Conceptual Framework
Summary of the terms and concepts in FS preparation
Concerned with general purpose FS, including consolidated FS
Special purpose financial reports are outside its scope
Hierarchy
1. Specific standard
2. Related standard (analogy) Note: Conceptual Framework ≠ PFRS
But: In case of conflict, PFRS prevails.
3. Conceptual Framework
4. Others (US GAAP, literature, practice)
Users
Primary — creditors, lenders, investors (CLIP)
Others — employees, customers, State, the public
Measurement bases
1. Historical cost
2. Current cost
3. Realizable value
4. Present value
Basic objective of accounting
To provide quantitative financial information about a business that is useful to statement
users, particularly owners and creditors, in making economic decisions
The accountancy profession
R.A. 9298 or “The Philippine Accountancy Act of 2004”
Board of Accountancy
Authorized by law to promulgate rules and regulations affecting the practice of the
accountancy profession
Prepares and grades the CPALE
Certificate of Accreditation
Issued to CPAs in public practice if they have acquired a minimum of 3 years of
meaningful experience in any areas of public practice, including taxation
Certificate of Registration
Issued to be able to practice public accountancy which shall be valid for 3 years and
renewable every 3 years
Three main areas of CPA practice
1. Public accounting
a. Auditing
i. Internal auditing
ii. External auditing — the “attest function” of independent CPAs
b. Taxation
c. Management advisory services
2. Private accounting
Controller — the highest accounting officer in an entity
3. Government accounting
a. Focus: the custody and administration of public funds
Generally Accepted Accounting Principles (GAAP)
Followed in the preparation and presentation of financial statements
Financial Reporting Standards Council (FRSC)
Replaced the Accounting Standards Council
Created by the PRC
Assists the BOA in carrying out the latter’s powers provided under R.A. 9298
Functions to establish and improve accounting standards in the Philippines
Publishes PAS, PFRS, and Interpretations
15 members (term of 3 years, renewable for another term)
Philippine Interpretations Committee (PIC)
Formed by the FRSC in August 2006
Prepares interpretations of PFRS
Provides timely guidance on financial reporting issues not specifically addressed in
current PFRS
International Accounting Standards Board
Replaced the IAS Committee
An independent and private sector body
Aims to achieve uniformity, greater transparency, and a higher degree of comparability
in financial reporting around the world
Publishes IAS, IFRS, and Interpretations
Accounting assumptions/postulates
1. Going concern or Continuity
The only assumption mentioned in the CF
The foundation of “cost principle”
2. Accounting entity
The entity is separate from its owners
Each business is independent
3. Time period
The indefinite life of an entity is subdivided into time/accounting periods which
are usually of equal length
4. Monetary unit
a. “Quantifiability” aspect
ALEIE should be stated in terms of a unit of measure, which is the ₱₱₱
b. “Stability of the peso” aspect
The purchasing power of the peso is stable; any instability is
insignificant, hence, inflation is ignored
General purpose financial reports
Do not and cannot provide all of the information needed; not designed to show the
entity’s value, but provide information to help the users estimate the entity’s value
Qualitative characteristics
1. Fundamental QC (content/substance)
a. Relevance
i. Predictive value
Accurate forecasting
ii. Confirmatory value
Confirm prior expectations
b. Faithful representation
i. Completeness / Full disclosure
Materiality/Doctrine
ii. Neutrality / Principle of fairness of Convenience
iii. Free from error
iv. Substance over form (old CF)
v. Prudence / Conservatism (old CF)
2. Enhancing QC (presentation/form) [VCUT]
a. Verifiability
b. Comparability and Consistency
Not the same, but interrelated.
Comparability is the goal, consistency achieves it
c. Understandability
d. Timeliness
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Conceptual Framework
Summary of the terms and concepts in FS preparation
Concerned with general purpose FS, including consolidated FS
Special purpose financial reports are outside its scope
Hierarchy
1. Specific standard
2. Related standard (analogy)
3. Conceptual Framework
4. Others (US GAAP, literature, practice)
Note: Conceptual Framework ≠ PFRS
But: In case of conflict, PFRS prevails.
