CONCEPTUAL FRAMEWORK 3
General Objective of Financial Statements
Financial Statements provide information about economic resources of the reporting entity,
claims against the entity and changes in the economic resources and claims.
Financial statements provides financial information about an entity’s assets, liabilities,
equity, income and expense useful to users of financial statements in:
1. Assessing future cash flows to the reporting entity.
2. Assessing management stewardship of the entity’s economic resources.
The financial information is provided by the following:
1. Statement of financial position by recognizing assets, liabilities and equity.
2. Statement of financial performance, by recognizing income and expenses
3. Other statements and notes by presenting and disclosing information about
a) Recognized assets, liabilities, equity, income and expenses
b) Unrecognized assets and liabilities
c) Cash flows
d) Contribution from equity holders and distribution to equity holders
e) Method, assumption, and judgement in estimating amount presented
Types of Financial Statements
The Revised Conceptual Framework recognizes three types of financial statements.
1. Consolidated Financial Statements – These are the financial statements prepared when the
reporting entities comprises both the parents and its subsidiaries.
2. Unconsolidated Financial Statements – These are the financial statements prepared when
the reporting entity is the parent alone.
3. Combined financial statements – These are the financial statements when the reporting
entity comprises two or more entities that are not linked by a parent and subsidiary
relationship.
Reporting Entity
A reporting entity is an entity that is required or chooses to prepare financial statements.
The reporting entity can be a single entity or a portion of an entity, or can comprise more
than one entity.
A reporting entity is not necessarily a legal entity.
Accordingly, the following can be considered a reporting entity.
a) Individual corporation, partnership, or proprietorship
b) The parent alone
c) The parent and its subsidiaries as single reporting entity
d) Two or more entitues without parent and subsidiary relationship as a single reporting entity
e) A reportable segment of an entity
Reporting Period
The reporting period is the period when the financial statements are prepared for general
purpose financial reporting.
Financial statements may be prepared on an interim basis, for example, quarterly and semi-
annual. Interim financial statements are not required but optional.
However, financial statements must be prepared on an annual basis, or for the period of 12
months.
Financial Statements are prepared for a specified period of time and provide information
about:
a) Assets, liabilities, and equity at the end of the reporting period.
b) Income and expenses during the reporting period.
To help users of the financial statements to idenify and assess change in trends, financial
statements also provides comparative information for at least one preceeding reporting period.
Financial statements may include information about transactions and other events that occurred
after the end of reporting period if the information is necessary to meet the general objective of
financial statements.
UNDERLYING ASSUMPTIONS
Accounting assumptions are the basic notions or fundamental premises on which the
accounting process is based. Accounting assumptions are also known as postulates.
Like building a structure that requires a solid foundation to avoid or prevent future collapse
and provide room for expansion, and so with accounting.
Accounting assumptions serve as the foundation or bedrock of accounting in order to avoid
misunderstanding but rather enhance the understanding and usefulness of the financial statements.
The Conceptual Framework for the Financial Reporting mentions only one assumption,
namely going concern.
However, implicit in accounting are the basic assumptions of accounting entity, time
period, and monetary unit.
Going Concern
The going concern or continuity assumption means that in the absence of evidence to the
contrary, the accounting entity will continue in operations for the foreseeable future.
The going concern postulate is the very foundation of the cost principle. Thus asset are
normally recorded at cost. As a rule, market value are ignored. However, some new standards
require measurements of certain asset at fair value.
If there is evidence that the entity would experience large and persistent losses or that the
entity’s operations are to be terminated, the going concern assumption is abandoned. In this vase,
the users of the statements will have a great interest in the amount of cash that will be generated
from the entity’s assets in the short term.
Accounting Entity
In financial accounting, the accounting entity is the specific business organization, which
may be a proprietorship, partnership, or corporation.
Under this assumption, the entity is separate from the owners, managers, and employees
who constitute the entity. Accordingly, transactions of the entity shall not be merged with the
transactions of owners. The reason for the entity assumption is to have a fair presentation of
financial statements.
Each business is an independent accounting entity.
The shareholder is not the corporation and the corporation is not the shareholder.
However, where parents and subsidiary relationship exists, consolidated statements for the
affiliates are usually made because for practical and economic purposes, the parent and the
subsidiary are a “single economic entity”. The consolidation, however, does not eliminate the legal
boundary segregating the affiliated entities. Accounting will continue to be done separately for
each entity.
Time period
The time period assumption requires that the indefinite life of an entity is subdivided into
accounting periods which are usually of equal length for the purpose of preparing financial reports
on financial position, performance and cash flow.
By convention, the accounting period or fiscal period is one year or a period of 12 months.
The one-year period is traditionally the accounting period because usually it is after one that the
government report are required.
The accounting period may be a calendar year or a natural business year. A calendar year
is a twelve-month period that ends on December 31. A natural business year is a twelve-month
period that ends on any month when the business is at the lowest or experiencing slack season.
Monetary unit
The monetary unit assumption has two aspects:
• Quantifiability aspect means that the assets, liabilities, equity, income and
expenses should be stated in terms of a unit of measure which is the peso in the
Philippines.
• Stability of the peso – assumption means that the purchasing power of the peso is
stable or constant and that instability is insignificant and therefore may be ignored.