Conceptual Framework of Accounting Standards

PRELIM 2. Current Value - is the concept that assets and

Chapter 1 liabilities be measured at the current value at which
Definition of Accounting they could be sold or settled as of the current date
 Accounting is a service activity with the function to a. Fair Value - the prices that would be received to
provide quantitative information, primarily financial sell an asset, or paid to transfer a liability, in an
in nature, about economic entities, that is intended orderly transaction between market
to be useful in decision making – Accounting participants.
Standards Council b. Value in Use - present value of the cash flows
 Accounting is the art of recording, classifying, and that an entity expects to derive from the use of
summarizing in a significant manner in terms of an asset and from its ultimate disposal,
money, transactions and events which are in part of including transaction costs on disposal.
a financial character interpreting the results thereof c. Fulfilment Value - present value of the cash
– Committee on Accounting terminology of the flows that an entity expects to be obliged to
American Institute of CPAs transfer as it fulfils an obligation.
 Accounting is the process of identifying, measuring d. Current Cost - reflects the current amount that
and communicating economic information to would be paid to acquire an equivalent asset
permit informed judgement and decision by users. – and received to take on an equivalent liability
American Accounting Association
Communicating
 Accounting is about quantitative information - Preparing and distributing accounting reports to the
 It is financial in nature potential users
 Information should be useful in decision making - Reason why accounting is the universal language of
business
Accounting as a Process
Purpose of Accounting Parts of Communicating
a.) Identify analytical component 1. Recording – systematically maintaining a record of
b.) Measure technical component all economic activities, journalizing
c.) Communicate formal component 2. Classifying – grouping of similar transacting, posting
Identifying to ledger
- Recognition or non-recognition of business activities as 3. Summarizing – preparation of financial statements
“accountable” events
*an event is accountable when it has effects on assets, Users of Financial Statements
liability and equity* 1. External Decision-makers – those who lack direct
Economic Activities – subject matter of accounting, access to the information generated by the internal
referred as transactions operations and relies on the general purpose of
Types of Transactions: financial statements to make their investments
1. External Transactions- involving one entity and Ex: Investors, employees, lenders, suppliers, customers,
another entity governments and their agencies, and Public
a. Purchase of goods from supplier 2. Internal Decision Makers – managers of an entity
b. Loan from Bank responsible for managing efficiently and effectively
c. Sale of Goods or services and who have the authority to obtain economic
d. Payment of salaries information they need [Process of providing
e. Payment of taxes accounting info to internal decision makers is called
2. Internal Transactions – involving the entity only Management Accounting]
a. Production – resources turned into
products Accounting as an Information System
b. Casualty Loss – any sudden and Financial Statements – key products of accounting
unanticipated loss from fortuitous Decision Usefulness – essence of accounting
events
OBJECTIVE OF ACCOUNTING:
To provide quantitative information about a business
Measuring that is useful to statement users particularly to owners
- assigning of peso amounts to the accountable and creditors in making economic decisions.
economic transactions and/or events
Measurement Basis: ACCOUNTANTS’ PRIMARY TASK:
1. Historical Cost - information derived from the price Supply financial information so that the statement users
of the transaction or other event that gave rise to could make informed judgement and better decisions
the item being measured.
- Recording at its original cost when acquired by the The Accounting Profession:
company. Republic Act 9298 – law regulating it in the Philippines,
-most common measure of financial transactions Philippine Accountancy Act of 2004

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Conceptual Framework of Accounting Standards
Board of Accountancy – body authorized to make rules Accounting Standards
affecting the practice of accountancy, prepares and - Creates common understanding between preparers
grades CPAL and users
Republic Act No. 10912 – law strengthening the - Necessary to ensure comparability and uniformity
continuing professional development program for all of financial statements
regulated professions
GAAP in the Philippines
Limitations of the Practice of Public Accountancy: - Formalized initially through the creation of
Certificate of Accreditation – issued to CPAs by BOA Accounting Standards Council (ASC)
approved by the PRC when CPA has acquired a - Financial Reporting Standards Council (FRSC)
minimum of three years of meaningful experience replaced the ASC
Professional Regulations Commission - issues the
certificate of registration to practice in public Financial Reporting Standards Council (FRSC)
accountancy which is valid for three years - Accounting standard setting body created by the
PRC and recommended by the BOA
Practice of CPAs: - Main function is to establish and improve
a. Public Accounting – render independent and accounting standards that will be generally
expert financial services to the public accepted in the Philippines
i. Auditing – primary service offered, - Accounting standard promulgated is the highest
examination of financial statement as to hierarchy of GAAP in the country
the fairness with which it is prepared - Approve statement of FRSC are Philippine
ii. Taxation – preparation of annual Accounting Standards (PAS) and Philippine
income tax returns and determination Financial Reporting Standards (PFRS)
of tax consequences of certain - Composed of 15 members (1 chairman, 14
proposed business endeavours representative)
iii. Management Advisory Services – - Adopted all the IAS AND IFRS
services to clients on matters of
accounting finance, business policies, Philippine Interpretations Committee
organization procedures, product costs - Formed by the FRSC in August 2006
and distribution - Replaced the Interpretations Committee formed by
b. Private Accounting – assists management in ASC
planning and controlling entity’s operations , - Prepares interpretations of PFRS for approval by the
controller is the highest accounting officer of an FRSC
entity - Provides timely guidance on financial reporting
c. Government Accounting – analyses, classifies issues not specifically addressed in PFRS
summarizes and communicates all transaction - Intended to give authoritative guidance
involving the receipt and disposition of - International Financial Reporting Interpretations
government funds and property, focus is the Committee (IFRIC) is its counterpart in the UK
custody and administration of public funds [IFRIC replaced the SIC]
International Accounting Standards Committee
Continuing Professional Development: - Created in 1973
CPD Unit – credit hours required for the renewal of CPA - Accounting standards issued by IASC are named as
License, 120 CPD Units in three years International Accounting Standards (IAS)
A CPA shall permanently be exempted from the CPD - IASC formed a committee known as the Standing
requirement at age 65 Interpretation Committee (SIC) which was
responsible for providing interpretations and
Financial Accounting – recording of business guidance to the accounting issuances.
transactions ad the eventual preparation of financial - Replaced by the International Accounting
statements, for internal and external users Standards Board (IASB)
Managerial Accounting – accumulation and preparation
of financial reports for internal users only, developing Main Objective:
accounting within the entity To achieve uniformity in the accounting principles
which are used by business and other organizations
Generally Accepted Accounting Principles (GAAP) for financial reporting around the world
- rules, procedure and practices for presentation of Other objectives:
financial statements 1. To formulate and publish in the public interest
- Establishing GAAP is a political process accounting standards to be observed in the
presentation of financial statements and to
PURPOSE OF ACCOUNTING STANDARDS: promote worldwide acceptance and observance
To identify proper accounting practices for the 2. To work generally for the improvement and
preparation and presentation of financial statements harmonization of regulations, accounting

