2: cfas

• Primary Users


  Existing and potential investors

  Lenders and other creditors
• Other users


  Employees

  Customers

  Government and their agencies

  Public
• Other Classifications of Users:

  1. Direct vs. Indirect Users
  2. External vs. Internal User
• Conceptual Framework for Financial Reporting


  It is a complete, comprehensive, and single document that summarizes the terms and concepts that underlie the preparation and presentation of financial statements.
• Scope of Conceptual Framework

  1. Objective of financial reporting (classification of users discussed in topic II)
  2. Qualitative characteristics of useful financial information
  3. Definition, recognition, and measurement of the elements from which financial statements are constructed
  4. Concept of capital and capital maintenance
• Qualitative Characteristics of Useful Financial Information


  identify the types of information that are likely to be most useful to users in making decisions about the reporting entity based on information in its financial reports.
• Qualitative Characteristics of Useful Financial Information


  They apply equally financial information in general-purpose financial reports as well as to financial reporting information provided in other ways.
• Relevance


  capable of making a difference in the decisions made by users.
• Confirmatory Value


  it provides feedback about (confirms or changes) previous evaluations
• Predictive Value 


  it can be used as an input to processes employed by users to predict future outcomes
• Materiality


  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


  General-purpose financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent.
• Completeness


  all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations.
• Neutrality


  unbiased in the selection or representation of financial information.
• Free from Error


  there are no errors or omissions for the reported information or;

  there are no errors or omissions in the description of the transaction and other events, and no errors have been made in selecting and applying an appropriate process to produce the reported information.
• Enhancing


  Comparability

  Verifiability

  Timeliness

  the usefulness of information that is relevant and faithfully represented.
• Comparability

  • enables users to identify and understand similarities in, and differences among, items.
  • Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.
• Consistency

  • the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.
  • is not uniformity
• Verifiability

  • assure users that information represents faithfully the economic phenomena it purports to represent.
  • different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
• Timeliness

  • information is available to decision makers in time to be capable of influencing their decisions.
  • the older the information is, the less useful it is.
• Understandability

  • classifying, characterizing and presenting information clearly and concisely
• Going Concern


  will continue in operation for the foreseeable future.
• Time period


  The indefinite life of the entity is subdivided into time periods or accounting periods which are usually of equal length for the purpose of preparing financial reports.
• Monetary Unit

  • the amounts in the financial statements should be stated in terms of a unit of measure which is the Philippine Peso
  • the purchasing power of the peso is stable or constant and its instability is insignificant and therefore may be ignored
• Accrual Accounting

  • The effects of transactions and events are recognized when these occur and not as cash or its equivalent is received or paid, and these recorded or reported in the financial statements of the periods to which these relate.
  • income is recognized when earned regardless of when received and expense when recognized when incurred regardless of when paid.
• Cost Principle


  the amount spent when an item was originally obtained, whether that purchase happened last year or ten years ago; amounts are not adjusted upward for inflation
• Full Disclosure Principle


  Sufficient information to permit the stakeholders to make an informed judgement about the financial condition and performance of the enterprise.
• Matching Principle


  These costs and expenses incurred in earning the revenue should be recorded in the same period.
• Revenue Recognition


  Revenues are recognized as soon as goods sold have been sold (delivered to the customers) or a service has been rendered, regardless of when the money is actually received.
• Reliability

  • Aims to ensure that all transactions, events, and business activities presented in the financial statements is reliable.
  • if it can be checked, verified, and reviewed with objective evidence.
  • a user should be able to fully rely on the information presented to be an accurate and faithful representation of that which it stands to represent.
• Prudence/Conservatism

  • when alternatives exist, the alternative which has the least favorable impact on equity shall be chosen.
  • preferred that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets.
• Substance Over Form

  • conflict between substance and form, the economic substance of the transaction shall prevail over the legal form.
  • accounting refers to a concept that transactions recorded in the financial statements and accompanying disclosures of a company must reflect their economic substance rather than their legal form.
• • Cost is a pervasive constraint on the information that can be provided by financial reporting.
  • Reporting financial information imposes costs and those costs should be justified by the benefits of reporting that information.
  • The benefit derived from the information should exceed the cost incurred in obtaining the information.


  Balance between Benefit and Cost
• the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition.


  Recognition
• the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement

  Measurement
• Assets are recorded at the amount of cash or cash equivalent paid of the fair value of the consideration given to acquire them at the time of their acquisition.

  Historical cost
• Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently.


  Current Cost
• Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal.

  Realizable Value
• Liabilities are carried at the undiscounted amounts of cash or cash equivalents expected to be required to settle the liabilities in the normal course of business.

  Settlement Value
• Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.


  Present Value