Users
Primary — creditors, lenders, investors (CLIP)
Others — employees, customers, State, the public
Measurement bases
1. Historical cost
2. Current cost
3. Realizable value
4. Present value
Basic objective of accounting
To provide quantitative financial information about a business that is useful to statement users, particularly owners and creditors,
in making economic decisions
The accountancy profession
R.A. 9298 or “The Philippine Accountancy Act of 2004”
Board of Accountancy
Authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession
Prepares and grades the CPALE
Certificate of Accreditation
Issued to CPAs in public practice if they have acquired a minimum of 3 years of meaningful experience in any areas of public
practice, including taxation
Certificate of Registration
Issued to be able to practice public accountancy which shall be valid for 3 years and renewable every 3 years
Three main areas of CPA practice
1. Public accounting
a. Auditing
i. Internal auditing
ii. External auditing — the “attest function” of independent CPAs
b. Taxation
c. Management advisory services
2. Private accounting
Controller — the highest accounting officer in an entity
3. Government accounting
a. Focus: the custody and administration of public funds
Generally Accepted Accounting Principles (GAAP)
Followed in the preparation and presentation of financial statements
Financial Reporting Standards Council (FRSC)
Replaced the Accounting Standards Council
Created by the PRC
Assists the BOA in carrying out the latter’s powers provided under R.A. 9298
Functions to establish and improve accounting standards in the Philippines
Publishes PAS, PFRS, and Interpretations
15 members (term of 3 years, renewable for another term)
Philippine Interpretations Committee (PIC)
Formed by the FRSC in August 2006
Prepares interpretations of PFRS
Provides timely guidance on financial reporting issues not specifically addressed in current PFRS
International Accounting Standards Board
Replaced the IAS Committee
An independent and private sector body
Aims to achieve uniformity, greater transparency, and a higher degree of comparability in financial reporting around the world
Publishes IAS, IFRS, and Interpretations
Accounting assumptions/postulates
1. Going concern or Continuity
The only assumption mentioned in the CF
The foundation of “cost principle”
2. Accounting entity
The entity is separate from its owners
Each business is independent
3. Time period
The indefinite life of an entity is subdivided into time/accounting periods which are usually of equal length
4. Monetary unit
a. “Quantifiability” aspect
ALEIE should be stated in terms of a unit of measure, which is the ₱₱₱
b. “Stability of the peso” aspect
The purchasing power of the peso is stable; any instability is insignificant, hence, inflation is ignored
General purpose financial reports
Do not and cannot provide all of the information needed; not designed to show the entity’s value, but provide information to help
the users estimate the entity’s value
Qualitative characteristics
1. Fundamental QC (content/substance)
a. Relevance
i. Predictive value
Accurate forecasting
ii. Confirmatory value
Confirm prior expectations
Materiality/Doctrine of Convenience
b. Faithful representation
i. Completeness / Full disclosure
ii. Neutrality / Principle of fairness
iii. Free from error
iv. Substance over form (old CF)
v. Prudence / Conservatism (old CF)
2. Enhancing QC (presentation/form) [VCUT]
a. Verifiability
b. Comparability and Consistency
Not the same, but interrelated.
Comparability is the goal, consistency achieves it
c. Understandability
d. Timeliness
BOA FRSC AASC ETC
1 – Senior accounting
1 – Senior Chairman in 1 – Senior Chairman in
1 – Chairman practitioner in the
accounting practice public practice
academe
1 – BOA 1 – BOA 1 – BOA
1 – SEC 1 – SEC
1 – BSP 1 – BSP
1 – COA 1 – COA
6 – Members, 1 – BIR
appointed by the
President 1 – Major organization of 1 – Associate in active
FS preparers and users public practice
2 Public practice 6 Public practice 1 Public practice
2 Commerce 1 Commerce 1 Commerce
2 Academe 1 Academe 1 Academe
2 Government 1 Government 1 Government
7 members 15 members 15 members 7 members
p
“Accounting is a service activity. Its function is to provide
quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making
economic decision.”
Accounting Standards Council (ASC)
p
“Accounting is the art of recording, classifying, and
summarizing
in a significant manner and in terms of money, transactions,
and events, which are in part at least of a financial character,
and interpreting the results thereof.”
Committee on Accounting Terminology of
the AICPA
p
“Accounting is the process of identifying, measuring, and
communicating economic information to permit informed
judgment and decision
by users of the information.”
American Accounting Association (AAA)
AAA’s definition has stood the test of time.