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Conceptual Framework of Accounting Standards
standards and procedures relating to the 1. Primary Users – whom the general purpose of
presentation of Financial Statements financial reporting are directed to
o Have the most critical need for the
International Accounting Standards Board (IASB) information
- Replaced the IASC o Provides resources of the entity
- Published International Financial Reporting Ex: existing and potential investors, lenders and other
Standards (IFRS) creditors
- Adopted standards issued by IASC 2. Other Users – fins the general purpose of
financial reports useful but the reports are not
Chapter 2 directed to them primarily
Elements that Guide the Preparation of Financial
Statements: OBJECTIVE OF FINANCIAL REPORTING (the ‘why’ of
1. Conceptual Framework accounting)
2. International Financial Reporting Standards To provide financial information about the reporting
(IFRS) / Philippine Financial Reporting Standards entity that is useful to existing and potential investors,
(PFRS) lenders and other creditors in making decision about
Conceptual Framework for Financial Reporting providing resources to the entity
o general guideline in the preparation and
presentation of financial statements in the SPECIFIC OBJECTIVES OF FINANCIAL REPORTING
absence of specific PFRS o Provide information that is useful in decision
o summary of the terms and concepts that making about providing resources to the entity
underlie the preparation and presentation of FS o Provide info useful in assessing the cash flow
for external users prospects of entity
o concepts for general purpose of accounting o Provide info about entity’s resources, claims and
o overall theoretical foundation changes in resources and claims
o It does not carry an inherent power to overrule
or be superior to the PFRSs/IFRSs. Financial Reporting – Provision of financial information
about an entity to external and primary users <- target
Provided Standard from Conceptual Framework users
o contributes to transparency Also includes the Following:
o Strengthen accountability  Financial highlights
o Contribute to Economic Efficiency  Summary of important financial figure
 Analysis of financial statements
Purpose of Conceptual Framework  Significant ratios
o assist FRSC/IASB in developing future PFRS/IFRS  Description of major products
and reviewing existing PFRS/IFRS;  Listing of corporate officers and directors
o help FRSC/IASB in promoting harmonization of Annual Financial Statements – principal way of
regulations, accounting standards, and providing information to external users
procedures relating to the presentation of
financial statements by providing a basis for Limitations of Financial Reporting
reducing a number of alternative accounting 1. Cannot provide all of the information needed
treatments permitted by FRSC/IASB; 2. Not designed to how the value of the entity,
o support the national standard setting bodies in only the estimate
the development of national standards; 3. Intended to provide common information
o aid preparers of financial statements in applying 4. Based on estimate and judgement rather than
PFRS/IFRS and dealing with topics that have yet exact depiction
to form the subject of PFRS/IFRS;
Management Stewardship
Purpose of Revised Conceptual Framework o Information about how efficient and effective
o assist the IASB to develop IFRS Standards based management has discharged it responsibilities to
on consistent concepts use the entity’s economic resources
o Assist preparers of FS to develop consistent
accounting policies when no standard applies to Investors – decision depends on the returns expected
a particular transaction or event Creditors – decision depends on the principal and
o Assist preparers of FS to develop accounting interest payment
policies when a standard allows a choice of an
accounting policy Financial Position – claims and resources of an entity
o Assist all parties to understand and interprets ( ALE)
Financial Performance aka Results of Operations –
the IFRS
level of income earned by an entity
Users of Financial Information
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Conceptual Framework of Accounting Standards
Liquidity – availability of cash in the near future  Measurement Uncertainty – when monetary
Solvency – availability of cash over a long term amount in financial reports cannot be observed
directly and must instead be estimated
Accrual Accounting – depicts the effects of transactions  Substance over form – economic substance of
and other event and circumstances even if the cash transactions are emphasized when economic
receipt or payment will occur on a different period substance differ from legal form

