Framework for the

Preparation and Presentation

of the Financial Statements
Thomas A. Siy III
CPAR
 FRSC Framework
Basic concepts by which
financial statements are
prepared
Sets out the concepts that
underlie the preparation and
presentation of financial
statements for external users
 Purpose of the framework
 Assist the Financial Reporting Standards Council (FRSC) in
developing accounting standards that represent generally
accepted accounting principle

 Assist the FRSC in its review and adoption of existing

International Accounting Standards

 Assist preparers of the financial statements in applying FRSC

Statements of Financial Accounting Standards and in dealing
with topics that have yet to form the subject of an FRSC
statement

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 Purpose of the framework
 Assist auditors in forming an opinion as to whether financial
statements conform with Philippine GAAP

 Assist users of financial statements in interpreting information

contained in the financial statements prepared in conformity with
Philippine GAAP

 Provide those who are interested in the work of the FRSC with
information about its approach to the formulation of Statements
of Financial Accounting Standards
 Scope of the Framework
 Defines the objective of financial statements
 Identifies the qualitative characteristics that
make information in financial statements
useful
 Defines the basic elements of financial
statements and the concepts for recognizing
and measuring them in financial statements
 Concepts of capital and capital
maintenance
 Limitations of the Framework
 Addresses general purpose financial
statements including consolidated financial
statements that a business enterprise
prepares and presents at least annually to
meet the common information
 The framework is not a standard, therefore
when there is a conflict between a standard
and the framework, the standard shall prevail
over the framework
 Users and their Information Needs
 Investors - The providers of risk capital and their advisers are
concerned with the risk inherent in, and return provided by, their
investments. They need information to help them determine
whether they should buy, hold or sell. Shareholders are also
interested in information which enables them to assess the
ability of the entity to pay dividends.
 Employees - Interested in information about the stability and
profitability of their employers. They are also interested in
information which enables them to assess the ability of the
entity to provide remuneration, retirement benefits and
employment opportunities.
 Lenders - Interested in information that enables them to
determine whether their loans, and the interest attaching to
them, will be paid when due.

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 Users and their Information Needs
 Suppliers and other creditors - Interested in information that enables them
to determine whether amounts owing to them will be paid when due.
Trade creditors are likely to be interested in an entity over a shorter period
than lenders unless they are dependent upon the continuation of the entity
as a major customer.
 Customers - Interested in information about the continuance of an entity,
especially when they have a long-term involvement with, or are dependent
on, the entity.
 Governments and their agencies - Interested in the allocation of resources
and, therefore, the activities of entities. They also require information in
order to regulate the activities of entities, determine taxation policies and
as the basis for national income and similar statistics.
 Public - Entities affect members of the public in a variety of ways. For
example, entities may make a substantial contribution to the local
economy in many ways including the number of people they employ and
their patronage of local suppliers. Financial statements may assist the
public by providing information about the trends and recent developments
in the prosperity of the entity and the range of its activities.
Responsibility for Financial
Statements

The management of an
enterprise has the primary
responsibility for preparing
and presenting the enterprise's
financial statements.
 Objectives of the Financial
Statements
I. Provide information about the financial position, performance
and changes in financial position of an enterprise that is
useful to a wide range of users in making economic decisions.

II. Meet the common needs of most users. However, financial

statements do not provide all the information that users may
need to make economic decisions since they largely portray the
financial effects of past events and do not necessarily provide
non-financial information.

III. Financial statements also show the results of the stewardship

of management.
 Financial Position Factors
 Economic Resources that an entity controls
 Liquidity - Availability of cash in the near future after
taking account of financial commitments over this
period
 Solvency - Availability of cash over the longer term to
meet financial commitments as they fall due.
 Financial Structure - Useful in predicting future
borrowing needs and how future profits and cash flows
will be distributed among those with an interest in the
entity, it is also useful in predicting how successful the
entity is likely to be in raising further finance
 Capacity for Adaptation - Useful in predicting the
ability of the entity to generate cash and cash
equivalents in the future also know as financial
flexibility.
 Performance of an Entity
 Profitability,is required in order to
assess potential changes in the
economic resources that it is likely
to control in the future
 Information about performance is
found in the income statement
 Changes in Financial Position or
Cash Flows
 Users of financial statements seek
information about the investing, financing
and operating activities that an enterprise
has undertaken during the reporting period.
This information helps in assessing how well
the enterprise is able to generate cash and
cash equivalents and how it uses those cash
flows. The cash flow statement provides
this kind of information.
 Underlying Assumptions
(Postulates)
The Framework sets out two underlying assumptions of financial
statements

Accrual Basis - The effects of transactions and other events

are recognized when they occur, rather than when cash or its
equivalent is received or paid, and they are reported in the
financial statements of the periods to which they relate.  

Going Concern - The financial statements presume that an

enterprise will continue in operation indefinitely or, if that
presumption is not valid, disclosure and a different basis of
reporting are required.
 Additional Postulates
 The FRSC conceptual framework mentions two assumptions only.
However, it is widely believed that an inherent trait of the financial
statements are the basic assumptions of:
Accounting Entity - The business is separate from the owners,
managers, and employees who constitute the business. Therefore
transactions of the said individuals should not be included as transactions
of the business.

Time Period - Financial reports are to be prepared for one year or a

period of twelve months.

