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Chapter 1: History of Accounting Standards - Publishes standards called
International Financial Reporting
FINANCIAL REPORTING STANDARDS
Standards (IFRS)
COUNCIL (FRSC)
The move toward IFRS is essential to achieve
- The development of generally
the goal of one uniform and globally
accepted accounting principles is
accepted financial reporting standards
formalized initially through the
creation of the Accounting PHILIPPINE FINANCIAL REPORTING
Standards Council or ASC STANDARDS (PFRS)
- Created by the Professional
- The FRSC issues standards called
Regulation Commission (PRC) upon
PFRS
recommendation of the Board of
Accountancy (BOA) The Philippine Financial Reporting Standards
- To assist the BOA in carrying out its collectively include all of the following:
powers and functions
a. PFRS which correspond to IFRS
Main Function: b. PAS which correspond to
- To establish and improve International Accounting Standards
accounting standards that will be used in (IAS)
the Philippines. c. Philippine Interpretations which
correspond to IFRIC
Approved statements of the FRSC
- Philippine Accounting Standards (PAS)
and Philippine Financial Reporting Standards
(PFRS) CONCEPTUAL FRAMEWORK
INTERNATIONAL ACCOUNTING STANDARDS - Promulgated by the International
COMMITTEE (IASC) Accounting Standards Board (IASB)
- Summary of the terms and concepts
- An independent private sector body that underlie the preparation and
with the objective of achieving presentation of FS for external users
uniformity in the accounting - Used as basis for preparing PFRS
principles for financial reporting
around the world Basic Purpose:
- It was formed in June 1973. 1. To assist the IASB in preparing IFRS
Headquartered in London, United 2. To assist preparers of FS to develop:
Kingdom a. Consistent accounting policy
INTERNATIONAL ACCOUNTING STANDARDS when no standard applies
BOARD (IASB) b. Develop accounting policy when
a standard allows a choice
- Replaces the International 3. To assist all other parties to
Accounting Standards Committee understand and interpret IFRS
(IASC) standards.
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If there is a standard that specifically applies SCOPE OF REVISED CONCEPTUAL
to a transaction, the interpretation overrides FRAMEWORK
the Conceptual Framework
1. Objective of Financial Reporting
In the absence of a standard or an 2. Qualitative characteristics of useful
interpretation, management shall consider financial information
the applicability of the Conceptual 3. Financial statements and reporting
Framework entity
4. Elements of financial statements
USERS OF FS
5. Recognition and derecognition
1. Primary Users 6. Measurement
- Include the existing and potential 7. Presentation and disclosure
investors, lenders and other 8. Concepts of capital and capital
creditors. These are the parties to maintenance
whom general purpose financial
OBJECTIVE OF FINANCIAL REPORTING
reports are primarily directed.
a. Owners/Investors – they are the - Provide financial information about
one who puts capital in business the reporting entity that is useful to
b. Manager – the one who is existing and potential investors,
responsible for running the lenders and other creditors in making
business decisions
c. Lenders & Creditors -assess the
Specific objectives:
paying ability of the
corporation/company a. To provide information useful in
d. Suppliers – the one who making decisions about providing
provides goods for the sale of the resources to the entity (Changes in
business Equity)
2. Other users b. To provide information useful in
- Users of FS other than existing assessing the cash flow prospects of
investors. Reports are not directed to the entity
them primarily. c. To provide information about entity
a. Employees – assess if the resources, claims and changes in
company can grant their demand resources and claims. (changes in
b. Customers – assess the ability of Financial Position and Income
the company to continuously Statement)
provide goods that they buying
c. Government – assess the correct The economic resources are the assets
payment of taxes and filing of all and the claims are the liabilities and
required documents equity of the entity
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LIMITATIONS OF FINANCIAL REPORTING Ingredients:
1. Do not and cannot provide all of the a. It has predictive value – help users
information that existing and correctly forecast outcome of events
potential investors, lenders and b. It has confirmatory value – enables
other creditors need. users to confirm or correct earlier
expectations
NOTE: Primary users need to consider
- Materiality/ doctrine of
relevant information from other sources
convenience: the relevance of an
2. Not designed to show the value of an information is affected by its nature
entity but the reports provide and materiality. Information is
information to help the primary material If omission, misstatement,
users estimate the value of the entity and obscuring information could
3. Intended to provide common affect the decision of primary users
information to users and cannot
Faithful representation
accommodate every request for
information - Shall be properly accounted for and
4. Based on estimate and judgement reported in the financial statements
rather than depiction
Ingredients:
CHAPTER 2: QUALITATIVE CHARACTERISTICS
a. Completeness – presented in a way
OF USEFUL FINANCIAL INFORMATION
that facilitates understanding and
Qualitative characteristics: avoids erroneous implication. To be
complete, the financial statements
- Qualities or attributes that make
shall be accompanied by notes to
financial accounting information
financial statements. The purpose of
useful to the users
the notes is to provide the necessary
- Classified into
disclosures required by Philippine
1. Fundamental qualitative
Financial Reporting Standards
characteristics
2. Enhancing qualitative
Standard of adequate disclosure
characteristics
- All significant and relevant
information leading to the
1. FUNDAMENTAL QUALITATIVE
preparation of financial statements
CHARACTERISTICS
shall be clearly reported.
