CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD

Chapter 1: • Current cost- includes fair value, value in use,

THE ACCOUNTANCY PROFESSION fulfillment value and current cost.
Definition of Accounting
Accounting Standards Council Communicating- process of preparing and distributing
(ASC): accounting reports to potential users of accounting information.
• Accounting is a service activity.
• The accounting function is to provide quantitative Implicit in the communication process:
information, primarily financial in nature, about • Recording- systematically maintaining a record of all
economic entities, that is intended to be useful in business transaction.
making economic decision.
• Classifying- sorting or grouping of similar and
American Accounting Association (AAA):
interrelated economic transaction.
• Accounting is the process of identifying, measuring
• Summarizing- preparation of accounting reports,
and communicating economic information to permit
such as; financial statement etc.
informed judgment and decision by users of the
information.
Accounting is an information system that measures
business activities, processes information into reports and
Important points
communicates the reports to decision makers.
1. Accounting is about quantitative information. Objective of Accounting:
2. The information is likely to be financial in nature. To provide quantitative financial information about a business
3. The information should be useful in decision making. that is useful to statement users.
The Accounting Profession
Identifying- recognition or non-recognition of business Philippine Accountancy Act of 2004 or Republic Act No. 9298 is
activities as “accountable” events. the law regulating the practice of accounting in the Philippines.
Not all business activities are accountable. In order to qualify to practice the accountancy profession, a
person must finish a degree of Bachelor of Science in
Ex. Hiring employees
Accountancy and pass a very difficult government examination
Transactions are classified into 2: given by Board of Accountancy.

• External transaction- economic events involving Board of Accountancy- the body authorized by law to
promulgate rules and regulations affecting the practice of the
one entity to another entity. accountancy profession in the Philippines.
• Internal transaction- economic events that mainly Limitations:
happen only within an entity. Example of these are: • Single practitioners and partnerships for the practice
of public accountancy.
o Production-process by which resources are
• The board of accountancy and approved by the
transformed into a product.
Professional Regulation Commission that such
o Casualty- unanticipated loss (from fire,
registrant has acquired a minimum of 3 years of
earthquake, flood etc.)
meaningful experience in any of the areas of public
Measuring- assigning of peso amounts to the accountable
economic transactions and events. practice including taxation.

2 measurement bases: Certified Public Accountant practice their profession in 3

• Historical cost- most common measure in the main areas:

financial transaction. • Public Accounting

• Private Accounting
• Government Accounting
 program for all regulated professions, including the
Public Accounting: composed of individual practitioners, accountancy profession.
small accounting firms and large multinational organizations
that render independent and expert financial services to public. CPD refers to the inculcation and acquisition of advanced
knowledge, skill, proficiency, and ethical and moral values after
Auditing or external auditing- the examination of financial initial registration of the CPA for assimilation into professional
statements by independent CPA for the purpose of expressing practice and lifelong learning.
an opinion as to the fairness with which the financial
statements are prepared. CPD Units- refers to the CPD credit units required for the
renewal of CPA license and accreditation of a CPA to practice
Taxation services- the preparation of annual income tax the accountancy profession every 3 years.
returns and determination of tax consequences of certain
proposed business endeavors. 120 CPD credit units in compliance period of 3 years.

Management Advisory Services- refers to services to clients 2017-80 credit units

on matters of accounting, finance, business policies, 2018- 100 credit units 2019-
organization procedures, product costs, distribution and many 120 credit units
other phases of business conduct operations. It includes the ff:

• Advice on installation of computer system The CPD is required for the renewal of CPA license and
• Quality control accreditation of a CPA to practice the accountancy profession.
• Installation and modification of accounting system
• Budgeting A CPA shall be permanently exempted from CPD requirements
• Forward planning and forecasting upon reaching the age of 65 years.

Design and modification of retirement plans

Generally Accepted Accounting Principles (GAAP)-
Advice on mergers and consolidations.
represents the rules, procedures, practices, and standards
followed in the presentation of financial statements.
Private Accounting- includes maintaining the records,
producing the financial reports, preparing the budgets and A political process which incorporates political actions

controlling and allocating the resources of the entity. of various interested user groups as well as
professional judgment, logic and research.

