Lessons

1. The Objective of General Purpose Financial Statements

2. Qualitative Characteristics of Useful Financial Information
3. Financial Statements and the Reporting Entity
4. The Elements of the Financial Statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of Capital and Capital Maintenance
Purpose of the Conceptual Framework
• Assist the IASB in developing standards that are based
on consistent concepts;
• Assist preparers in developing consistent accounting policies
when no Standard applies to a particular transaction or
when a Standard allows a choice of accounting policy; and
• Assist all parties in understanding and interpreting the
standards.
Purpose of the Conceptual Framework
The Framework provides the foundation for the
development of standards that:
• Promote transparency;
• Strengthen accountability; and
• Contribute to economic efficiency
Status of the Conceptual Framework
Hierarchy of reporting standards:
1. PFRS
2. Judgment:
1. Management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
2. Management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices
Scope of the Conceptual Framework
• The Framework is concerned with the general-
purpose financial statements.
• Concepts of GPFS that are incorporated in the
Framework
• The objective of financial reporting
• Qualitative characteristics of useful financial information
• Financial statements and the reporting entity
• The elements of financial statements
• Recognition and derecognition
• Measurement
• Presentation and disclosure
• Concepts of capital and capital maintenance
Chapter 1
The Objective of Financial
Reporting
Objective of Financial Reporting
• The objective of general purpose financial reporting is to
provide financial information about the reporting entity that
is useful to existing and potential investors, lenders and
other creditors in making decisions relating to providing
resources to the entity.

• Existing and potential investors, lenders and other creditors

need information about:
• the economic resources of the entity, claims against the entity and
changes in those resources and claim; and
• how efficiently and effectively the entity’s management and
governing board have discharged their responsibilities to use the
entity’s economic resources.
Economic Resources and Claims
• Information about the nature and amounts of a reporting entity’s
economic resources and claims can help users to identify the reporting
entity’s financial strengths and weaknesses.
• That information can help users to assess the reporting entity’s liquidity
and solvency, its needs for additional financing and how successful it is
likely to be in obtaining that financing.
• That information can also help users to assess management’s
stewardship of the entity’s economic resources.
• Information about priorities and payment requirements of existing
claims helps users to predict how future cash flow will be distributed
among those with a claim against the reporting entity.
Changes in Economic Resources and Claims
• Changes in a reporting entity’s economic resources and claims result
from that entity’s financial performance and from other events or
transactions such as issuing debt or equity instruments.
• To properly assess both the prospects for future net cash inflows to the
reporting entity and management’s stewardship of the entity’s economic
resources, users need to be able to identify those two types of changes.
• Information about a reporting entity’s financial performance helps users
to understand the return that the entity has produced on its economic
resources.
• Information about a reporting entity’s past financial performance and
how its management discharged its stewardship responsibilities is
usually helpful in predicting the entity’s future returns on its economic
resources.
Changes in Economic Resources and Claims
1. Financial performance reflected by accrual accounting
2. Financial performance reflected in the past cash outflow
3. Changes in economic resources and claims not
resulting from financial performance
Chapter 2
Qualitative Characteristics
Qualitative Characteristics
• Qualities or attributes that make financial
accounting information useful to the users.

• Under Conceptual Framework for Financial

Reporting, qualitative characteristics are classified
into fundamental qualitative characteristic and
enhancing qualitative characteristic.
Fundamental Qualitative
Characteristics
1. Relevance - is the capacity of the information to
influence a decision. To be relevant, the financial
information must be capable of making a difference
in the decisions made by users.

• Information that does not bear on an economic

decision is useless.
Fundamental Qualitative
Characteristics
• Financial information to be relevant must have a
predictive value. Information is useful when it
increases the likelihood of correctly or accurately
predicting or forecasting outcome of events

• Information about financial position and past

performance is frequently used in predicting
dividend/maturing commitments
Fundamental Qualitative
Characteristics
• Financial information to be relevant must also have
a confirmatory value. Information is useful when it
helps shareholders confirm or revise earlier
expectations
Fundamental Qualitative
Characteristics
• Materiality is a practical rule in accounting which
dictates that strict adherence to GAAP is not
required when the items are not significant enough
to affect the evaluation, decision and fairness of the
financial statements.

• It is a quantitative threshold linked very closely to

the qualitative characteristic of relevance
Fundamental Qualitative
Characteristics
• Information is material if its omission could
influence the economic decision that the users
make on the basis of the financial information
about an entity.