Accrual Basis – effects of transactions are recorded Enhancing Qualitative Characteristics (presentation or
when they occur form)
1. Comparability – ability to bring together for the
Chapter 3 purpose of noting points and likeness and
Qualitative Characteristics – qualities or attributes that difference, enables users to identify and
make financial information useful to the users understand similarities and differences
Uniform application of accounting method
Fundament Qualitative Characteristics (content or between and across entities in the same
substance) industry
1. Relevance - capacity of information to a. Horizontal Comparability or
influence decision Intracomparability – within an entity
Ingredients of Relevance b. Dimensional Comparability or
a. Predictive Value – helps increase the Intercomparability – across entities
likelihood of accurately predicting  Principle of Consistency – use of same method for
outcome of events the same item, either from period to period within
b. Confirmatory Value – provides feedback an entity or in a single period across entities
about previous evaluations Uniform application of accounting method from
Factors Affecting Relevance period to period
a. Nature 2. Understandability – information must be
b. Materiality (Doctrine of Convenience) - comprehensible or intelligible if it is to be useful
quantitative threshold , sub quality of Readily understandable to users
relevance Characteristics of Understandability: Clear and
o Depends on the relative size of the item Concise
o Dependent on good judgement, 3. Verifiability – different knowledgeable and
professional expertise and common independent observers could reach a consensus
sense that a particular depiction is a faithful
o If its omission r misstatement could representation, supported by evidence
affect economic decisions Types of Verification
o Factors of Materiality : size and nature a. Direct – through direct observation
of item b. Indirect – checking inputs to a model,
2. Faithful Representation – financial reports formula or other technique,
match economic phenomena in words and recalculating the inputs using the same
numbers, effects of transactions are properly methodology
accounted for 4. Timeliness – available or communicated early
Ingredients of Relevance enough when a decision is to be made
a. Completeness – presented in a way that
facilitates understanding and avoids Constraints
erroneous implication , result of principal of Cost Constraint
full disclosure  Consideration of cost incurred in generating
 Standard of Adequate disclosure – disclosure of any financial information against the benefit to be
financial facts significant enough to influence obtained from having the information
judgement of informed users  benefits of reporting financial information should
b. Neutrality – Without biased in the justify and be greater than the costs imposed on
preparation of financial statements, to be supplying it
fair Material Constraint
 Prudence – is the exercise of care and  threshold used to determine whether business
caution when dealing with uncertainties, transactions are important to the financial
supports neutrality results of a business
 Conservatism - when alternatives exists the  is material enough to exceed the constraint
alternative with the least effect on equity threshold, then it is recorded in the financial
should be chosen records, and therefore appears in the financial
c. Free from Error – there are no errors or statements
omissions the description of the phenomenon
or transaction

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Conceptual Framework of Accounting Standards
Chapter 4 Control – an entity has control if it can direct the
Types of Financial Statements use of the asset and obtain the economic benefit
1. Consolidated Financial Statements – prepared that flow from it, also include ability to prevent
when reporting entity compromise both parent others from using asset or obtaining the economic
and its subsidiaries benefits
2. Unconsolidated Financial Statements – Essential characteristics of asset:
prepared when the reporting entity is the a. The asset is a present economic resource.
parent alone b. The economic resource is a right that has
3. Combined Financial Statements – when the the potential to produce economic benefits.
reporting entity compromises two or more c. The economic resource is controlled by the
entity that are not linked by a parent and entity as a result of past events.
subsidiary relationship 2. Liability - present obligation of an entity to transfer
an economic resource as a result of past events
Reporting Entity – required to prepare financial Obligation – is a duty or responsibility that an entity
statements, can be a single entity a portion of an entity has no practical ability to avoid, can be legal or
or more than one entity, not necessarily a legal entity constructive
Reporting Period – period when financial statements Essential characteristics of asset:
are prepared a. The entity has an obligation.
b. The obligation is to transfer an economic
Accounting Assumptions (Postulates) – basic notions or resource.
fundamental premises, serve as the foundation or c. The obligation is a present obligation that
bedrock of accounting in order to avoid exists as a result of past event.
misunderstanding 3. Equity – residual interest in the assets of the entity
Going Concern is the only mentioned after deducting all the liabilities
assumption in the Conceptual Framework Elements of Financial Performance
Going Concern (Continuity Assumption) – in absence of 1. Income – increases in assets or decreases in liability
evidence to contrary the accounting entity is viewed as that result in increase of equity other than those
continuing in operation indefinitely relating to equity contributions from equity holders
o Foundation of cost principle o Revenue – from normal course of operations,
Accounting Entity – entity is separate from the owners, the essence of revenue is regularity
manager and employees who constitute the entity o Gains – other items that meet the definition of
Time Period – indefinite life of an entity is subdivided income and do not arise in the course of
into accounting periods which are usually of equal ordinary activities
length for financial reporting 2. Expense – decrease in asset or increase in liability
 Fiscal year- any 12 consecutive months that result to a decrease in equity other than those
 Natural Business year- 12 months cycle that relating to distributions of equity holders
ends at lowest level of annual cycle o Expenses - arise from ordinary/ regular
 Interim Year- period less than a year activities
 Calendar Year- 12 month period ending on Dec o Losses - do not arise in the course of the
31 ordinary regular activities
Monetary Unit – has two aspects: quantifiability and
stability of peso Chapter 6
 Quantifiability is the recording of account in Recognition – process of capturing for inclusion in the
a unit of measure which is the Philippine financial statements an item that meets the definition
peso of one of the elements
 Stability of Peso is the assumption that  Recognized at carrying amount
purchasing power of peso is stable and Derecognition – removal of all or part of a recognized
constant asset or liability from statement of financial position

Chapter 5 Types of Recognition

Elements of the Financial Statements a.) Point of sale income recognition – income
– Quantitative information reported in the statement of recognized when earned
financial position and performance o Legal title of the goods passes to the
– Building blocks of financial statements buyer at the point of sale
o Income may be recognized at the point
Elements of Statement of Financial Position of production, during production and at
1. Asset – present economic resource controlled by the point of collection
the entity as a result of past events b.) Expense Recognition – expenses are recognized
Economic Resource – is a right that has the potential when incurred, application of the matching
to produce economic benefits principle
Three Applications of Matching Principle:

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Conceptual Framework of Accounting Standards
1. Cause and Effect Association (strict
matching concept) – expense is recognized
when revenues is recognized 2. Physical Capital – quantitative measure of the
2. Systematic and Rational Allocation – cost physical productive capacity to produce goods
are expensed by allocation over the period and services
benefited o based on current cost
3. Immediate Recognition – costs are
expensed outright because of uncertainty Assume in the previous illustration that net assets of
of future economic benefits 500 on Jan 1 had a current cost of 800 by reason of
inflation
Chapter 7
Presentation and disclosure – effective tools of Computation of Net Income
communications Net Assets – Dec 31 (2500-1300) 1300
Add: Dividends Paid 300
Statement of financial Performance – collective term Total 1600
Less: Net Assets at Current Cost, 800
for profit or loss statement and statement of other
Jan 1
comprehensive income
Additional Investment 400 (1200)
Net Income 400
Statement of Profit and Loss – primary source of
information about entity’s financial performance
Chapter 8
General purpose financial statement are directed to
Aggregation – adding together of assets, liabilities,
common users
equities, income and expenses that have similar
characteristics and are included in the same
OBJECTIVE OF FINANCIAL STATEMENTS
classification
To provide information about the financial position,
o Makes information more useful but may conceal
financial performance and cash flows of an entity that is
some detail
useful to a wide ranges of users in making economic
decisions
Ways to Determine Financial Performance
1. Transaction Approach - traditional preparation
Frequency of Reporting: at least annually
of an income statement
When an entity’s reporting period changes it shall
2. Capital Maintenance Approach (well-offness) –
disclose:
net income incurs only after the capital used
a. the period covered by the financial
from the beginning of the period is maintained
statements
b. reason for using a longer or shorter period
Return on Capital - amount in excess of their original
c. fact that amounts presented in the financial
investment
statements are not entirely comparable
Return of Capital – an erosion of the capital invested in
Statement of financial Position
the entity
o a formal statement showing the three elements of
financial positions
Concepts of Capital Maintenance
Classification of an Asset
1. Financial Capital (Net assets approach) –
a. Current Asset
monetary amount of the net assets contributed
b. Non-Current Asset
by shareholders and the amount increase in the
Classification of Liability
net assets resulting from earnings retained by
a. Current Liability
the entity
b. Non-Current Liability
o Based on historical cost
Jan 1 Dec 31 Refinance – roll over an obligation for at least twelve
Total Assets 1500 2500
months after the reporting period
Total Liabilities 1000 1200
With discretion – Non-current liabilities
Additional Investments of the 400
Year Without discretion – Current Liabilities
Dividends Paid 300 Covenants - deal with financial promises. A company
enters into a covenant as part of an agreement with an
Computation of Net Income investor or lenders. It agrees that its financial ratios will
Net Assets – Dec 31 (2500-1300) 1300 remain at specified levels
Add: Dividends Paid 300 o If broken liability becomes payable on demand
Total 1600
Less: Net Assets - Jan 1 (1500- Equity = Net Assets
1000) 500 Terms used in Reporting the equity of an entity:
Additional Investments 400 (900) a. Owner’s Equity
Net Income 700 b. Partners’ Equity
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Conceptual Framework of Accounting Standards
c. Stockholders’ Equity or Shareholders’ Equity May be transferred within equity or retained
earnings
Notes to Financial Statements – provides narrative Presentation of Comprehensive income
description or disaggregation of items in FS and 1. Two Statements
information about items that do not qualify for a. An income statement
recognition b. A statement of comprehensive income,
beginning with profit or loss as shown
Forms of Statement of Financial Position in the income statement plus or minus
a. Report Form – sets forth the three major the components of OCI
sections (ALE) 2. Single Statement
b. Account Form – Assets are shown on the left Combined statement showing the components
side and the liabilities and equity on the right of profits or loss and components of OCI in a
side single statement
Sources of Income
Chapter 9 a. Sales of Merchandise to Customers - PoL
Income Statement - formal statement showing the b. Rendering of Services - PoL
financial performance of an entity for a given period of c. Use of Entity Resources - PoL
time d. Disposal of Resources other than Product - OCI
Level of Income Earned (results of operations) - how Components of Expense
financial performance is measured a. Cost of Goods sold
Comprehensive Income – change in equity during a b. Distribution costs or selling expense
period resulting from transactions and other events, c. Administrative Cost
other than changes resulting from transactions with d. Other Expenses
owners in their capacity as owners e. Income Tax Expense
Inclusions of Comprehensive Income:
o Components of Profit and Loss Classifications of Expenses
o Components of other Comprehensive o Distribution costs – directly related to selling
income Salesmen’s Salaries
Profit or Loss Salesmen’s Commissions
- Total income less expenses excluding components Travelling and Marketing Expenses
of other comprehensive income Advertising and Publicity
Other Comprehensive Income Freight Out
- Items of income and expenses including Depreciation of Delivery equipment and Store
reclassification adjustments that are not recognized Equipment
in PFRS o Administrative Expenses – cost of
Inclusions administering the business
 Unrealized gain or loss on equity investment Doubtful Accounts
 Unrealized gain or loss on debt investment Office Salaries
 Gains or loss from transaction of the financial Expense of General Executives
statement of a foreign operation Expense of General Accounting and credit
 Revaluation surplus during the year department
 Unrealized gain or loss derived from contracts Office supplies used
designated as cash flow hedge Certain Taxes
 Remeasurements of defined benefit plan Contribution
 Change in the fair value attributable to credit risk of Professional Fees
a financial liability Depreciation of Building and Office Equipment
OCI that will be reclassified to Profit or Loss Amortization of Intangible Assets
 Unrealized gain or loss on debt investment o Other Expenses – expenses which are not
 Gains or loss from transaction of the financial directly related to the selling and admin
statement of a foreign operation functions
 Unrealized gain or loss derived from contracts Loss on Sale of Trading Investments
designated as cash flow hedge Loss on Disposal of PPE
OCI that will be reclassified to Retained Earnings Loss on Sale of Non-current Investment
 Unrealized gain or loss on equity investment Casualty Loss (fortuitous events)
Upon disposal of investment
 Revaluation surplus during the year Disclosed on the face of the Income Statement and
 Remeasurements of defined benefit plan Statement of Comprehensive Income
Permanently excluded from profit and loss a. Profit or Loss for the period attributable to
statement noncontrolling interest and owners of the
 Change in the fair value attributable to credit risk of parent
a financial liability
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Conceptual Framework of Accounting Standards
b. Total Comprehensive income for the period Acquired on Installment Basis = Cash Price
attributable to noncontrolling interest and Equivalent
owners of the parents  Cost of Property Plant and Equipment
Acquired through Issuance of Share Capital =
Forms of Income Statement Fair Value of Property Received, Fair Value
1. Functional (Cost of Goods Sold Method) – of Share Capital, Par Value/ Stated Value of
classifies expense according to their function as Share Capital
 Cost of Property Plant and Equipment
part of COGS, distribution costs, administrative
Acquired through Issuance of Bonds Payable
costs and other expenses
= Fair Value of Bonds Payable, Fair Value of
2. Natural (Nature of Expense Method) – Asset Received, Fare amount of Bonds
aggregated according to their nature, expenses Payable
with the same nature are grouped and  Cost of Property Plant and Equipment
presented as one item Acquired through Exchange for a
Nonmonetary Asset = Fair Value and Any
Comprehensive Income - includes net income or loss Cash Payment
for the period plus or minus the components of other (Exchange is Recognized at carrying amount
comprehensive income if it lacks Commercial Substance)