The major objective of the private accountant is to assist

management in planning and controlling the entity’s operations. Purposes of accounting standards
To identify proper accounting practices for the preparation and

Government Accounting-encompasses the process of presentation of financial statements.

analyzing, classifying, summarizing and communicating all

transactions involving the receipt and disposition of Financial Reporting Standards Council

government funds and property and interpreting the result The financial reporting standard is now replaces into The
thereof. Accounting Standard Council. The FRSC is the accounting
standard setting body created by Professional Regulation
Continuing Profession Development (CPD) Commission upon recommendation of the Board of
Republic Act No. 10912 is the law mandating and Accountancy to assist the BOA in carrying out its powers and
strengthening the continuing professional development function provided under RA no. 9298
The main function is to establish and improve accounting
standards that will be generally accepted in the Philippines. International Accounting Standards Board The

Compositions of FRSC: international accounting standards board now

Composed of 15 members (1 chairman and 14 members) replaces the International Accounting Standards

Board of Accountancy 1 Committee or IASC

Securities and Exchange Commission 1

BangkoSentralngPilipinas 1 The IASB standard-setting process includes in the correct;

Bureau of Internal Audit 1 • Order research

Major organization of preparers and users of financial • Discussion paper

statement (Financial Executives Institute of the Philippines or • Exposure d6raft

FINEX) 1 • Accounting standard

Accredited national professional organization of CPAs:

Chapter 2:
Public Practice 2
CONCEPTUAL FRAMEWORK (OBJECTIVE OF FINANCIAL
Commerce and Industry 2
REPORTING)
Academe or Education 2
Conceptual Framework
Government 2
- Is a complete, comprehensive and single document
promulgated by the International Accounting
14
Standards Board.
Philippine Interpretations Committee
- Is a summary of the terms and concepts that underlie
Was formed by the FRSC in August 2006 and has replaced the
the preparation and presentation of financial
Interpretations Committee or IC formed by accounting
statement for external users?
standards council in May 2002.
- Is an attempt to provide an overall theoretical
The role of PIC to prepare interpretations of PFRS for approval
foundation for accounting.
by the FRSC and to provide timely guidance on financial
reporting issues not specifically addressed in current PFRS. - Is intended to guide standards-setter, prepares and
users of financial information in the preparation of

International Accounting Standards Committee Is an statements.

independent private sector body, with the objectives of The Foundation for Standards that:

achieving uniformity in the accounting principles which are • Contribute to transparency

used by business and other organizations for financial • Strengthen accountability
reporting around the world. • Contribute to economic efficiency
Objectives of IASC: Purpose of Conceptual Framework:

• To formulate and publish in the public interest • To assist the IASB, to develop IFRS standards based

accounting standards to be observed in the on consistent on concepts.

presentation of financial statements and to • To assist preparers of financial information to develop

promote their worldwide acceptance and consistent accounting policy when no standards
observance. applies

• To work generally for the improvement and • To assist preparers of financial statements, to develop
harmonization of regulations, accounting accounting policy
standards and procedures relating to the • To assist all parties to understand and interpret the
presentation of financial statements. IFRS standards.
 Specific objectives of financial reporting:
Users of financial information • To provide information that is useful for decision
• Primary users- the parties to whom general purpose making.
financial reports are primarily directed. • To provide information useful in assessing the cash
o Existing and potential investors- flow prospects of the entity.
concerned with the risk inherent in and • To provide information about entity, resources, claims,
return provided by their investments. and changes in resources and claims.

o Lenders and other creditors- determine

whether their loans, interest thereon and Accrual Accounting- depicts the effects of transactions and

other amounts owing to them will be paid other events and circumstances on entity’s economic

when due. resources and claims in the period

• Other users- users of financial information other than • Means that income is recognized when earned
regardless of when received and expense is
the existing and potential investors, lenders and other
recognized when incurred regardless of when paid.
creditors.
Limitations of financial reporting
o Employees- assess their ability of the entity
• Cannot provide all of the information that existing and
o Customers
potential investors, lenders, and other creditors need.
o Governments and their agencies
• Not designed to show the value of an entity
o Public • Cannot accommodate every request for information
Scope of Revised Conceptual Framework • Based on judgment rather than exact depiction.
• Objectives of financial reporting
• Qualitative characteristics of useful financial Chapter 3:
information CONCEPTUAL FRAMEWORK (QUALITATIVE
• Financial statements and reporting entity CHARACTERISTICS)
• Elements of financial statements
• Recognition and derecognition Qualitative Characteristics- the qualities or attributes that
• Measurement make financial accounting information useful to the users.
• Presentation and disclosure Fundamental Qualitative Characteristics
• Concepts of capital and capital maintenance  Relevance
Objective of Financial Reporting
 Faithful representation
To provide financial information about the reporting entity that
is useful to existing and potential investors, lenders and other
Application of Qualitative Characteristic
creditors in making decisions about providing resources to the
1. Identify an economic phenomenon
entity.
2. Identify the information of the phenomenon
Financial Reporting- the provision of financial information
3. Determine whether the information is available.
about an entity to external users that is useful to them in
Relevance
making economic decisions and for assessing the
effectiveness of the entity’s management. - is the capacity of the information to influence a
decision.