• An item is material if knowledge of it would affect

or influence the decision of the informed users of
the financial statements.
Fundamental Qualitative
Characteristics
• Size and nature on an item are considered in
materiality.

• Size of an item in relation to the total group to

which the items belongs to is taken into account

• Nature of the item may be inherently material

because by very nature it affects economic decision
Fundamental Qualitative
Characteristics
2. Faithful representation - means that financial
reports represent economic phenomena or
transactions in words or number.

• Simply means that actual effects of the transactions

shall be properly accounted for and reported in the
financial statements.
Fundamental Qualitative
Characteristics
• Completeness requires that relevant information
should be presented in a way that facilitates
understanding and avoids erroneous implication

• Standard of adequate disclosure – disclosure of any

financial facts significant enough to influence the
judgement of informed users
Fundamental Qualitative
Characteristics
• A neutral depiction is without bias in the
preparation or presentation of financial information

• The information not favor one party to the

detriment of the other party

• For information to be neutral, it has to be fair

Fundamental Qualitative
Characteristics
• Free from error means there are no errors
or omissions in the description of the phenomenon
or transaction and that process used to produce
the reported information has been selected and
applied with no errors in the process.

• It does not mean perfectly accurate in all respects

Fundamental Qualitative
Characteristics
• Faithful representation inherently represents the
substance and reality of an economic phenomenon
or transaction rather than merely representing the
legal form.
Enhancing Qualitative
Characteristics
1. Comparability - means the ability to bring
together for the purpose of noting points of likeness
and difference. It enables users to identify and
understand similarities and dissimilarities.
Enhancing Qualitative
Characteristics
• Implicit in the quality of comparability is the
principle of consistency.

• It refers to the use of the same method for the

same item, within period to period within the entity
or across the entities in the same period
Enhancing Qualitative
Characteristics
• In a limited sense, consistency is the uniform
application of accounting method from period to
period within an entity. Comparability is the
uniform application of accounting method between
and across entities in the same industry.
Enhancing Qualitative
Characteristics
• Consistency is desirable and essential to achieve
comparability of the FS. However, consistency does
not mean that no change in accounting method can
be made. But there shall be full disclosure of the
change and the peso effect thereof.
Enhancing Qualitative
Characteristics
2. Understandability - requires that financial
information must be comprehensible or intelligible.

• Classifying, characterizing and presenting

information clearly and concisely makes it
understandable
Enhancing Qualitative
Characteristics
• The information should be presented in a form and
expressed in terminology that a user understands.
Enhancing Qualitative
Characteristics
• However, financial statements cannot realistically
be understandable to everyone but only to users
who have reasonable knowledge of business and
economic activities and who review and analyze the
information diligently
Enhancing Qualitative
Characteristics
3. Verifiability - means that different
knowledgeable and independent observers could
reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful
representation.

• Verifiability implies consensus

Enhancing Qualitative
Characteristics
• Direct verification means verifying an amount or
other representation through direct observation

• Indirect verification means checking the inputs into

the model, formula and recalculating the inputs
using same formula.
Enhancing Qualitative
Characteristics
4. Timeliness - means that the financial information
must be available or communicated early enough
when a decision is to be made
Enhancing Qualitative
Characteristics
• Timeliness - enhances the truism that without the
knowledge of the past, the basis for prediction will
usually be lacking

• What happened in the past would become the basis

of what would happen in the future
Constraint on Useful Information
• Cost is a pervasive constraint on the information
that can be provided by financial reporting

• There must be a consideration of the cost incurred

in generating financial information against the
benefit to be obtained from having the information.
Constraint on Useful Information
• The benefit received from the information should
exceed the cost incurred in obtaining that
information.

• The assessment shall be a matter of professional

judgment.
Chapter 3
Financial Statements and Reporting
Entity
Financial Statements
• Provide information about economic resources of
the reporting entity, claims against the entity and
changes in the economic resources and claims.
Financial Statements
• It helps users assess future cash flows to the
reporting entity as well as management
stewardship of the entity’s economic resources.
Reporting Entity
• An entity that is required or chooses to prepare
financial statements.

• A reporting entity can be a single entity or a portion

of an entity or can comprise more than one entity.

• A reporting entity is not necessarily a legal entity.

Types of Financial Statements
• Consolidated Financial Statements – when the
reporting entity comprises both parent and
subsidiaries.

• Unconsolidated Financial Statements – when the

reporting entity is the parent alone.

