includes
◌ Fair value (at measurement date)
◌ Value in use for asset- the present value
of the cash flows that an entity expects to
derive from the use of an asset and from
the ultimate disposal. 
◌ Fulfillment value for liability- the present
value of cash that an entity expects to
transfer in paring or settling a liability. 
◌ Current Cost- the cost of an equivalent
Transaction Cost asset at the measurement dare comprising
the consideration that would be received
Costs that is directly attributable to the acquisition, less any transaction cost at measurement
issue or disposal of an asset or liability date.  
Examples: Legal Fees, Finder Fee
Note: The Framework does not include concepts or
principles for selecting which measurement basis
B. Fair Value (FV) of the consideration given to should be used for particular elements of financial
acquire the asset “at the time of acquisition” statements or in particular circumstances.

What is Fair Value? Components of Financial Statements

The price that would be received A complete set of financial statements comprises:

 to sell an asset or
1) A statement of financial position as at the end of
the period
2) A statement of comprehensive income for the
period
3) A statement of changes in equity for the period
4) A statement of cash flows for the period
5) Notes, comprising a summary of significant
accounting policies and other explanatory
information
6) A statement of financial position as at the
beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or
makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in Current liabilities
its financial statements.
An entity shall classify a liability as current when:
Statement of Financial Position- Shows the financial
condition of an entity of a particular date (a) It expects to settle the liability in its normal
operating cycle
Current/Noncurrent Distinction- An entity must (b) It holds the liability primarily for the purpose of
normally present a classified statement of financial trading
position, separating current and noncurrent assets and (c) The liability is due to be settled within twelve
liabilities. Only if a presentation based on liquidity months after the reporting period
provides information that is reliable and more (d) The entity does not have an unconditional right to
relevant may the current/noncurrent split be omitted. defer settlement of the liability for at least twelve
months after the reporting period
Current assets
An entity shall classify all other liabilities as non-
An entity shall classify an asset as current when: current.
SHAREHOLDERS’ EQUITY
(a) It expects to realize the asset, or intends to sell or
consume it, in its normal operating cycle I. CONTRIBUTED (PAID-IN / INVESTED
(b) It holds the asset primarily for the purpose of CAPITAL) CAPITAL
trading
(c) It expects to realize the asset within twelve Represent the amount invested or contributed by
months after the reporting period owners.
(d) The asset is cash or a cash equivalent (as defined
This is divided into:
in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least 1. Capital Share – the contributions equal to the par
twelve months after the reporting period. or stated value of the share purchased by owners; or
the total contribution by owners in case of no-par
An entity shall classify all other assets as non-
share.
current.
2. Share Premium – contribution in excess of the par
Normal Operating Cycle – The time between the or stated value, gains from share transactions and
acquisition of assets for processing and their “other” equity items that are not included in earnings
realization cash or cash equivalents. When the or other comprehensive income.
entity’s normal operating cycle is not clearly II. RETAINED EARNINGS
identifiable, its duration is assumed to be twelve
months. Accumulated profits and losses that have not been
declared as dividends.
Classified into retained earnings that are prohibited
from being declared as dividends due to legal and
contractual requirements or upon the decision of the
Board of Directors, “appropriated” and retained
earnings available as dividends to shareholders,
“unappropriated”.
1. Increases – Effect of changes in accounting policy
and correction of prior period errors, Net Income and
Quasi re-organization.
2. Decreases - Effect of changes in accounting policy Note: In the Philippines, the common practice is to
and correction of prior period errors, Dividends, present current assets/liabilities before non-current
Losses on share transactions like retirement and assets/liabilities
reissuance of treasury shares, conversion of
preference shares and recapitalization of par value Income Statement / Statement of Comprehensive
other than share splits. Income