- Relate to the content or substance of
b. Free from error – there are no errors
financial information
or omissions in the transaction
- Relevance and faithful
c. Neutrality – must be free from bias
representation
and should not favor one party. To
Relevance be neutral is to be fair.
d. Substance over form – if information
- Capacity of the information to is to represent faithfully the
influence a decision transactions and other events, it is
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necessary that the transaction and could reach consensus.
events are accounted in accordance Verifiability implies
with their substance and not merely consensus and synonymous
their legal form. with objectivity.
e. Prudence – exercise of care and
Types of Verification
caution when dealing with the
uncertainties in the measurement 1. Direct verification –
process such that assets or income verifying an amount or
are not overstated and liabilities or other representation
expenses are not understated. through direct
Neutrality is supported by the observation
exercise of prudence 2. Indirect verification –
f. Conservatism – synonymous with checking the inputs to a
prudence. When alternative exist, model, formula or other
the alternative which has the least technique and recalculating
effect on equity should be chosen. the inputs using the same
“In case of doubt, record any loss methodology.
and do not record any gain.” b. Comparability
Inventories are measured at the - the ability to bring together for
lower cost and net realizable value. the purpose of noting points of
Contingent loss is recognized as a likeness and difference. Enable
“provision” if the loss is probable and users to identify and understand
the amount can be reliably similarities and dissimilarities
measured. among items.
Contingent gain is not recognized but - May be made within an entity or
disclosed only between across entities.
g. Measurement uncertainty – arises - Within an entity is also known as
when monetary amounts cannot be horizontal comparability or
observed directly and must instead intracomparability
be estimated. - Across entities is also known as
Measurement uncertainty can affect intercomparability or dimension
faithful representation if the level of comparability
uncertainty in providing an estimate c. Consistency – refers to the
is high use of the same method for
the same item, either from
2. ENHANCING QUALITATIVE period to period.
CHARACTERISTICS
- Intended to increase the usefulness Comparability is the goal and
of the financial information that is Consistency helps to achieve that
relevant and faithfully represented goal
a. Verifiability – different d. Understandability – readily
knowledgeable and understandable by users.
independent observers
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Users are expected to have Expense recognition – expenses are
reasonable understanding of recognized when incurred
economic activities. It links
The expense recognition principle is the
decision makers and decision
application of the matching principle.
they make
e. Timeliness – having information Matching principle – requires that those
available to users. It enhances costs and expenses incurred in earning a
the truism that without revenue shall be reported in the same
knowledge of the past, the basis period.
for prediction will usually be
lacking and without interest in Matching principle has three applications:
the future, knowledge of the a. Cause and effect association
past is sterile. - The expense is recognized when
Generally, the older the information, the revenue is already recognized
the less useful. - Strict matching concept
But what happened in the past This matching process,
would become the basis of what commonly referred to as the
would happen in the future. matching of cost with revenue,
involves the simultaneous or
- Cost constraint – a consideration of combined recognition of revenue
the cost incurred in generating and expenses that result directly
financial information against the and jointly from the same
benefit to be obtained from having transactions or events.
the information Example: cost of merchandise
inventory
CHAPTER 5: RECOGNITION AND
Such cost is considered as an asset in
DERECOGNITION
the meantime that the merchandise
Recognition is on hand.
When the merchandise is sold,
- process of capturing for inclusion in
the cost is expensed in the form
the FS an item that meets the
of cost of goods sold because at
definition of an asset, liability, equity,
such time revenue can now be
income, or expense
recognized.
- The amount at which an asset, a
b. Systematic and rational allocation
liability or equity is recognized in the
- costs are expensed by allocating over
statement of financial position is
the periods benefited
reported as carrying amount.
