CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS

Final Exam

DEFINITION OF ACCOUNTING

It is the process of identifying, measuring, and communicating economic information to make judgment and
decision by the users. It is also the language of business.

THREE ACTIVITIES IN ACCOUNTING

1. Identifying
- It is the process of analyzing events and transactions to be recognized or not.

● Recognition
- The process of including the effects of an accountable event in the financial position or comprehensive
income through a journal entry.

● Accountable Event
- Also known as economic activity
- It affects the A, L, OE, I, and E of a business.

● Non-Accountable Event
- It can be disclosed in the notes if it has an accounting relevance through memorandum entry.

TYPES OF EVENTS

● External Events
- It involves an entity and another external party.

➢ Exchange / Reciprocal Transfer

- There is a giving and receiving of economic resources or obligations between the entity and external
party.
- EX: sale, purchase, payment of debts

➢ Non-reciprocal Transfer
- There is only a “one way” transaction.
- EX: donations, gifts, payment of taxes

➢ External Event other than Transfer

- It involves changes in resources or obligations of an entity caused by an external party.
- It does not involve transfers of resources or obligations.
- EX: changes in fair value, price, technological changes

● Internal Events

➢ Production
- The process of converting resources into finished goods.

➢ Casualty
- The company experienced an unanticipated loss from disasters.
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2. Measuring
- It involves assigning numbers, monetary, to economic events.
- Some of the bases are historical cost, fair value, present value, realizable value, and current cost.
- Financial statements are prepared using a mixture of costs (historical and current) and values.

● Valuation by Opinion
- It is when the measurement is affected by estimates.
- EX: Uncollectible receivables, depreciation (useful life and residual value), and retained earnings
(income and expenses)

● Valuation by Fact
- It is when measurement is unaffected by estimates.
- EX: Ordinary share capital at par, acquisition cost of land

3. Communicating
- It is the process of transforming economic data into useful accounting information to interpret and
disseminate to users.

THREE ASPECTS

● Recording
- The process of systematically writing accountable events through journal entries.

● Classifying
- It involves grouping the interrelated items through the ledger.

● Summarizing
- It is putting together the recorded and classified information through financial statements and other
accounting reports.

BASIC PURPOSE OF ACCOUNTING

It is to provide information to make economic decisions.

● Economic Entity
- It uses accounting to record economic activities, process data, and disseminate information.
- It is the combination of persons and property that controls economic resources to achieve certain goals.

➢ Not-for-profit Entity
- It carries out the needs of the community and its members.

➢ Business Entity
- It operates for profit.

● Economic Activities

➢ Production
➢ Exchange

➢ Consumption
- Process of using the final output of the production process.
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Final Exam

➢ Income Distribution
- Process of allocating rights to the use of output among individuals and groups in society.

➢ Savings

➢ Investment
- Process of using current inputs to increase the stock of resources for output as opposed to immediately
consumable output.

TYPES OF INFORMATION

1. Qualitative Information
2. Quantitative Information
3. Financial Information

TYPES OF INFORMATION (as to users)

1. General Purpose Accounting Information

- It is designed to meet the common needs of external users.
- It is provided under financial accounting and is governed by Generally Accepted Accounting Principles
(GAAP) represented by the Philippine Financial Reporting Standards (PFRSs).

2. Special Purpose Accounting Information

- It is designed to meet specific needs of internal users.
- It is provided by other types of accounting other than financial accounting.

ACCOUNTING AS…

● A social science
- It is a body of knowledge which has been systematically gathered, classified, and organized.

● A practical art
- It requires the use of creative skills and judgment.

● An information system
- It identifies and measures economic activities, processes information into financial reports and
communicates to decision makers.

● A language of business
- It is fundamental to the communication of financial information.

CREATIVE & CRITICAL THINKING

1. Creative Thinking
- The use of imagination to solve problems by finding new ideas in identifying alternative solutions.
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Final Exam

2. Critical Thinking
- It involves the logical analysis of issues and inductive or deductive reasoning to evaluate alternative
solutions.

ACCOUNTING CONCEPTS

➢ Accounting Assumptions
- The fundamental concepts and basic notions that provide the foundation of the accounting process.

➢ Accounting Theory
- It is a logical reasoning in broad principles to provide a general frame of reference to evaluate
accounting practices and guide the development of new practices.
- It comprises the Conceptual Framework and the PFRSs.

1. Double-entry System

2. Going Concern Assumption

3. Separate Entity

4. Stable Monetary Unit

5. Time Period

6. Materiality Concept
- If the material’s omission could influence the economic decisions. It requires professional judgment
based on size and nature.

7. Cost-Benefit

8. Accrual Basis of Accounting

9. Historical Cost Concept

10.Concept of Articulation
- It is the need to use the complete set of financial statements that are interrelated and interact with
each other.

11.Full Disclosure Principle

- It strives for sufficient detail and condensation to disclose matters and to make the information
understandable.

12.Consistency Concept
- The changes are disclosed in the notes.