- requires the financial information should be related or

pertinent to the economic decision.
Ingredients: income are not overstated and liabilities or expenses are not

• Predictive value-if it can be used as an output to understated.

processes employed by users to predict future Conservatism- means alternative exist, the alternative which
has the least effect on equity should be chosen. “in case of
outcome; financial information has a predictive value doubts, record any loss and do not record any gain.”
when it can help the users increase the likelihood of Measurement Uncertainty- arises when monetary amounts
correctly or accurately predicting or forecasting in financial reports cannot be observed directly and must be
estimated.
outcome of events.
Substance over Form- is not considered a separate
• Confirmatory value- provides feedback about component of faithful representation because it would be
previous information; financial information has redundant. It is necessary that the transaction and events are
accounted in accordance.
confirmatory value when it enables users confirm or
correct earlier expectations. Enhancing Qualitative Characteristics- intended to increase
Materiality the usefulness of the financial information that is relevant and
- A practical rule in accounting which dictates that strict faithfully represented.
adherence to GAAP is not required when the items • Comparability- enables the users to identify and
are not significant enough to affect the evaluation, understand similarities and dissimilarities among
decision and fairness of the financial statements. items.
- Also known as doctrine of convenience • Consistency- refers to the use of the same method
The relevance of information is affected by its nature and
materiality. for the same item.

• Understandability- requires that financial

Factors of materiality:
information must be comprehensible or intelligible if it
• Size of an item is to be most useful.
• Nature of an item
• Verifiability- implies concensus o Direct verification-
verifying an amount or other presentation through
Faithful Representation- means that the actual effects of the
direct observation. Ex. counting cash.
transactions shall be properly accounted for and reported in the
o Indirect verification- checking the inputs to a
financial information.
model, formula or other techniques.
- Means that financial reports represent economic
• Timeliness- financial information should be updated.
phenomena or transactions in words and numbers.
Ingredients:
Chapter 4:
• Completeness-requires that the financial reports
CONCEPTUAL FRAMEWORK (UNDERLYING
facilitates understanding and avoids erroneous
ASSUMPTIONS)
implication.

• Neutrality- is without bias in the presentation.

Financial statement- provides information about economic
• Free from errors- means there are no errors.
resources of reporting entity.
• Standard of adequate disclosure- means that all
significant and relevant information leading to the
Types:
preparation of financial statements shall clearly
• Consolidated financial statements- assets,
reported.
liabilities, equity, income and expenses of both
Prudence- the exercise of care and caution when dealing with
parents and its subsidiaries.
uncertainties in the measurement process such that assets or
• Unconsolidated financial statements- parent’s
asset, liabilities, equity, income and expenses.
 • Combined financial statements- assets, liabilities, item that meets the definition of an asset, liability, equity,
equity, income and expenses of two or more entities income or expense.
and not linked with parent and subsidiary relationship.
The amount at which an asset, a liability or equity is recognized
Reporting entity- an entity that is required or chooses to in the statement of financial position is reported as carrying
prepare financial statements. amount.

Reporting period- period when financial statement is Derecognition- the removal of all or part of a recognized asset
prepared. or liability from the statement of financial position. It normally
Underlying Assumptions occurs when an items doesn’t meets the definition of an asset

Going concern- means that in the absence of evidence to the or a liability.

contrary, the accounting entity is viewed as continuing in

operation indefinitely. MEASUREMENT-defined as quantifying in monetary terms in
Accounting entity-is the specific business organization. the elements in the financial statement.