Forms of Statement of Financial Position An entity shall present all items of income and
expense recognized in a period:
1. Report Form- This form set forth the three (3)
major sections in Downward sequence of Assets, (a) In a single statement of comprehensive income, or
Liabilities and Equity (b) In two statements: a statement displaying
components of profit or loss (separate income
statement) and a second statement beginning with
profit or loss and displaying components of other
comprehensive income (statement of comprehensive
income).
Components of Comprehensive Income
1. Profit and Loss - Income minus Expenses
including Tax expense and any Income or Loss from
Discontinued Operations.
2. Other Comprehensive income – –Items of
income and expenses including reclassification
adjustments (RA) that are not included in Profit and
Loss as required by a standard or interpretation.
There are two types of OCI items, those that are
reclassified to profit or loss (RA) and those that are
reclassified to Retained Earnings (RE). OCI includes
the following;
 Unrealized gain or loss on equity investments
measured at FVOCI (RE)
 Unrealized gain or loss on debt investments
2. Account Form- Assets are shown in the Left side measured at FVOCI (RA)
and the liabilities and equity on the Right  Unrealized gain or loss from derivative contracts
designated as cash flow hedge (RA)
 Revaluation Surplus (RE)
 Remeasurement Gains and losses for defined
benefit plans (RE)
  Change in fair value arising from credit risk for - PAS 1 requires that an entity prepare its
financial liabilities measured at FVPL (RE) financial statements, except for cash flow
 Translation gains and losses of foreign information, using the accrual basis of
operations accounting.
3. Consistency of Presentation
An entity shall present either an analysis of expenses - The presentation and classification of items in
using a classification based on either; the financial statements shall be retained
from one period to the next unless a change is
 the nature of expenses or justified either by a change in circumstances
or a requirement of a new PFRS.
 their function within the entity, whichever
4. Materiality and Aggregation
provides information that is reliable and more
- Each material class of similar items must be
relevant.
presented separately in the financial statements.
Dissimilar items may be aggregated only if they
Nature of expense method – Expenses are
are individually immaterial.
aggregated in the income statement according to their
5. Offsetting
nature and are not reallocated among various
- Assets and liabilities, and income and expenses,
functions within the entity.
may not be offset unless required or permitted
by a Standard or an Interpretation.
6. Comparative Information
- PAS 1 requires that comparative information
shall be disclosed in respect of the previous
period for all amounts reported in the financial
statements, both face of financial statements and
notes, unless another Standard requires
Function of expense or cost of sales method – otherwise. If comparative amounts are changed
Classifies expenses according to their function as part or reclassified, various disclosures are required.
of cost of sales or, for example, the cost of
distribution or administrative activities. Concepts of Capital & Capital Maintenance

Concepts of Capital

Financial concept of capital - capital is

synonymous with net assets of the enterprise. This
is the concept of capital adopted by most
enterprises. A financial concept of capital, e.g.
invested money or invested purchasing power,
Presentation and Disclosure means capital is the net assets or equity of the
entity.
1. Going Concern
- An entity preparing PFRS financial statements is Physical concept of capital – capital is regarded as
presumed to be a going concern. the productive capacity of the enterprise based on,
- If management has significant concerns about for example, units of output per day.
the entity's ability to continue as a going
concern, the uncertainties must be disclosed. If Concepts of Capital Maintenance
management concludes that the entity is not a
going concern, the financial statements should Financial capital maintenance – Under this concept,
not be prepared on a going concern basis, in a profit is earned only if the financial (or money)
which case PAS 1 requires a series of amount of the net assets at the end of the of the period
disclosures. exceeds the financial (or money) amount of the net
2. Accrual Basis of Accounting assets at the beginning of the period, after excluding
any distributions to, and contributions from, owners
during the period.
There is profit if the ending net assets are greater than
the beginning net assets, after taking out the effects of
investments by owners and distributions made to
owners

NET ASSET END  > NET ASSET BEGINNING = 

PROFIT

Physical capital maintenance – Under this concept,

a profit is earned only if the physical productive
capacity (or operating capability) of the enterprise (or
the resources need to achieve that capacity) at the end
of the period exceeds the physical productive
capacity at the beginning of the period, after
excluding any distributions to, and contributions
from, owners during the period.

A profit is earned only if the physical productive

capacity or operating up ability at the end of the
period exceeds that of the beginning, after excluding
contributions from the distributions to owners