2. CONCEPTUAL FRAMEWORK ACCOUNTING STANDARDS

• What is the law regulating the practice of accountancy in the Philippines?

  
  

  R.A. No. 9298
• Conceptual Framework


  Prescribes the concepts for general purpose financial reporting
• Status of the Conceptual Framework

  It is not a PFRS, when there is a conflict the PFRS prevails

  In the absence of a standard, management shall consider the Conceptual Framework in making judgments
• Scope of the Conceptual Framework

  • Objective of financial reporting

  2. Qualitative characteristics of useful financial information

  3. Financial statements and the reporting entity

  4. Elements of financial statements

  5. Recognition and derecognition

  6. Measurement

  7. Presentation and disclosure

  8. Concepts of capital and capital maintenance

  
• Objective of general purpose financial reporting

  To provide financial information about the reporting entity that is useful to primary users in making decisions about providing resources to the entity
• Primary users


  • Existing and potential investors

  Lenders and other creditors
• Fundamental qualitative characteristics


  • Relevance

  Faithful representation
• Enhancing qualitative characteristics


  • Comparability

  Verifiability

  Timeliness

  Understandability
• Relevance


  Information is relevant if it can affect the decisions of users

  Relevant information has predictive value and confirmatory value

  Materiality is an 'entity-specific' aspect of relevance
• Faithful representation


  Information provides a true, correct and complete depiction of what it purports to represent

  Faithfully represented information is complete, neutral, and free from error
• Fundamental vs. Enhancing


  Fundamental characteristics make information useful

  Enhancing characteristics enhance the usefulness of information
• Comparability


  Information helps users identify similarities and differences between different sets of information
• Verifiability


  Different users could reach consensus as to what the information purports to represent
• Timeliness


  Information is available to users in time to be able to influence their decisions
• Understandability


  Users are expected to have reasonable knowledge of business activities and willingness to analyze the information diligently
• Objective and scope of financial statements

  To provide financial information about the reporting entity's assets, liabilities, equity, income and expenses that is useful in assessing the entity's ability to generate future net cash inflows and management's stewardship over economic resources

  
• Reporting period


  Financial statements are prepared for a specific period of time and include comparative information for at least one preceding reporting period

  
• Going concern


  Financial statements are normally prepared on the assumption that the reporting entity is a going concern
• Reporting entity


  A reporting entity is one that is required, or chooses, to prepare financial statements, and is not necessarily a legal entity
• Asset


  A present economic resource controlled by the entity as a result of past events, with the potential to produce economic benefits
• Liability


  A present obligation of the entity to transfer an economic resource as a result of past events
• Equity


  The residual interest in the assets of the entity after deducting all its liabilities
• Income


  Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
• Expenses


  Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims
• Executory contracts


  Contracts that are equally unperformed, establishing a combined right and obligation to exchange economic resources
• Recognition


  The process of including an item that meets the definition of a financial statement element in the financial statements

  
• Recognition criteria


  An item is recognized if it meets the definition of an element and recognizing it would provide useful information
• Relevance for recognition


  The recognition of an item may not provide relevant information if there is uncertainty about its existence or low probability of inflow/outflow of economic benefits
• Faithful representation for recognition

  Measurement uncertainty can affect faithful representation but not necessarily relevance
• Derecognition


  The removal of a previously recognized asset or liability from the entity's statement of financial position
• Unit of account


  The right or group of rights, obligation or group of obligations, or group of rights and obligations, to which recognition criteria and measurement concepts are applied
• Measurement bases


  • Historical cost

  Fair value

  Value in use and fulfilment value

  Current cost
• Historical cost


  The consideration paid to acquire an asset plus transaction costs, or the consideration received to incur a liability minus transaction costs
• Fair value


  The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants
• Value in use and fulfilment value

  Value in use is the present value of the cash flows or other economic benefits expected from an asset

  Fulfilment value is the present value of the cash or other economic resources expected to be transferred to fulfil a liability
• Current cost


  The cost of an equivalent asset or liability at the measurement date, comprising the consideration that would be paid/received plus/minus the transaction costs that would be incurred
• Entry values vs. Exit values

  Current cost and historical cost are entry values, whereas fair value, value in use and fulfilment value are exit values
• Value in use


  The present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal
• Fulfilment value


  The present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability
• Current cost of an asset

  The cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date