Time period- accounting cycle a) Historical Cost-first amount to be included in the FS.
Monetary unit b) Current Value- includes fair value, value in use for
• Quantifiable aspects- stated in terms of a unit of asset, Fulfillment value for liability, current cost.
measurement which is peso in the Ph.  Fair Value-exit price
• Stability of the peso- purchasing power of peso is  Value in use-is the present value of the cash
stable or constant flow that an entity expects to derive from the
use of an asset and from the ultimate
Chapter 5: disposal.
CONCEPTUAL FRAMEWORK (ELEMENTS OF FINANCIAL  Fulfillment value-is the present value of cash
STATEMENT) that an entity expects to transfer in paying or
settling a liability.
Elements directly related to the measurement of financial
 Current Cost-entry price but reflects market
position are: conditions on measurement date.
a. Asset- economic resources

b. Liability- present obligation Chapter 7:

c. Equity- residual interest in the assets CONCEPTUAL FRAMEWORK (PRESENTATION AND
DISCLOSURE)
Elements directly related to the measurement of financial
performance are: The presentation and disclosure can be effective

a. Income- increase in asset communication tool about the information in financial

b. Expense-decrease in asset statements. Effective communication tool of information in

Chapter 6: financial statements:

CONCEPTUAL FRAMEWORK (RECOGNITION AND - Makes the information more relevant and contributes

MEASUREMENT) to a faithful representation of an entity’s asset,

liabilities, income and expenses.

The revised Conceptual Framework defines recognition as the - Also enhances the understandability and

process of capturing for inclusion in the financial statements an comparability of information in the financial
statements.
 - Is supported by not duplicating information in different
parts of the financial statements.
Classification- sorting of asset, liabilities, equity, income and 2. Total Asset- Dec 31 2,500,000
expenses on the basis of shared or similar characteristic. Total Liabilities- Dec 31 (1,200.000)
Net asset- Dec. 31 1,300,000
Net asset- Jan.1 (500,000)
The statement of profit and loss is the primary source of
Total 800,000
information about an entity’s financial performance for the
Additional investments (400,000)
reporting period.
Total 400,000
Dividend paid 300,000
Aggregation- the adding together of asset, liabilities, equity,
NET INCOME 700,000
income and expenses that have similar or shared
characteristics.

PhysicalCapital- quantitative measure of the physical

Capital maintenance approach- means that net income
productive capacity to produce goods and services.
occurs only after the capital used from the beginning of the
(CURRENT COST)
period is maintained.
Illustration:
• Return on capital- shareholder’s investment in the
Net assets – Jan. 1 1,300,000
entity.
Add: dividends paid 300,000
• Return of capital- erosion of capital invested.
Total 1,600,000

Financial Capital- the monetary amount of the net assets Less: Net asset- Jan.1 800,000 additional

contributed by shareholders and the amount of the increase in investments 400,000 1,200,000

net assets resulting from earning retained by the entity. NET INCOME 400,000

(Historical Cost)

Illustration: Total Asset- Dec 31 2,500,000

Jan. 1 Dec. 31 Total Liabilities- Dec 31 (1,200.000)
Total asset 1,500,000 2,500,000
Net asset- Dec. 31 1,300,000
Total liabilities 1,000,000 1,200,000
Net asset- Jan.1 (800,000)
Additional investments during the year
Total 500,000
400,000
Additional investments (400,000)
Dividends paid during the year
Total 100,000
300,000
Dividend paid 300,000

COMPUTATION OF NET INCOME NET INCOME 400,000

1. Net assets – Jan. 1 1,300,000

Add: dividends paid 300,000
Chapter 8:
Total 1,600,000
PAS 1(STATEMENT OF FINANCIAL POSITIONS)
Less: Net asset- Jan.1500,000
additional investments 400,000 900,000 Financial statements- means by which the information

NET INCOME 700,000 accumulated and processed in financial accounting is

periodically communicated to the users.
Components: Forms of financial position

1. Statement of financial position Report form

2. Income statement • Account form

3. Statement of comprehensive income

Non-controlling asset- not 100% owned by an entity.
4. Statement of changes in equity

5. Statement of cash flows Chapter 9

6. Notes
PAS 1(STATEMENT OF COMPREHENSIVE INCOME)

Frequency of reporting
Income statement- a formal statement showing the financial
Financial statement should be prepare at least annually.
performance of an entity for a given period of time.

Statement of financial position- a formal statement showing the

Comprehensive income- the change in equity during a period
3 elements comprising financial position, namely assets,
resulting from transactions and other events, other than
liabilities and equity.
changes resulting from transactions with owners in their
capacity as owners. Comprehensive income includes:
Assets- economic resources controlled by an entity.
• Components of profit and loss
• Current Asset- short term assets
• Component of other comprehensive income
• Non-current asset- long term assets

Other Comprehensive Income- comprises items of income and

Property, plant and equipment- tangible assets which are held
expenses including reclassification adjustment that are not
by an entity for use in production or supply in goods.
recognized in profit or loss as required or permitted by PFRS.