13. Matching Concept

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Final Exam
14.Entity Theory
- Its objective is proper income determination (proper matching of cost against revenues).
- It emphasizes the income statement.
- A = L + Capital

15.Proprietary Theory
- Its objective is proper valuation of assets, which highlights the importance of balance sheets.
- A - L = Capital

16.Residual Entity Theory

- It is applicable when there are two classes of shares issued (OS or PS). It is applied in the computation
of book value and return on equity.
- A - L - PSE =OSE

17.Fund Theory
- Its objective is custody and administration of funds (cash flows). It is used in government and fiduciary
accounting.
- Cash Inflows - Cash Outflows = Fund

18.Realization
- It is the process of converting non-cash assets into cash. It deals with revenue recognition.

19.Prudence
- It is the use of caution under conditions of uncertainty.
- The assets and income are not overstated; and liabilities and expenses are not understated.
- The one which has the least effect on equity is chosen.

➢ Cookie Jar Reserve

- A form of fraudulent reporting where liabilities are overstated during high profits or income are
overstated during poor performance.

20.Systematic and Rational Allocation

- It is when the costs that are not related to the earning of revenue are initially recorded as assets
- It is recognized as an expense over the periods that they are consumed.

21.Immediate Recognition
- When the costs that do not meet the definition of an asset are expensed immediately.

COMMON BRANCHES OF ACCOUNTING

1. Financial Accounting
- It focuses on general purpose financial statements for external users.
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Final Exam

● Financial Statements
- The structured representation of an entity’s financial position and results of operations.
- It is the end product of the accounting process.

● Financial Report
- It includes financial statements plus other information that will improve the user’s ability to make
efficient economic decisions.

● Financial Reporting
- It is the provision of information about an entity to external users in making investment and credit
decisions.

➢ Primary Objective
- To provide information about an entity’s economic resources, claims, and changes in those resources.

➢ Secondary Objective
- To provide information in assessing the entity’s management stewardship (how efficiently and effectively
they discharged their responsibilities to use the economic resources).

2. Management Accounting
- It is the accumulation and communication of information for internal users. It involves management
advisory services.

3. Cost Accounting
- It is the systematic recording and analysis of the costs of materials, labor, and overhead incident.

4. Auditing
- It is the process of evaluating the correspondence with established criteria and expressing an opinion.

5. Tax Accounting
- It is the preparation of tax returns and tax advice.

6. Government Accounting
- It emphasizes the custody of public funds. It involves the purposes, responsibility and the accountability
of the individuals entrusted with those funds.

7. Fiduciary Accounting
- It is the handling of accounts by a person entrusted with the custody for the benefit of another.

8. Estate Accounting
- It is handling accounts for fiduciaries who wind up the affairs of a deceased person.

9. Social Accounting/Social and Environmental Accounting/Social Responsibility Accounting

- It is the process of communicating the social and environmental effects of an entity’s economic actions
to the society.
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Final Exam

10.Institutional Accounting
- The accounting for non-profit entities other than the government.

11.Accounting Systems
- It is the installation of accounting procedures to accumulate financial data and designing the forms to
gather data.

12.Accounting Research
- It is the careful analysis of economic events and other variables. It involves a broad range of topics.

BOOKKEEPING
- It is the process of recording the transactions and ends with the preparation of the trial balance.

FOUR SECTORS OF ACCOUNTING

1. Practice of Public Accountancy

- It is the rendering of accounting related services to more than one client on a fee basis.

2. Practice in Commerce and Industry

- It is employment in the private sector which involves decision making.

3. Practice in Education/Academe
- It is the teaching of accounting, auditing, management advisory services, finance, business law, etc.

4. Practice in the Government

- The accountant performs proprietary functions and it requires professional knowledge.

ACCOUNTING STANDARDS

● Philippine Financial Reporting Standards (PFRSs)

- It is represented by GAAP
- It is the standards and interpretations adopted by the Financial Reporting Standards Council (FRSC)

➢ Philippine Financial Reporting Standards

➢ Philippine Accounting Standards
➢ Interpretations

HIERARCHY OF REPORTING STANDARDS

1. PFRSs

2. Judgment
- To develop accounting policy that is relevant and reliable when PFRS is absent in that transaction or
event
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Final Exam

● In descending order:

➢ Requirements in PFRSs
➢ Conceptual Framework

● Pronouncements of other standard-setting bodies, Accounting Literature, and Accepted industry

practices

STANDARD-SETTING BODIES

1. Financial Reporting Standards Council (FRSC)

- It is the official accounting standard setting body in the Philippines created R.A 9298.
- It consists of 15 individuals (14 members and chairman).

➢ 1 person
- Chairperson
- Members: BOA, COA, SEC, BSP, BIR, major orgs of preparers of financial statements

➢ 2 persons: Accredited National Professional Organization of CPAs (e.g PICPA)

- Members: Public Practice, Commerce and Industry, Education, and Government

2. Philippine Interpretations Committee (PIC)

- It is formed by the Accounting Standards Council (ASC).
- It reviews the interpretations of the International Financial Reporting Interpretations Committee (IFRIC)
for approval and adoption by the FRSC.

3. Board of Accountancy (BOA)

- It supervises registration, licensure and practice of accountancy in the Philippines.
- It has a chairperson and 6 members appointed by the President (vice-chairperson among the members
for 1-year term).

4. Securities and Exchange Commission (SEC)

- It regulates corporations and partnerships, capital and investment markets, and the investing public.
- Some of its rulings affect the entity’s accounting requirements and policies.