Statement of Retained Earnings – shows the changes Measurement after Recognition:

affecting directly the retained earnings of an entity and  Cost Model
relates the income statement to the statement of Cost XX
financial position Accumulated Depreciation (XX)
Statement of Changes in Equity – shows the Accumulated Impairment Loss (XX)
movements in the elements or components of the New Measurement XX
shareholders’ equity
Statement of Cash Flows – summarizes the operating  Revaluation Model
investing and financing activities of an entity Fair Value @ Date of Revaluation XX
Accumulated Depreciation (XX)
Accumulated Impairment Loss (XX)
MIDTERM = WALA KO KABALO ANO GN TUN AN TA New Measurement XX
SNG MIDTERM TULOG KO GURO

Cash Discount – Reduction of Costs

ENDTERM Commercial Substance – a new motion and is defined
Property Plant and Equipment (PPE) as the event or transaction causing the cash flows of the
- Tangible assets that are held for use in production entity to change significantly by reason of the exchange
or supply of good or services, for rental to others, or Cost – is the amount of cash or cash equivalent paid and
for administrative purposes, and are expected to be the fair value of the other consideration given to
used for more than one period acquire an asset at the time of acquisition or
construction
Characteristics of PPE
a. It is a tangible asset Characteristics of Cost
b. Used in business a. Purchase price
c. Useful for more than one year o Import duties
PPEs are Recognized as an Asset when o Non-refundable purchase taxes
a. Future economic benefits related with it is o Less: trade discounts and rebates
probable b. Direct Cost of bringing the asset to the location
b. Its cost can be measured reliably and condition
c. Estimate of Cost of Dismantling and Removing
Property, Plant and Equipment that is recognized as an the item and restoring the site on which it is
asset is measure at COST located (Installation cost)

Direct Attributable Costs:

 Cost of Property Plant and Equipment =
 Employee Benefit arising directly from the
Cash Price Equivalent at Recognition Date
acquisition and/or construction of PPE
 Cost of Property Plant and Equipment  Cost of Site Preparation
Acquired on Cash Basis = Cash Paid, Directly  Initial Delivery and Handling Cost
Attributable Cost  Installation and Assembly Cost
 Cost of Property Plant and Equipment  Professional Fee
Acquired on Account = Invoice Price Minus  Cost of Testing Asset
Discount
 Cost of Property Plant and Equipment Costs that are Expensed Right Away:
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Conceptual Framework of Accounting Standards
 Cost of Opening a New Facility  Residual Value – estimated net amount obtainable
 Cost of Introducing a New Product or Service when asset is at the end of its useful life
o Cost of Advertising and Promoting  Useful Life – period over which an asset is expected
 Cost of Conducting Business in a New Location/ to be available for use of an entity
New Class of Customer o Expected Usage of Asset
o Cost of Staff Training o Expected Physical Wear and Tear
 Administration and Other General Overhead o Technical and Commercial Absolescence
Cost o Legal Limits
 Cost Incurred when an Item is not working as it
should be yet Depreciation Method – reflects the pattern in which
 Initial Operating Loss the future economic benefits from the asset are
 Cost of Relocating or Reorganizing part or all of expected to be consumed by the entity
Entity’s Organization - Reviewed at least every year-end
- Can be Changed when there is a significant change
Construction - cost of construction is determined using in the expected pattern
the same principles as for an acquired asset
It Includes: Types of Depreciation Method
 Direct Cost of Materials 1. Straight Line Method
 Direct Cost of Labor 2. Production Method
 Indirect Cost and Incremental Overhead 3. Diminishing Balance or Accelerated Method
Identifiable to the construction o Sum of Years’ Digit Method
Derecognition – Cost of the PPE together with the o Double Declining Method
related accumulated depreciation shall be removed
from the statement of financial position Straight Line Method
 Carrying amount of an item in the PPE shall be  Depreciation is a function of time not of usage
derecognize on disposal or when no future  Allocation of depreciable amount equally over
economic benefits is expected the number of years of useful life
 Gain or Loss from the disposal is recognize in  Constant charge over the useful life of the asset
the statement of profit or loss  Adopted when principal cause of depreciation is
 Gain = other income passage of time
 Gain or loss = difference between the net
disposal proceeds and the carrying amount of Production Method
the item  Depreciation is a function of use not of time
 Useful life of an asset is considered in terms of
Fully Depreciated Property = When Carrying Amount is output it produces or the number of hours it
equal to 0 or its Residual Value works
Entities are encouraged but not required to disclose fully  Depreciation is related to the estimated
depreciated properties production capability of the asset and is
expressed in a rate per unit of output or per
hour of use
Purchase Cost XX  Adopted when principal cause of depreciation is
Accumulated Depreciation (XX) usage
Accumulated Impairment (XX)
Carrying Amount XX Diminishing Balance or Accelerated Method
 Provides higher depreciation in earlier years
and lower depreciation in later years
NOTE: RESIDUAL VALUE IS THE SAME AS SALVAGE  Results in decreasing depreciation charge over
VALUE the useful life
 “new assets are generally capable of producing
Depreciation – systematic allocation of the depreciable more revenue in the earlier years than in the
amount of an asset over the useful life later years”
- A matter of cost allocation in recognition of the
exhaustion of the useful life of an item of PPE Government Grant
- It is an Expense, may be part of cost of o Assistance by government in the form of transfer of
manufacturing or Operating Expense resources to an entity in return for part or future
- Begins when asset is available for use, ceases when compliance with certain conditions relating to the
asset is derecognized operating activities of the entity
o Recognized when there is reasonable assurance
Factors of Depreciation that the company will
 Depreciable Amount – cost of an asset or the a. comply with the conditions attaching to the
substituted cost less the residual value grant
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Conceptual Framework of Accounting Standards
b. grant will be received reports within 45 days after end of the interim
period
Classifications of Grants  SEC requires entities covered by Rules on
 Grant related to an Asset Commercial Paper and Financing Act to file
 Grant related to Income quarterly interim financial reports within 45
days after end of the interim period
The grant is taken to income over one or more periods
in which the related cost is incurred Components of Interim Financial Reports:
o Condensed Statement of Financial Position
Presentation of Government Grant o Condensed Statement of Comprehensive
1. Grant Related to an Asset: Income
a. Setting grant as deferred income o Condensed Statement of Changes in Equity
b. Deducting the grant in arriving at the o Condensed statement of Cash Flows
carrying amount of the asset
2. Grant Related to Income: NOTE: Condensed financial statements are a summary
a. In the income statement separately or form of a company's earnings statement, balance sheet,
under the general heading of “other and cash flow statement. These statements are created
income” to provide a quick overview of the company's financial
b. Grant is deducted from the related status
expense
Items of profit or loss can be presented in a separate
Government Assistance – action by government condensed income statement
designed to provide an economic benefit specific to an
entity or range of entities under certain criteria Disclosure in Compliance with PFRS:
- no value can reasonably be placed upon it  If entity’s interim financial reporting is in
compliance with PFRS such fact must be
Government Assistance DOES NOT include the disclosed
following:  Must comply with all requirements of PFRS to
 improvement to general transportation and say it Complies with the PFRS
communication network
 imposition of trading constraints on Selected Explanatory Notes – designed to provide
competitors explanation of significant events and transactions
 improved facilities arising since the last annual FS

Disclosure about Government Grant: Disclosure in Condensed Financial Statements:

 accounting policy and method of presentation  Write-down of inventories and reversal of
adopted in FS write-downs
 Nature and extent of government grant and  Recognition of loss from impairment of PPE and
indication of other forms of government its reversal
assistance which company has benefitted from  Reversal of any provision of restructuring
 Unfulfilled conditions and other contingencies  Acquisition and disposal of items in PPE
attaching to gov’t assistance that was  Commitments for the Purchase of PPE
recognized  Litigation settlements
 Connections of prior period errors in previously
It is not required to disclose the name of the gov’t reported financial data
agency which gave the grant along with the date of  Changes in the economic circumstances that
sanction. affect fair value of financial assets and liabilities
 Any debt to defraud or any breach of a debt
Interim Financial Reporting covenant that has not been corrected
 Preparation and presentation of financial subsequently
statements for a period less than one year  Related party transactions
 Can be presented monthly, quarterly or  Changes in classifications of financial assets
semiannually (quarterly are most common)  Contingent liabilities and contingents assets
 Publicly Traded Entities are encouraged to
provided interim financial reports at least Impairment of Assets
semiannually and such reports are to be made  a fall in the market value of an asset so that the
available not later than 60 days after the end of recoverable amount is now less than the
the interim period carrying amount in the statement of financial
 SEC and Ph Stock Exchange require entities position
covered by reportorial requirements of Revised Carrying Amount- amount at which an asset is
Securities Act to file quarterly interim financial recognized in the financial statement after deducting
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Conceptual Framework of Accounting Standards
accumulated depreciation and accumulated impairment Cost of Disposal – incremental cost directly attributable
loss to the disposal of an asset excluding finance cost and
income taxes
Amount in FS XX
Accumulated Depreciation (XX) Value in Use – present value or discounted value of
Accumulated Impairment (XX) future net cash flows expected to be derived from an
Carrying Amount XX asset