• Combined Financial Statements – reporting entity

comprises two or more entities not linked by
parent-subsidiary relationship.
Reporting Period
• Period when financial statements are prepared for
general purpose financial reporting, to help users of
financial statements to identify and assess changes and
trends

• Financial statements also provide comparative

information for at least one preceding reporting
period.
Perspective adopted in Financial
Statements
• Financial statements provide information about
transactions and other events viewed from the
perspective of the reporting entity as a whole, not
from the perspective of any particular group of the
entity’s existing or potential investors, lenders or
other creditors.
Going concern assumption
• Financial statements are normally prepared on the
assumption that the reporting entity is a going
concern and will continue in operation for the
foreseeable future.
• Hence, it is assumed that the entity has neither the
intention nor the need to enter liquidation or to
cease trading. If such an intention or need exists,
the financial statements may have to be prepared
on a different basis.
• If so, the financial statements describe the basis
used.
Chapter 4
The Elements of Financial Statements
Elements related to
Financial Position
ASSET
• Defined as a present economic resource controlled
by the entity as a result of past events.
Elements related to
Financial Position
ASSET
The asset is a present economic resource.
• An economic resource is a right that has the
potential to produce economic benefit.
Elements related to
Financial Position
ASSET
The asset is a present economic resource.
• An economic resource is a right that has the
potential to produce economic benefit.
Elements related to
Financial Position
ASSET
The asset is a present economic resource.
• An economic resource is a right that has the
potential to produce economic benefit.
Ø For the potential to exist, it does not need to be certain
or even likely that the right will produce economic
benefits. It is only necessary that the right already exists.
Ø The right may be:
Ø rights that correspond to an obligation of another party
Ø rights that do not correspond to an obligation of another party
Elements related to
Financial Position
ASSET
The economic resource is controlled by the entity as
a result of past events.
Ø An entity controls an asset if it has the present ability to
direct the use of the asset and obtain the economic
benefits that flow from it.

Ø Control may arise if an entity enforces legal rights.

Elements related to
Financial Position
LIABILITY
• Defined as a present obligation of an entity to
transfer an economic resource as a result of past
events.
Elements related to
Financial Position
LIABILITY
The entity has an obligation
• An obligation is a duty or responsibility that an
entity has no practical ability to avoid. It may be
legal or constructive.
Elements related to
Financial Position
LIABILITY
The obligation is to transfer an economic resource
Elements related to
Financial Position
LIABILITY
The obligation is a present obligation that exists as a
result of past event.
Ø The entity has already obtained economic benefits
Ø An entity must transfer an economic resource
Ø Obligations to pay cash
Ø Obligations to deliver goods or services
Ø obligations to exchange economic resources with another party on unfavorable
terms
Ø obligations to transfer an economic resource if a specified uncertain future event
occurs.
Ø obligations to issue a financial instrument if that financial instrument will oblige
the entity to transfer an economic resource.
Elements related to
Financial Position
EQUITY
• Defined as the residual interest in the assets of the
entity after deducting all of the liabilities.
• Different classes of equity claims, such as ordinary shares
and preference shares, may confer on their holders different
rights, for example, rights to receive some or all of the
following from the entity:
• Dividends;
• Proceeds from satisfying the equity claims; and
• Other equity claims.
Elements related to
Financial Performance
INCOME
• Increase in assets or decreases in liabilities that
result in increases in equity, other than those
relating to contributions from equity holders.
Elements related to
Financial Performance
EXPENSE
• Decreases in assets or increase in liabilities that
result in decreases in equity, other than those
relating to distributions from equity holders.

Note:
Income and expenses are the elements of financial statements that
relate to an entity’s financial performance.
Chapter 5
Recognition and Derecognition
Recognition
• Defined as the process of capturing for inclusion in
the financial statements an item that meets the
definition of an asset, liability, equity, income or
expense.
• Recognition links the elements to the statements of
financial position and statement of financial
performance.
• The amount at which an asset, liability or equity is
recognized in the statement of financial position is
reported as carrying amount.
How recognition links the elements of
financial statements
Recognition Criteria
• Only items that meet the definition of an asset, a
liability or equity are recognized in the statement of
financial position.
• Similarly, only items that meet the definition of
income or expense are recognized in the statement
of financial performance.
• Items must be recognized only when recognition
provides users of financial statements with
information that is both relevant and faithfully
represented.
Recognition Criteria
• With respect to sale of goods in the ordinary course
of business income shall be considered earned
hence to be recognized at the point of sale.
Recognition Criteria
• The expense recognition principle is the application
of the matching principle.