5. Bureau of Internal Revenue (BIR)

- It administers the provision of the National Internal Revenue Code.
- They influence the choice of accounting methods and procedures.

6. Bangko Sentral ng Pilipinas (BSP)

- It is the selection and application of accounting policies by banks.

7. Cooperative Development Authority (CDA)

- It is the selection and application of accounting policies by cooperatives.
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Final Exam

INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

- It is the standard setting body of the International Financial Reporting Standards Foundation (IFRS
Foundation).
- They develop and promote global accounting standards.
- It was established under IASC on April 1, 2001, London.

● Former Name:
- International Accounting Standards Committee Foundation (IASC Foundation) (June 1973).
- Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the UK, Ireland, and the US
- It is a non-profit organization in Delaware, USA.

➢ International Financial Reporting Standards (IFRSs)

➢ International Accounting Standards (IASs)
➢ Interpretations

DUE PROCESS:

1. Identifies and reviews issues and considers the application of the Conceptual Framework

2. Study national accounting requirements and practice

3. Consulting the Trustees and the Advisory Council

4. Form an advisory group

5. Publish a discussion document for public comment

6. Publish a draft for public comment

7. Publish a draft with conclusions and views

8. Consider all comments received

9. Hold a public hearing and field test

10. Publish a standard (basis, explanations, due process, opinion of the members)

1. International Financial Reporting Interpretation Council (IFRIC)

- It prepares interpretations of how specific issues should be accounted for under the application of IFRS.

2. IFRS Advisory Council

- Its role is advising on priorities within the IASB’S working program.
- The members are appointed by IFRS Foundation

3. International Federation of Accountants (IFAC)

- It is a non-profit, non-governmental, and non-political organization that represents the worldwide
accountancy profession.

4. International Organization of Securities Commissions (IOSCO)

- It is an international body of security commissions and the Philippine SEC is a member.
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Final Exam

NORWALK AGREEMENT:
- It is a memorandum of understanding between the Federal Accounting Standards Board (FASB) and
International Accounting Standards Board (IASB).
- It is their commitment to the convergence of U.S GAAP and IFRS

➢ Make their financial reporting standards fully compatible

➢ Coordinate their future work programs to maintain compatibility

“Financial reporting standards continuously change primarily in response to the user's needs.”

PURPOSE OF CONCEPTUAL FRAMEWORK

- It prescribes the concepts for general purpose financial reporting.

IT ASSISTS…

● The IASB in developing standards

● The preparers develop consistent accounting policies when no Standard applies to a particular
transaction

● All parties in understanding and interpreting the Standards

IT PROVIDES THE FOUNDATION FOR THE DEVELOPMENT OF STANDARDS THAT:

● Promoting transparency by enhancing comparability and quality in financial information

● Strengthen the accountability by reducing information gap

● Contributing to economic efficiency by helping investors to identify opportunities and risks

STATUS OF CONCEPTUAL FRAMEWORK

The Conceptual Framework is not a Standard. If there is a conflict between the Standard and Conceptual
Framework, the Standard will prevail. It is concerned with general purpose financial reporting. Its revisions will
not automatically change the Standards not until the IASB goes through its due process of amending a
Standard.

HIERARCHY OF REPORTING STANDARDS:

1. PFRSs

2. Judgment

➢ Requirements in PFRSs
➢ Conceptual Framework

3. Pronouncements of other standard-setting bodies and Accounting Literature

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SCOPE OF CONCEPTUAL FRAMEWORK

1. The objective of Financial Reporting

2. Qualitative Characteristics of useful information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

THE OBJECTIVE OF FINANCIAL REPORTING

THE OBJECTIVE FOUNDATION OF CONCEPTUAL FRAMEWORK:

It is to provide financial information about an entity that is useful for external users such as investors and
creditors to make decisions about providing resources to the entity.

● Primary Users

➢ Existing and potential investors

➢ Lenders and other creditors

General purpose financial reports do not and cannot provide all the information needs of primary users
(common needs). It does not directly show the value of an entity (estimates only).

● Decisions of primary users

➢ Buying, selling, or holding investments

➢ Providing or settling loans
➢ Exercise voting or similar rights that could influence the management’s actions

● Expectations about returns depend on:

➢ Prospects for future net cash inflows

➢ Management stewardship

● Financial Position
- It provides information about an entity’s A, L, and OE.
- It shows its liquidity (short-term) and solvency (long-term), the need for additional financing,
generate future cash flows, and the management’s stewardship of their resources.

● Changes in Economic resources and claims

- It provides information about its financial performance (income and expenses) that lead to changes on
financial position.
- It helps the users assess the entity’s ability to produce return from its resources.
- Information based on accrual accounting provides a better basis for assessing an entity’s financial
performance.
- Information about its past cash flows help users assess its ability to generate future cash flows
(operating, investing, and financing activities).
- It may also change when there is issuing debt or equity instruments.
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Final Exam

➢ Return
- It is an indication on how well a management has efficiently and effectively used their resources.
- It helps in assessing the uncertainty of future cash flows.

QUALITATIVE CHARACTERISTICS

It identifies the most useful types of information to be used by primary users in making decisions. It applies to
financial statements and financial information.

1. Fundamental Qualitative Characteristics

- These make information useful to users

● Relevance
- It can make a difference in the decision of users.
- Predictive and Confirmatory values are interrelated.
- Cash flows

➢ Predictive Value
- The information can help users in making predictions about future outcomes.