NOTE: Cash flows are pretax cash flows and pretax

An asset shall not be carried at above the recoverable discount rate is applied in determining present value
amount
If carrying amount is higher than recoverable amount Calculation of Value in Use
the asset is judged to have suffered an impairment loss  Cash flow projections shall be based on
reasonable and supportable assumptions
Accounting for Impairment, Three main Accounting  Based on the most recent budgets on financial
Issues forecast, usually max 5 years
o Indication of Possible Impairment  Discount rate used is current pretax rate
o Measurement of the recoverable amount
o Recognition of Impairment Loss Compositions of Estimates of Future Cash Flows
 Projection of cash inflows related to continuing
Indication for Impairment  Projection of cash outflows necessary for cash
- Entity shall assess at each reporting date whether inflows
any indication that an asset may be impaired exists  Net cash flows received or paid on disposal of
- If it exists, entity shall estimate recoverable amount asset
- Test will be done to an intangible asset with
indefinite useful life or intangible asset not yet Recognition of Impairment Loss
available for impairment annually
- Causes of impairment may be external or internal
External Causes: Amount in FS XX
a. Decrease in market value due to time or a new Accumulated Depreciation (XX)
competitor Carrying Amount XX
b. Change in technological, legal, or economic market
c. Increase in Interest rate of return on investment Carrying Amount XX
which affects the discount rate Recoverable Amount (XX)
d. Carrying amount is more fair value of net assets Impairment Loss XX

Internal Sources
a. Evidence of obsolescence of an asset Cash Generating Unit - smallest Identifiable group of
b. Change in the manner which an asset is used with assets that generate cash inflows, tested for impairment
adverse effect on the entity at least annually including goodwill
c. Evidence that economic performance of an asset
will be worse than expected Goodwill- does not generate cash flows independently
from other assets or group of assets, recoverable
Measurement of Recoverable Amount amount of goodwill cannot be determined
- Recoverable amount of a goodwill is determined for
Fair Value XX the cash generating unit to which it belongs
Cost of Disposal or Value in Use (XX)
Recoverable Amount XX Intangible Assets
 Identifiable nonmonetary asset without physical
substance
NOTE: Whichever of the two (Cost of Disposal or Value
in Use) is Higher will be the one used Criteria of Intangible Asset:
 Identifiability – if it can be sold, transferred,
Fair Value less Cost of Disposal = Exit Price or Selling licensed or rented separately (separable, arises
Price of an Asset less cost of Disposal from contractual or legal rights)
 Control – power of an entity to have access over
Fair Value – Price to be r3eceived to sell an asset in an the benefits of an asset and prevent others to
orderly transaction between market participants at enjoy such benefits
measurement date  Future Economic Benefit- may be revenue of
sale or cost savings

Recognition of Intangible Assets:

11
Conceptual Framework of Accounting Standards
 Future economic benefits is probable Amortization – is the systematic allocation of the
 Cost can be measured reliably amortizable amount of an intangible asset over the
useful life (Amortization period, useful life)
Intangible assets are measured initially at cost - Begins when asset is available for use
- Amortized on a systematic basis over the useful life
Cost of Intangible Assets Includes: of an intangible asset
o Purchase Price - Ceased when intangible asset is derecognized
o Import Duties and nonrefundable purchase tax - Useful life may be finite or indefinite
o Directly Attributable cost of preparing the asset - If finite: useful life is expressed in terms of years or
 Employee benefit number of units produced
 Professional Fee - Indefinite: when there is no foreseeable limit to the
 Cost of Testing period over which an asset is expected to generate
 Cost of Materials and Services net cash flows
 Fee to register a legal right
 Amortization Patent Amortization Method – pattern in which the future
economic benefits from assets are expected to be
Internally generated goodwill shall not be recognized as consumed by the entity
an asset
If pattern cannot be deemed reliable the straight-line
Expensed: method of amortization is used
Start-up Costs
Training Costs Residual Value of an asset shall be presumed to be zero
Advertising and Promotional Costs except:
Business Relocation and Reorganization Costs a. When a 3rd party is committed on buying the
asset at the end of its life
General Rule: Subsequent Expenditure on an intangible b. When there is an active market and its residual
asset shall be recognized as expense value can be measure reliably
Exception:
 When future economic benefits is probable Derecognize Intangible Asset:
 Cost can be measured reliably o On disposal of Asset
o When no future economic benefits are
Subsequent Measurement of Intangible Assets: expected
 Cost Model
Cost XX Difference between net disposal proceeds and carrying
Accumulated Depreciation (XX) amount is either the gain or loss from derecognition
Accumulated Impairment Loss (XX)
New Measurement XX To assess whether an internally generated intangible
asset meets the criteria for recognition it is classified
 Revaluation Model into research phase and development phase
Fair Value @ Date of Revaluation XX Research Phase – to discover new knowledge useful for
Accumulated Depreciation (XX) product development
Accumulated Impairment Loss (XX) Development Phase – application of research findings
New Measurement XX to develop new product
If phase cannot be determined it is assumed to be it is
treated as an expenditure incurred during research
Note: Intangible asset can only be carried at revalued phase
amount if there is an active market for the asset
Capitalizable Expenditures - research and
Amortization of Intangible Assets developmental cost which have alternative future use.
a. Intangible Assets with Limited or Finite Life are Investment Property – property held by an owner or by
amortized over their useful life the lessee under a finance lease to earn rentals or for
Tested for impairment when there is an long-term capital appreciation (LAND and BUILDING)
indication of impairment at the end of reporting or when its use is undetermined yet
period - Building owned and leased out
- Building Vacant but held to be leased out
b. Intangible Assets with Indefinite Life are not - Building constructed for future use as an
amortized but tested at least annually for Investment Property
impairment and whenever there is an indication - Not held for use in production or supply of goods
of impairment and services (These are known as Owner-occupied
property)
- Not held for sale