• The matching principle requires that those costs

and expenses incurred in earning a revenue shall be
reported in the same period.
Recognition Criteria
Cause and effect association
• Under this principle, the expense is recognized
when the revenue is already recognized. This
process involves the simultaneous or combined
recognition of revenue and expenses that result
directly and jointly form the same transactions or
events.
Recognition Criteria
Systematic and rational allocation
• Under this principle, some costs are expensed by
simply allocating them over the periods benefited.
When economic benefits are expected to arise over
several accounting periods and the association with
income can only be broadly or indirectly
determined, expenses are recognized on the basis
of systematic and allocation procedures.
Recognition Criteria
Immediate recognition
• Under this principle, the cost incurred is expensed
outright because of uncertainty of future economic
benefits or difficulty of reliably associating certain
costs with future revenue.
Recognition Criteria
Immediate recognition
• Expense is recognized immediately:
a. When an expenditure produces no future economic
benefit
b. When cost incurred does not qualify or ceases to
qualify for recognition as an asset
Derecognition
• Derecognition means the removal of all or part of a
recognized asset or liability from the statement of
financial position. This happens when an item no
longer meets the definition of an asset or liability.
• for an asset, derecognition normally occurs when the
entity loses control of all or part of the recognized asset;
and
• for a liability, derecognition normally occurs when the
entity no longer has a present obligation for all or part of
the recognized liability.
Chapter 6
Measurement
Measurement
• Measurement is defined as quantifying in monetary
terms the elements in the financial statements.
• Historical cost - measures provide monetary information about
assets, liabilities and related income and expenses, using information
derived, at least in part, from the price of the transaction or other
event that gave rise to them.
• Current value - measures provide monetary information about
assets, liabilities and related income and expenses, using information
updated to reflect conditions at the measurement date. CV
Measurement bases: (1) Fair value; (2) value in use for assets and
fulfillment value for liabilities; and (3) current cost.
Measurement
• In selecting a measurement basis for an asset or
liability and for the related income and expense, it
is necessary to consider the nature of the
information that the measurement basis will
produce.
Chapter 7
Presentation and Disclosure
Presentation and disclosure
• A reporting entity communicates information about its assets, liabilities, equity,
income and expenses by presenting and disclosing information in its financial
statements.
• Effective communication of information in financial statements makes that
information more relevant and contributes to a faithful representation of an
entity’s assets, liabilities, equity, income and expenses. It also enhances the
understandability and comparability of information in financial statements.
• Effective communication of information in financial statements requires:
• focusing on presentation and disclosure objectives and principles rather than
focusing on rules (relevance, faithful representation; comparability);
• classifying information in a manner that groups similar items and separates
dissimilar items (understandability, comparability, faithful representation);
and
• aggregating information in such a way that it is not obscured either by
unnecessary detail or by excessive aggregation (summarizing large volume of
details).
Chapter 8
Concepts of Capital and Capital
Maintenance
Concepts of Capital
• Under a financial concept of capital, such as invested money
or invested purchasing power, capital is synonymous with
the net assets or equity of the entity. Financial capital is the
monetary amount of the net assets contributed by
shareholders and the amount of the increase in net assets
resulting from earnings retained by the entity. Financial
capital maintenance can be measured in either nominal
monetary units or units of constant purchasing power.

• Under a physical concept of capital, such as operating

capability, capital is regarded as the productive capacity of
the entity based on, for example, units of output per day.
Physical capital shall be equal to the net asset of the entity
expressed in terms of current cost.
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 period exceeds the financial (or money) amount of net assets
at the beginning of the period, after excluding any distributions to,
and contributions from, owners during the period.
Concepts of Capital Maintenance
• Physical capital maintenance. Under this concept a profit is earned
only if the physical productive capacity (or operating capability) of
the entity (or the resources or funds needed 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.
Concepts of Capital Maintenance
• In general terms, an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the
period. Any amount over and above that required to maintain the
capital at the beginning of the period is profit.
• Under the concept of financial capital maintenance where capital is
defined in terms of nominal monetary units, profit represents the
increase in nominal money capital over the period. Thus, increases in
the prices of assets held over the period, conventionally referred to
as holding gains, are, conceptually, profits.
Lessons
1. The Objective of General Purpose Financial Statements
2. Qualitative Characteristics of Useful Financial Information
3. Financial Statements and the Reporting Entity
4. The Elements of the Financial Statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of Capital and Capital Maintenance