➢ Confirmatory Value
- It is also called a feedback value.
- The information can help users in confirming their previous predictions.

● Materiality
- It is an “entity-specific” aspect of relevance, which depends on the item’s nature and size (facts).
- It is a matter of professional judgment.

MATERIALITY PROCESS:
- It was provided by the IFRS Practice Statement 2: Making Materiality Judgments.

1. Identify information that has the potential to be material.

- It must be according to the requirements of the Standard and the common information needs of the
primary users.

2. Assess whether the information is in fact, material.

➢ Whether it can influence the user’s decision

➢ Its quantitative (size) and qualitative (characteristics or context).

3. Organize the information within the draft of the financial statements.

4. Review the draft.

● Faithful Representation
- It is when the information provides a true, correct, and complete depiction of the economic phenomena.
- Substance over form
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➢ Completeness
- All the information necessary for users are provided.
- EX: nature description, numerical depiction, and explanations of facts

➢ Neutrality
- The information is selected without bias.
- It is supported by prudence (assets and income are not overstated and liabilities and expenses
are not understated).

➢ Free from error

- There are no errors in the description and process.

2. Enhancing Qualitative Characteristics

- It enhances the usefulness of the information.

● Comparability
- It can help users identify similarities and differences between different sets of information provided by
an entity in different periods (intra-comparability) and different entities in a single period
(inter-comparability).
- The goal of consistency.

● Verifiability
- It is when different users could reach a general agreement as to what the information purports to
represent.
- It can be observed in direct and indirect verification.

● Timeliness
- It is when the information is available to users in time to be able to influence their decisions.

● Understandability
- It is when the information is clear and in a concise manner.
- Financial reports are intended for users who have reasonable knowledge of business activities and are
willing to analyze the information diligently.

COST CONSTRAINT
➢ Cost
- A pervasive constraint of the entity’s ability to provide useful information.

FINANCIAL STATEMENTS AND REPORTING ENTITY

REPORTING PERIOD
- The A, L, and OE are provided at the end or during the reporting period.
- The I and E are provided for the reporting period.

● Comparative Information
- Entity’s should provide at least one preceding reporting period to help users evaluate changes and
trends (intra-comparability).
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● Forward-looking Information
- Financial statements are designed to provide information about past events.
- Future transactions are included if it relates to the past information presented in the financial
statements and is useful to the users.

● Perspective Adopted in Financial Statements

- Financial statements are prepared from the perspective of the entity.

REPORTING ENTITY
- They are required or chooses to prepare financial statements and are not necessarily a legal entity.
- It can be single, combination, and group.

● Parent
- It is the controlling entity.

● Subsidiary
- It is a controlled entity.

● Consolidated Financial Statements

- If a reporting entity comprises both the parent and its subsidiaries.
- It enables users to better assess the parent’s prospect for future cash flows because the parent’s cash
flows are affected by the cash flows of subsidiaries.

● Unconsolidated Financial Statements

- If a reporting entity consists of the parent alone.
- It can be used as additional information for the consolidated financial statements.
- It cannot be used as a substitute for the consolidated financial statements.

● Combined Financial Statements

- If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary
relationship.

● Individual Financial Statements

- It is the financial statements of each subsidiary alone.

ELEMENTS OF FINANCIAL STATEMENTS

1. Asset
- It is a present economic resource, a right, controlled by an entity that has the potential to produce
economic benefits.
- A set of rights.

3 ASPECTS:

● Right
- It normally arises from law, contract, trade secret, and constructive obligation.
- Not all rights are assets.
- To be an asset, a right must produce benefits beyond other parties and is controlled by the entity.
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➢ Rights that correspond to an obligation of another party

- Right to receive cash, goods, and services
- Right to exchange resources on favorable terms
- Right to benefit from an obligation of another party.

➢ Right that do not correspond to an obligation of another party

- Right over physical objects
- Right to use intellectual property

● Potential to produce Economic Benefits

- A present right that has the potential to produce economic benefits, and not the future economic
benefits that the right may produce.
- An asset can exist even if the probability of producing a benefit is low.

THE ASSET MAY BE..

➢ Sold, leased, transferred, or exchanged

➢ Enhance the value of other assets
➢ To promote efficiency and cost savings
➢ To settle a liability

● Control
- The entity has the exclusive right over the benefits and prevents others from accessing those benefits.
- It indicates the extent for the entity to account for the economic resource.
- Physical possession is not necessary to have control.

2. Liability
- It is a present obligation of an entity to transfer economic resources.

3 ASPECTS:

● Obligation
- A duty or responsibility that cannot be avoided.

➢ Legal Obligation
- It results from a contract, legislation, or other operation of law.

➢ Constructive Obligation
- It results from an entity’s actions that create a valid expectation on others.

● Transfer of an Economic Resource

- A liability can exist even if the probability of the transfer is low.

THE LIABILITIES MAY BE..

➢ Pay cash, goods, or render services

➢ Exchange assets on unfavorable terms
➢ Transfer asset if a specified uncertain future event occurs
➢ Issue a financial instrument that obliges the entity to transfer
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● Present Obligation as a result of Past Events

IF..

➢ The entity has already obtained economic benefits or taken action.