12
Conceptual Framework of Accounting Standards
- Not restated because they are automatically
Investment Properties are measured initially at cost reported in terms of current purchasing power
Nonmonetary Items - items which cannot be classified
Cost include: as monetary
 Purchase Price - Their peso amount reported in financial statements
 Directly Attributable Expenditure differ from the amounts that are ultimately
o Professional Fee realizable or payable
o Property Transfer Taxes - Restated
o Other Transactions Costs Purchasing Power – goods and services that money can
buy
Subsequent Measurement of Investment Property: General Price Index – index number used for
 Cost Model restatement constructed by the Government
Cost XX
Accumulated Depreciation (XX) Change Effect Term
Accumulated Impairment Loss (XX) Increase in
Purchasing Power
New Measurement XX general Price Inflation
Decreased
Index
 Fair Value Model - Investment Property is Decrease in
Purchasing Power
carried at fair value, any changes over the general Price Deflation
Increased
Index
period is recorded as gain or loss

Note: If an office is leased on a furnished basis its fair Restatement Formula

value includes the fair value of the furniture
Index Number at end
Residual Value of Investment Property is of Reporting Period
assumed to be X Historical Cost
Index Number on
Derecognize Investment Property: Date of Acquisition
o On disposal
o Investment property is permanently withdrawn
o When no future economic benefits are
Noncurrent Assets Held for Sale
expected
- Asset that does not meet the definition of a current
asset
Disclosures Related to Investment Property
o Available for immediate sale in present
 If entity uses cost model or Fair value model in
condition
measuring it
o Sale must be highly probable
 Amount of rental income and related expense
 Restrictions of Investment Property through Disposal Group – group of assets to be disposed of by
rental or sale proceeds sale in a single transaction
 Contractual obligations to Purchase or construct - Carrying amount can be recovered through sale
Investment Property rather than continuing use

Hyperinflation Noncurrent asset held for sale must be measured at

- It is a matter of judgment the lower carrying amount or fair value less cost of
- Indicated by characteristics of the economic disposal
environment of a country
Note: Noncurrent assets held for sale are not
Constant Peso Accounting – restatement of depreciated
conventional or historical financial statements in terms If fair value less cost of disposal is lower than
of the current purchasing power of the peso through carrying amount the writedown is treated as an
the use of index number impairment loss
- Objective: report elements of financial statements
in in terms of pesos that have the same purchasing Abandoned noncurrent assets are not classified as
power noncurrent assets or disposal group
AKA Purchasing power or Price Level Accounting
Nominal Peso Accounting - Preparation of financial Operating Segment
statements based on historical cost  Component of an entity
Monetary Items – money held and assets and liabilities o May earn revenue and incur expenses
to be received or paid in a fixed determinable amount o Results are regularly reviewed by the
of money entity’s chief operating decision maker
- Right to receive or obligation to deliver a fixed o Discrete financial information is
amount of money available

13
Conceptual Framework of Accounting Standards
Segment Reporting o About Geographical Area
 Disclosure of certain financial information about  Revenue from external customers in
the products and services an entity produces the entity’s country of domicile
and the geographical areas in which an entity Separate disclosure of material revenue from external
operates customers in an individual foreign country
 Purpose: to enable investors and users make o About major customers*
better assessment of each business activity  Fact or reliance on major customers
which leads to the understanding of the  Total amount of revenue from major
performance of the entity as a whole customers
 Identity of the segments reporting the
Chief operating Decision Maker – identifies a function, revenue
not necessarily a manager *a single external customer providing revenue which
Function : allocate resources to the segments and amounts to 10% or more of entity’s external revenue
assess their performance
Fair Value Measurement
Management Approach – used in identifying operating Fair Value - the prices that would be received to sell an
segments on the basis of internal reports about asset, or paid to transfer a liability, in an orderly
components of an entity that are regularly reviewed by transaction between market participants.
the chief operating decision maker - Directly observable and readily available
- Can be estimated by valuation method
Reportable if any of the following criteria are met: - Shall not be adjusted for transaction cost
o Segment Revenue is 10% or more of the - Shall be adjusted for transport cost
combined revenue o Exit Price
o Profit or Loss is 10% or more of the combined o Price in an orderly transaction
Profit o Price agreed upon by market participants
o Profit or Loss is 10% or more of the combined
Loss Market Participants – buyers and sellers in the market
o Asset is 10% or more of the combined assets  Independent and unrelated parties
o When below 10% of any of the aforementioned  Knowledgeable or with understanding of the
conditions but management believes that it transaction
would be useful to users of financial statements  Willing or motivated to enter transaction

Overall Size Test – 75% Threshold Active Market – Transactions has sufficient regularity
- If total revenue of reportable operating segments and volume to provide pricing info
constitutes less than 75%, additional operating
segments shall be identified as reportable until at Principal Market – greatest volume and level of activity
75% of external revenue is reached for the asset, most advantageous market

Disclosure for Each Segment Most Advantageous Market – maximizes the amount
 General Information that would be received to sell the asset or minimizes
o Factors used to identify reportable amount to be paid to transfer liability
segments
o Types of products and services from Highest and Best Use of Asset Possess the following:
which each reportable segment derives (Provide maximum value either on a stand-alone basis
revenue or a group combination)
 Info about profit or loss Physically Possible
o Measure of profit or loss Legally Permissible
 Info about segment assets, liabilities and basis Financially Feasible
of measurement
o Measure of total assets and total Valuation Method
liabilities  Market Approach – identical and comparable
 Reconciliations of the total segment revenue, asset and liability
segment profit or loss, segment assets and  Income Approach – future amounts into
segment liabilities discounted cash flows
Entity Wide Disclosure  Cost Approach – current replacement cost to
 Additional information that is required to be replace the asset with a comparable asset
disclosed by all entities if such info is not part of
reportable segment information Fair Value Hierarchy
o About products and Services 1. Level 1 Input – Quoted Price in an active market
 Revenue from external customers for for identical asset/liability
each product/service
14
Conceptual Framework of Accounting Standards
2. Level 2 Input – Not observable either directly or
indirectly
3. Level 3 – Unobservable inputs for the asset or
liability

15