- there is no direct association with
Accrual Basis revenue
- depreciation
- Recognize income when earned c. Immediate recognition
regardless of collection
- Recognize expense when incurred
regardless of payments
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- Expense outright because of - Exit price/exit value
difficulty of associating with
revenue
- Salary expense c. Fulfillment value (Liabilities)
- Present value of cash that
Derecognition
is expected in paying or
- Removal of all or part from the FS settling the liability
- Normally occurs when an item no - Includes transaction cost
longer meets the definition of an on settlement on liab
asset or liability - Exit price/exit value
d. Current cost
- Replacement cost
CHAPTER 6: MEASUREMENT - Price of cost of an
equivalent asset/liab
Measurement
CHAPTER 7: CLASSIFICATION
- Quantifying in monetary terms the
elements in the FS Classification
2 Categories - Sorting of assets, liabilities, equity,
income and expense
1. Historical cost
a. Cost incurred in acquiring or Aggregation
creating the asset
- Adding together assets, liabilities,
b. Entry price/entry value
equity, income and expense
c. Asset = Consideration paid +
transaction cost CHAPTER 8: CONCEPTS OF CALITAL AND
d. Liability = consideration received CAPITAL MAINTENANCE
– transaction cost
Approaches in determining Net Income:
2. Current Value/Cost
a. Fair Value a. Transaction approach
- price that would be - Traditional preparation of an income
received/paid between statement
market participants - Normal
- exit price/exit value b. Capital maintenance approach
- For liabilities – “Present - Net income occurs in excess of
Value” beginning capital
b. Value in Use (Asset) 2 concepts:
- Present value of cash 1. Financial capital concept –
flows that is expected to net assets is based on
derived from continuing monetary amount invested
use of the asset (historical cost)
- Includes transaction cost 2. Physical Capital – net assets
on the disposal of asset is based on physical
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productive capacity to In other words, the financial statements
produce goods or service are normally prepared on the assumption
(current cost) that the entity will continue in operations
for the foreseeable future.
CHAPTER 3: FINANCIAL STATEMENTS
AND REPORTING ENTITY - Explicit assumption (sinasabi)
Financial Statements Accounting Entity Assumption
Objective - Entity is separate from the owners,
managers, and employees who
- Provide information about economic
constitutes the entity.
resources of the reporting entity,
- Implicit assumption (di na sinasabi,
claims against the entity and changes
automatic na)
in the economic resources and claims
Time period assumption/Periodicity
Economic resources – assets
Claims – liabilities - The indefinite life of the entity is
Changes in the economic resources and subdivided into accounting periods
claims – Equity Income/Expenses which are usually of equal length for
the purpose of preparing reports on
Reporting Entity
financial position, financial
- Entity that prepares financial performance, and cash flows.
statements - Implicit assumption
Reporting Period Monetary Unit Assumption
- Period of financial statements - Elements of FS should be stated in
terms of a measure (Philippine Peso)
Required: Annual basis - Implicit Assumption
1. Calendar year: ending on Dec 31
2. Natural Business year/fiscal year:
Ending on any day other than Dec 31
Optional: Interim
Financial statements may be prepared on
an interim basis, e.g., three months
(quarterly), six months, or nine months
ACCOUNTING ASSUMPTIONS
Going Concern/Continuity Assumption
- Accounting entity is viewed as
continuing in operation indefinitely
in the absence of evidence in the
contrary.
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Note:
Income
CHAPTER 4: ELEMENTS OF FINANCIAL
STATEMENTS 1. Revenue
- Arises in the course of ordinary
Financial Position
activities
- Asset - Regular / regularity
- Liability - Referred to by variety of different
- Equity names including sales, fees,
interest, dividends, royalties and
Financial Performance rent
- Income 2. Gains
- Expenses - Other items that meet the
definition of income but do not
arise in the course of ordinary
Asset activities
- Present economic resource Expense
controlled by the entity as a result 1. Expense
of past events - Arises in the course of ordinary
Liability activities
2. Losses
- Present obligation of an entity to - Do not arise in the course of
transfer an economic resource as a ordinary regular activities
result of past events
Equity
- Residual interest in the assets after
deducting liabilities
Income
- Increase in assets or decreases in
liabilities that result in increases in
equity, other than those relating to
contributions from equity holders
Expense
- Decrease in asset or increase in
liabilities that result in decreases in
equity, other than those relating to
distributions to equity holders
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