➢ The entity may have to transfer even though it would not, as a consequence.

● Executory Contracts
- It is a contract that is equally unperformed by both parties.
- It establishes a combined right and obligation.

➢ If the entity performs first, it is an asset.

➢ If the other party performs first, it is a liability.

3. Equity
- It is the residual interest in the assets after deducting all its liabilities.
- It may be sub-classified in the statement of financial position.
- Reserves refer to the amount set aside for creditors or stakeholders from losses.
- Transfer of reserves are appropriations of retained earnings.

4. Income
- It increases in assets.
- It decreases liabilities.
- It increases equity.
- It excludes contributions from its owners.

● Expenses
- It decreases assets.
- It increases liabilities.
- It decreases equity.
- It excludes distributions to its owners.

RECOGNITION AND DERECOGNITION

Recognition is the process of including an item in the financial statements if it meets the definition of its
elements.

Carrying amount is an amount which an asset, liability, or equity is recognized in the statement of financial
position.

● Recognition Process

1. Statement of Financial Position at the beginning period

- A = L + OE
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2. Statement of Financial Performance

- Income - Expenses

3. Contributions from holders - distributions to holders

4. Statement of Financial Position at the ending period.

- A = L + OE

● Recognition Criteria

1. It meets the definition of A, L, OE, I, and E.

2. It would provide useful information.

● Relevance
- The item is an asset or liability.
- The item has a high probability of inflow and outflow of economic benefits.
- Cash flows

IT MAY NOT RELEVANT IF:

➢ It is uncertain if asset or liability exists.

➢ The probability of asset and liability is low.

● Faithful Representation
- It is the level of the item’s uncertainty and other factors (presentation and disclosure).
- A high measurement uncertainty can affect the faithful representation of an item.

➢ Outcome Uncertainty
- When uncertainty about the timing of inflow or outflow of benefits that result from an asset or liability.

➢ Existence Uncertainty
- When an asset or liability is uncertain to exist.

Derecognition is the removal of a previously recognized asset or liability.

● If an assets and liabilities have expired, consumed, collected, or transferred

● Continues to recognize any assets or liabilities retained after derecognition.

Unit of account is a group of rights, obligations, or rights of groups and obligations where recognition criteria
and measurement concepts were applied.

➢ Transfers
- Derecognition is not appropriate if the entity retains substantial control of a transferred asset.
- If there is a partial transfer, the entity derecognizes only the transferred component.
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Final Exam

COMMENTARY ON THE CHANGES IN THE CONCEPTUAL FRAMEWORK

● Asset

Previous Version New Version

● Definition ● Definition
Asset is a resource controlled by an entity as a result Asset is a present economic resource, a right,
of past events where future economic benefits are controlled by an entity as a result of past events that
expected to flow. has the potential to produce benefits.

● Elements ● Elements

➢ Control ➢ Right
➢ Past Events ➢ Potential to Produce Economic Benefits
➢ Future Economic Benefits ➢ Control

● Recognition Criteria

Previous Version New Version

● Item meets the definition of the financial ● Item meets the definition of the financial
statement’s elements. statement’s elements.

● Any future economic benefit will flow to or ● Recognizing it will provide useful information
from the entity. (relevant, faithful representation, etc.)

● Items have a cost or value that can be

measured with reliability.

● Derecognition

Previous Version New Version

● Not specifically addressed ● When it has expired, consumed, collected, or

transferred.

● Liability

Previous Version New Version

● Definition ● Definition
Liability is a present obligation from past events. The Liability is a present obligation to transfer an
settlement is a result of an outflow of resources. economic resource as a result of past events.

● Elements ● Elements

➢ Present Obligations from past events ➢ Obligation

➢ Outflow of benefits ➢ Transfer of benefits
➢ Present Obligations from past events
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● Equity, Income, and Expenses

1. Includes revenues and gains (income)

2. Deleted expenses and losses (expenses)

3. Income and expenses are classified as recognized either in profit or loss or other comprehensive
income.

4. Removed “systematic and rational allocation” and “immediate recognition”.

5. Introduced the “unit of account” and executory contracts”

MEASUREMENT

It is quantifying an item in monetary terms with an appropriate measurement basis.

MEASUREMENT BASES

1. Historical Cost
- It is an entry value.
- Asset: It is the consideration paid to acquire the asset plus transaction costs.

➢ Impairment, depreciation, or amortization

➢ Collections
➢ Discount or premium amortization

- Liability: It is the consideration received to incur the liability minus transaction costs.

➢ Increase in obligation resulting from the liability becoming onerous

➢ Payments or fulfillments
➢ Discount or premium amortization

- It is recognized as current value when historical cost is impossible to identify.

2. Current Value
- It measures the reflected changes in values at the measurement date.
- It is not derived from the price of the transaction.

● Fair Value
- The price that would be received to sell an asset or paid for a liability between market participants at
the measurement date.
- It is not an entity-specific measurement.
- It is not adjusted for transaction costs.
- It can be measured by observing prices in an active market or indirectly using measurement techniques.
- It is an exit value.

● Value in Use
- It is the present value of the cash flows or benefits that an entity expects to derive from the use of an
asset and from its ultimate disposal.
- It is an entity-specific assumption.
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Final Exam
- It is measured indirectly.
- It is an exit value.