Long term investment- an asset held by an entity for the

Components
accretion of wealth through capital distribution.
 IC that will reclassified to profit or loss

 Unrealized gain or loss on debt investment

Intangible asset- asset without physical substance. Ex.
Goodwill  Gain or loss from translation of the FS

 Unrealized gain or loss from derivate contracts

Other non-current asset- are those assets that do not fit into  IC that will reclassified to retained earnings
the definition of the previously mentioned noncurrent assets  Unrealized gain or loss on equity investment

 Revaluation surplus during the year

Liabilities- present obligation of an entity
 Re-measurements of defined benefit plan
• Current liabilities- obligation within a year
 Change in fair value attributable to credit risk
• Non-Current liabilities- obligation more than 1 year.

Covenants- restriction of borrower. Presentation of comprehensive income

1. Two statements (income statement and statement of

Equity- residual interest in the assets. comprehensive income)

2. Single statement of Comprehensive income

Shareholder’s equity- is the residual interest of owner in the net
asset of a corporation Sources of income

a. Sales of merchandise to customers

 b. Rendering services • Indirect Labor

c. Use of entity resources • Utilities 60%

d. Disposal of resources other than products • Indirect Materials

• Depreciation- Factory Building

Components of expense • Factory Salary

COST OF GOODS MANUFACTURED
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses- selling, Add: WIP Beginning
Finished goods- Beginning
advertising, and delivery of goods.
Less: WIP Ending
c. Administrative expenses- all operating expense.
Finished Goods- Ending
d. Other expense- not related to selling and
COSTS OF GOOD SOLD
administrative expenses.

e. Income tax expense

CHAPTER 10
PAS 2(INVENTORIES)
Forms of income statement

a. Functional presentation- classifies expenses

Inventories- assets held for sale; comprises of finished goods,
according to their function.
processed goods, and raw materials.
b. Natural presentation-classifies expense according to
their nature.
Classes of Inventories:

 Trading concern- buy and sell (merchandise

Statement of comprehensive income- provides more
inventory)
comprehensive information on the financial performance.
 Manufacturing concern- buys goods to transform it to
new product.
Statement of retained earnings- shows the changes affecting
- Finished goods
directly the retained earnings of an entity.
- Goods in process

Statement of changes in equity- a basic statement that shows - Raw materials

the movements of the shareholder’s equity. - Factory or manufacturing

support Cost of Inventories:

Statement of cash flows- summarize the operating, investing, a. Cost of purchase

and financing activities of an entity. b. Cost of conversion

- Fixed production overhead

Formula:
- Variable production overhead
Beginning Raw Materials
c. Other cost
Add: Purchases
- Abnormal amount of wastes
Less: Freight in
- Storage Costs
Purchases Returns & Allowances
- Administration Costs
NET RAW MATERIALS PURCHASES
- Distribution or selling costs
Less: Raw Materials Ending
RAW MATERIALS USED
Cost of inventories of a service provider- consist of labor and
Add: Direct Labor
other costs of a personnel directly engaged in providing
Manufacturing Overhead:
services.
 Example of change in accounting policy:
Costs Formula 1. Change in method in inventory pricing (cost formula)
• FIFO 2. Change in the method of accounting for long term use
• Weighted Average 3. Initial adaptation of policy to carry assets
• LIFO
4. Change to a new policy
• Specific identification (Ex. Second Hand Car)
Measurement of inventories- provides that inventories
Retrosperspective- adjustment to the opening balance of
shall be measured at the lowest of cost and net realizable
retained earnings.
value.
Retroactive- changing previous years to be comparable.
Net Realizable Value- agreed price
Allowance and loss method- inventories is recorded at
CHAPTER 13
cost.
1. Adjusting Events- provide evidence of conditions
CHAPTER 11
that exist at the end of reporting period.
PAS 7(STATEMENT OF CASH FLOW)
2. Non adjusting Events-provide indicative of
.;
conditions that arise after the end of the period.
Statement of Cash Flows- provides information about the
cash and cash payments.

- Cash

- Cash Equivalent (not cash but convertible to cash)

Classification of cash flow

- Operating Activities- included in the income

statement

- Investing Activities- Noncurrent asset

- Financing Activities- Equity or noncurrent liability

Noncash transactions- are transaction that do not requires

use of cash and cash equivalent shall be excluded.

CHAPTER 12
Accounting Policies- are the specific principles, bases,
conventions, rules and practices applied by an entity in
preparing and presenting financial statements.

Change in accounting policy occurs when:

1. Required in the standard

2. When the changes will result in more relevant and

faithfully represented information