Monetary Unit - There are two aspects under this assumption. First is
the quantifiability of the peso, meaning that the elements of the
financial statements should be stated under one unit of measure which is
the Philippine Peso. Second is the stability of the peso, means that
there is still an assumption that the purchasing power of the peso is stable
or constant and that instability is insignificant and therefore ignored.
 Qualitative Characteristics of
Financial Statements
 These characteristics are the attributes that
make the information in financial
statements useful to investors, creditors,
and others. The Framework identifies four
principal qualitative characteristics:
a. Understandability
b. Relevance
c. Reliability
d. Comparability
 Primary Characteristics
 Relevance - Information in financial statements is relevant
when it influences the economic decisions of users. It can do
that both by (a) helping them evaluate past, present, or future
events relating to an enterprise and by (b) confirming or
correcting past evaluations they have made.
Ingredients of relevance: 
Predictive Value – Information can help users increase the
likelihood of correctly predicting or forecasting the outcome of
certain events.
Feedback Value – Information can help users confirm or
correct earlier expectations. Note that the predictive and
confirmatory roles of information are interrelated.
Timeliness - Information loses its relevance if it is not timely

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 Primary Characteristics
 Reliability - Information in financial statements is reliable if it is free from
material error and bias and can be depended upon by users to represent
events and transactions faithfully. Information is not reliable when it is
purposely designed to influence users' decisions in a particular direction.
Factors of reliability
 

Faithful Representation – Information must represent faithfully the

transactions and events it either purports to represent or could
reasonably purport to represent.
 
Substance over form – Transactions are to be accounted for and
presented according to their substance and economic reality and not
merely their legal form.
 

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 Primary Characteristics
Neutrality - Information contained in the financial statements
must be free from bias and error.
 
Prudence (Conservatism) – The inclusion of a degree of
caution in the exercise of judgments needed in making
estimates or choosing alternatives so that the outcome will have
the least effect on equity.
 
Completeness – to be reliable, the information in the financial
statements must be complete within the bounds of materiality
and cost.
 Constraints to Relevant and
Reliable Information

 Timeliness – Undue delay in reporting of information

may lead to the loss of relevance even though
enhancing it reliability. While providing information
before all aspects of a transaction or other events are
known may increase the relevance of information,
thus impairing its reliability.

 Balance between Benefit and Cost - The benefits

derived from relevant and reliable information should
exceed the cost of providing it.
 Secondary Characteristics
 Understandability - Information should be presented in a way
that is readily understandable by users who have a reasonable
knowledge of business and economic activities and accounting
and who are willing to study the information diligently.

 Comparability - Users must be able to compare the financial

statements of an enterprise over time so that they can identify
trends in its financial position and performance. Users must also
be able to compare the financial statements of different
enterprises. Disclosure of accounting policies is essential for
comparability especially when the enterprise adopts a new or
changes its accounting policies.
 The Elements of Financial
Statements
 The elements directly related to financial position and their
definition according to the framework are:

Asset - An asset is a resource controlled by the enterprise as a

result of past events and from which future economic benefits are
expected to flow to the enterprise.
 
Liability - A liability is a present obligation of the enterprise arising
from past events, the settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic
benefits.
 
Equity - Equity is the residual interest in the assets of the
enterprise after deducting all its liabilities.

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 The Elements of Financial
Statements
 The elements directly related to performance and their
definition according to the framework are:

Income - Income is increases in economic benefits during the

accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants.
 
Expense - Expenses are decreases in economic benefits during
the accounting period in the form of outflows or depletions of
assets or incurrence of liabilities that result in decreases in
equity, other than those relating to distributions to equity
participants.
 Recognition of the Elements of
Financial Statements
 Recognition is the process of incorporating in
the balance sheet or income statement an item
that meets the definition of an element and
satisfies the following criteria for recognition:
1. It is probable that any future economic
benefit associated with the item will flow
to or from the enterprise and
2. The item's cost or value can be measured
with reliability.
 Specific Recognition Principles
 An asset is recognized in the balance sheet when it is probable that
the future economic benefits will flow to the enterprise and the asset
has a cost or value that can be measured reliably.
 A liability is recognized in the balance sheet when it is probable
that an outflow of resources embodying economic benefits will result
from the settlement of a present obligation and the amount at which
the settlement will take place can be measured reliably.
 Income is recognized in the income statement when an increase in
future economic benefits related to an increase in an asset or a
decrease of a liability has arisen that can be measured reliably. This
means, in effect, that recognition of income occurs simultaneously
with the recognition of increases in assets or decreases in liabilities
 Expenses are recognized when a decrease in future economic
benefits related to a decrease in an asset or an increase of a liability
has arisen that can be measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with the recognition
of an increase in liabilities or a decrease in assets.
 Measurement of the Elements of
Financial Statements
Measurement involves assigning monetary amounts
at which the elements of the financial statements are to
be recognized and reported. The Framework
acknowledges that a variety of measurement bases are
used today to different degrees and in varying
combinations in financial statements, including:
• Historical cost
• Current cost
• Net realizable (settlement) value
• Present value (discounted)
 Concepts of Capital

 Financial concept of capital - capital is

synonymous with net assets of the enterprise.
This is the concept of capital adopted by most
enterprises.
 
 Physical concept of capital – capital is
regarded as the productive capacity of the
enterprise based on, for example, units of
output per day.
 Concepts of Capital Maintenance

 Financial capital maintenance – Under this concept, a profit is

earned only if the financial (or money) amount of the net assets at
the end of the of the period exceeds the financial (or money)
amount of the net assets at the beginning of the period, after
excluding any distributions to, and contributions from, owners
during the period.
 
 Physical capital maintenance – Under this concept, a profit is
earned only if the physical productive capacity (or operating
capability) of the enterprise (or the resources need to achieve that
capacity) at the end of the period exceeds the physical productive
capacity at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.