● Fulfillment Value
- It is the present value of the cash or resources that an entity expects to be obliged to transfer as it
fulfills a liability.
- It is an entity-specific assumption.
- It is measured indirectly.
- It is an exit value.

● Current Cost
- It is an entry value.
- It can only be measured indirectly.
- Asset: It is the consideration that would be paid at the measurement date plus the transaction costs
that would be incurred.

- Liability: It is the consideration that would be received for an equivalent liability at the measurement
date minus the transaction costs that would be incurred.

CONSIDERATIONS WHEN SELECTING A BASIS:

● The nature of information

● The qualitative characteristics, cost-constraint, and other factors

INFORMATION PROVIDED BY BASES:

● Asset at Historical Cost

- It results in subsequent recognition of depreciation or impairment.
- It will not result from gain or loss, unless the asset is impaired.

● Asset at Fair Value or Value in Use

- It results in subsequent recognition of gain or loss from changes in fair value.

● Asset at Current Cost

- It results in the recognition of holding gains and losses from price changes.
- It will not result from gain or loss, unless the asset is impaired.

MEASUREMENT OF EQUITY:
- It is not measured directly.
- It is generally positive.

CASH-FLOW-BASED MEASUREMENT TECHNIQUES

- It requires estimating.
- It is used in applying measurement basis.

● Statistical Mean
- Expected value or Probability-Weighted Average
- It is the average amount within the entire range.
- It is not to predict ultimate cash inflow (outflow) from an asset (liability).

● Statistical Median
- It is the middle amount within the range.
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- It reflects the probability of an inflow or outflow to be no more than that amount.

● Statistical Mode
- It reflects the single most likely ultimate inflow (outflow) from the asset (liability).

PRESENTATION AND DISCLOSURE

A, L, OE, I, and E’s information are communicated

● Focuses on presentation and disclosure objectives and principles

● Classifying information
● Aggregating information

OBJECTIVES:

● Gives the entity the flexibility to provide relevant and faithfully represented information.

● Requires information that has both intra-comparability and inter-comparability.

PRINCIPLES:

● Boilerplate, means standardized descriptions, are useful.

● Duplication is unnecessary which will make it less understandable.

CLASSIFICATION:
- It is the sorting of the elements with similar nature, function, and measurement basis.

OFFSETTING:
- It occurs when an asset and liability with separate units are combined and only the net amount is
presented.
- It is not appropriate.

AGGREGATION:
- It is the adding together the elements that have shared characteristics and are included in the same
classification.
- It summarizes a large volume of detail.

CONCEPTS OF CAPITAL MAINTENANCE

CAPITAL:

1. Financial Concept of Capital

- The capital is regarded as the invested money or invested purchasing power.
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2. Physical Concept of Capital

- The capital is regarded as the entity's productive capacity.

CAPITAL MAINTENANCE:

1. Financial Capital Maintenance

- When profit is earned if the net assets at the end of the period exceeds the net assets at the beginning
of the period after excluding equity.
- It can be measured in nominal monetary units or units of constant purchasing power.

2. Physical Capital Maintenance

- Profit is earned only if the productive capacity at the end of the period exceeds the productive capacity
at the beginning of the period after excluding equity.

PHILIPPINE ACCOUNTANCY ACT OF 2004

- Republic Act No. 9298

- It recognizes the importance of accountants in nation building and development.
- It shall develop and nurture competent, virtuous, productive and well rounded professional accountants.

OBJECTIVES

1. Standardization and regulation of accounting education

2. examination for registration of certified public accountants

3. supervision, control, and regulation of the practice of accountancy in the Philippines.

PROFESSIONAL REGULATORY BOARD OF ACCOUNTANCY

- It is composed of a chairman and six (6) members for a term of 3 years.

- They are appointed by the President of the Philippines.
- The Board shall elect a vice-chairman from among its members for a term one (1) year.

QUALIFICATIONS:

● natural-born citizen and a resident of the Philippines

● duly registered Certified Public Accountant with a least 10 years of work experience

● good moral character and not have been convicted of crimes involving moral turpitude

● not have any pecuniary interest, directly or indirectly, in any school, college, university or institution
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POWERS AND FUNCTION:

1. Prescribe and adopt the rules and regulations to carry out the Act

2. Supervise the registration, licensure and practice of accountancy in the Philippines

3. Administer oaths in connection of this Act

4. Issue, suspend, revoke, or reinstate the Certificate of Registration

5. Adopt an official seal of the Board

6. Prescribe and/or adopt a Code of Ethics

7. Monitor the conditions affecting the practice of accountancy and adopt such measures

8. Conduct an oversight into the quality of audits of financial statements

9. Investigate violations of this act and the rules and regulations promulgated

10.Issue a cease or desist order to any person, association, partnership or corporation engaged in violation

11.prepare, adopt, issue or amend the syllabi and questions of the subjects for examinations in
consultation

GROUNDS FOR SUSPENSION:

● Neglect of duty

● Violation or tolerance of any violation of this Act and Code of Ethics

● Final judgment of crimes

● Manipulation or rigging of the certified public accountant’s licensure examination results

EXAMINATION, REGISTRATION, AND LICENSURE

QUALIFICATIONS:

