FAR

• Conceptual Framework for Financial Reporting


  Basic concepts by which financial statements are prepared
• The Conceptual Framework is not an IFRS and hence does not define standards for any particular measurement or disclosure issue
• Scope of the Conceptual Framework

  • The Objective of general purpose financial reporting
  • Qualitative characteristics of financial information
  • Underlying assumption
  • The definition, recognition and measurement of the elements of the financial statements
  • Concepts of capital and capital maintenance
• Objective of general purpose financial reporting

  To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
• Financial performance reflected by accrual accounting

  Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period
• Fundamental qualitative characteristics


  • Relevance
  • Faithful representation
• Relevance


  Information in financial statements is relevant when it is capable of making a difference in the decisions made by the users
• 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
• Materiality


  Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity
• Faithful representation


  Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent
• Ingredients of faithful representation

  • Complete
  • Neutral
  • Free from error
• Enhancing qualitative characteristics

  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
• Comparability

  Enables users to identify and understand similarities in, and differences among, items
• Verifiability


  Helps assure users that information faithfully represents the economic phenomena it purports to represent
• Timeliness


  Having information available to decision-makers in time to be capable of influencing their decisions
• Understandability


  Classifying, characterising and presenting information clearly and concisely makes it understandable
• Cost constraint on useful financial reporting

  Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information
• Underlying assumptions (postulates)


  • Going concern
  • Accounting entity
  • Time period
  • Monetary unit
• Going concern


  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
• 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


  The elements of the financial statements should be stated under one unit of measure which is the Philippine Peso, and the purchasing power of the peso is stable or constant and that instability is insignificant and therefore ignored
• Elements of financial statements directly related to financial position

  • Asset
  • Liability
  • Equity
• Asset


  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 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


  The residual interest in the assets of the enterprise after deducting all its liabilities
• Elements of financial statements directly related to performance

  • Income
  • Expense
• Income


  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


  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
• Criteria for recognition of elements

  • It is probable that any future economic benefit associated with the item will flow to or from the enterprise
  • The item's cost or value can be measured with reliability
• Measurement bases for elements

  • Historical cost
  • Current cost
  • Net realizable (settlement) value
  • Present value (discounted)
• Financial concept of capital

  Capital is synonymous with net assets of the enterprise
• Physical concept of capital

  Capital is regarded as the productive capacity of the enterprise based on, for example, units of output per day
• Financial capital maintenance


  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


  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