● Filipino citizen

● Good moral character

● holder of the degree of Bachelor of Science in Accountancy duly recognized by the CHED

● Not been convicted of any criminal offense

SCOPE OF EXAMINATION:

1. Auditing

2. Taxation
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3. Financial Accounting and Reporting

4. Advanced Accounting

5. Regulatory Framework

6. Management Services

REQUIRED RATING:

- To be qualified as having passed the licensure examination for accountants, a candidate must obtain a
general average of 75%, with no grades lower than 65% in any given subject.
- Any candidate who fails in two (2) complete Certified Public Accountant Board Examinations shall be
disqualified from taking another set of examinations unless he/she submits evidence to the satisfaction
of the Board that he/she enrolled in and completed at least twenty-four (24) units of subject given in
the licensure examination.
- A Professional Identification Card can be issued to every registrant renewable every three (3) years.

CODE OF ETHICS

- June 2005
- Revised on July 2006

PRINCIPLES, THREATS, AND SAFEGUARDS

- Acceptance of the responsibility to act in the public interest, not to satisfy the needs of the client

- professional accountant should observe and comply with the Code of Ethics

FUNDAMENTAL PRINCIPLES:

1. Integrity - straightforward and honest

A professional accountant should not be associated with:

● Contains a misleading statement

● Contains information furnished recklessly

● Omits or obscures information required to be included where such omission or obscurity would be
misleading.

2. Objectivity - should not allow bias, conflict of interest or undue influence of others

3. Professional Competence and Due Care

- maintain professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional service.

- act diligently and in accordance with applicable technical and professional standards

● Attainment of professional competence

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● Maintenance of professional competence

- continuing awareness and an understanding of relevant technical professional and business
developments

4. Confidentiality - respect the confidentiality of information acquired

- unless there is a legal or professional right or duty to disclose

5. Professional Behavior - comply with relevant laws and regulations

● Make exaggerated claims for the services they are able to offer, the qualifications they possess, or
experience they have gained

● Make disparaging references or unsubstantiated comparisons to the work of others

CONCEPTUAL FRAMEWORK APPROACH:

- A professional accountant has an obligation to identify, evaluate (qualitative and quantitative factors)
and address threats to compliance with the fundamental principles.

THREATS

1. Self-interest threats - close family member

2. Self-review threats - previous judgment needs to be re-evaluated by the professional accountant

responsible for that judgment

3. Advocacy threats - promotes a position or opinion to the point that subsequent objectivity may be
compromised

4. Familiarity threats - professional accountant becomes too sympathetic to the interests of others

5. Intimidation Threats - professional accountant may be deterred from acting objectively by threats,
actual or perceived

SAFEGUARDS:

1. Educational, training and experience requirements for entry into the profession.

2. Continuing professional development requirements.

3. Corporate governance regulations.

4. Professional standards.

5. Professional or regulatory monitoring and disciplinary procedures.

6. External review by a legally empowered third party of the reports, returns, communications or
information produced by a professional accountant.

ETHICAL CONFLICT RESOLUTION:

1. Relevant facts

2. Ethical issues involved

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3. Fundamental principles related to the matter in question

4. Established internal procedures

5. Alternative courses of action

- If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional
accountant should refuse to remain associated with the matter creating the conflict.

PAS 1: PRESENTATION OF FINANCIAL STATEMENTS

- Basis for the presentation of general purpose financial statements, structure, and requirements to
ensure comparability.

➢ Intra-comparability
- Horizontal
- Same entity but different periods

➢ Inter-comparability
- Dimensional
- Different entities but same periods

● Financial Statements
- Structured representation of an entity’s financial position and results of its operations
- It is the end product of the financial reporting process.

PURPOSE:

1. Primary Objective
- To provide information about the financial position, performance, and cash flows of an entity that can be
used by users to make economic decisions.

2. Secondary Objective
- To show the results of management’s stewardship over their resources

GENERAL FEATURES:

● Fair Presentation and compliance with PFRS

● Going Concern

● Accrual Basis of Accounting

● Materiality and Aggregation

● Offsetting

● Comparative Information

● Consistency
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WORKING CAPITAL = CA - CL

PAS 7: STATEMENT OF CASH FLOWS

● Operating Activities (cash)

- Income statement
- Current assets
- Current liabilities

● Investing Activities
- Balance sheet
- Long-term investments
- Property, plant, and equipment

● Financing Activities
- Utang
- Equity

PAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

- Selecting, applying, and changing accounting policies

- Accounting and disclosures of the changes and errors
- To enhance the relevance, reliability, and comparability of the financial statements

ACCOUNTING POLICIES

- These are the specific principles, bases, conventions, rules and practices applied in preparing and
presenting the financial statements.

HIERARCHY OF REPORTING STANDARDS:

1. PFRS (PFRSs, PASs, and Interpretations)

2. Judgment

➢ Shall consider:
- Requirements on other PFRS
- Conceptual Framework

➢ May consider:
- Pronouncements issued by other standard-setting bodies
- Other accounting literature and practices
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CHANGES IN ACCOUNTING POLICY

- PAS 8 requires consistent selection and application of accounting policies.

- Normally results from a change in measurement basis

● It only permits a change in accounting policy only if the change:

a. Required by PFRS

b. Results in reliable and more relevant information

ACCOUNTING:

1. Transitional Provision in a PFRS

2. Retrospective Application, in the absence of transitional

- Adjusting the opening balance of the affected component for the earliest prior period presented as if the
new accounting policy had always been applied.

- Voluntary change

3. Prospective Application, if retrospective is impracticable

CHANGES IN ACCOUNTING ESTIMATES

- It is an adjustment of the carrying amount of an asset, liability, or the periodic consumption of asset.
- It involves judgments based on the latest available information and developments, not corrections of
error.
- Normally result from changes on how the expected inflows or outflows of economic benefits are realized
from assets or incurred liabilities.

➢ Net realizable value

➢ Depreciation
➢ Bad debts
➢ Fair value of financial assets and liabilities
➢ Provisions

ACCOUNTING: accounted by prospective application (effects in profit and loss)

a. Period of change

b. Period of change and future periods, if both are affected.

IF THE CHANGE IS DIFFICULT TO DETERMINE, TREAT IT AS A CHANGE IN ACCOUNTING

ESTIMATE.
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ERRORS

- It is the misapplication of accounting policies, math, oversights, misinterpretations, and fraud.

● Material Errors
- Those that cause the financial statements to be misstated.

● Intentional Errors
- Fraud

● Error of Commission
- Doing something wrong

● Error of Omission
- Not doing something that should have been done

TYPE OF ERRORS:

1. Current Period Errors

- Errors in the current period that were noticed during and after the preparation of the statements, but
before it will be issued.
- It is corrected by simply correcting the entries.

2. Prior Period Errors

- Errors in one or more prior periods that were discovered before or after the preparation, and before this
is issued.
- It is corrected by retrospective restatement.

RETROSPECTIVE RESTATEMENT:

- Correcting a prior period error as if the error had never occurred.

a. Restating the comparative amounts for the prior periods presented where the error occurred.

PAS 10: EVENTS AFTER THE REPORTING PERIOD

- The accounting for and disclosures of events (when is the date to be authorized).

- Favorable and unfavorable events that occur between the end of the reporting period and the date for it
to be authorized for issue.

● Date of authorization of the financial statements

- Date when the management authorizes the statements regardless of whether the authorization is final
and subject to further approval.
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TWO TYPES:

1. Adjusting events after

- Events that provide evidence of conditions that existed at the end of the reporting period.

2. Non-adjusting events after

- Disclosed if they are material
- Events that are indicative of conditions that arose after the reporting period.

PAS 24: RELATED PARTY DISCLOSURES

- Contains guidelines in identifying related party relationships, transactions, outstanding balances,

commitments, and necessary disclosures for these items.

- It is necessary to indicate the possibility that an entity’s financial position and performance might have
been affected by the existence of such a relationship.

RELATED PARTIES:
- If one party has the ability to affect the financial and operating decisions of the other party through
control, significant influence, and joint control.

➢ Key Management Personnel

- Persons having authority and responsibility for planning, directing, and controlling of the activities,
directly or indirectly.

DISCLOSURES

Relationship between parents and subsidiaries:

➢ A parent-subsidiary relationship is disclosed even if there have been no transactions happened.

➢ Name of the parent

Key Management Personnel Compensation:

➢ Short-term employee benefits

➢ Post-employment benefits
➢ Other long-term benefits
➢ Termination benefits
➢ Share-based payment

Related Party Transactions:

- It is a transfer of resources, services, or obligations.

- Disclosed in separate or individual financial statements
- WILL NOT INCLUDE in consolidated financial statements
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➢ Nature of the relationship

➢ Nature, terms and amount, and outstanding balances
➢ Doubtful debts recognized on the outstanding balances

Government-related entities:

➢ Name of the government and nature of the relationship

➢ Nature and amount of each individually significant transaction
➢ Other transactions that are collectively significant but are individually insignificant

PAS 37: PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS

- Prescribes the accounting and disclosure requirements for provisions, contingent liabilities, and
contingent assets to help users understand their nature, timing, and amount.
- DO NOT INCLUDE arising from executory contracts, unless they are onerous (cost exceeds benefits)

PROVISIONS

- A liability of uncertain timing or amount.

- Necessarily be estimated
- They are present in SFP separately from other types of liabilities.
- RECOGNIZED AND DISCLOSED

RECOGNITION CRITERIA:

a. Has present obligation (legal or constructive) resulting from past event

b. It is probable that there is an outflow of resources to settle the obligation.

c. The amount can be reliably estimated.

CONTINGENT LIABILITIES

- They are not recognized because they do not meet all of the recognition criteria.

- It is a possible obligation whose existence can be recognized by the occurrence or non-occurrence of

uncertain future events, not wholly within the control of the entity.
- DISCLOSED ONLY

➢ Not probable in the outflow

➢ Amount cannot be reliably estimated
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CONTINGENT ASSETS

- DISCLOSED ONLY, if the economic benefits is PROBABLE

- They are not recognized because they DO NOT MEET all of the asset recognition criteria:

➢ Resource controlled from past events

➢ Probable inflow
➢ Reliable estimation

EXPECTED VALUE:
- If the measured provision involves a large population of items.
- Weighting all possible outcomes by their associated probabilities

MIDPOINT OF THE RANGE:

- If there is a continuous range of possible outcomes.

BEST ESTIMATE:
- General rule (one-off event)