The Conceptual Framework for Financial Reporting is a complete,

comprehensive and single document promulgated by the International

Accounting Standards Board. It is a summary of terms and concepts that
underlie the preparation and presentation of financial statements
for external users. In other words, the Conceptual Framework describes the
concepts for general purpose financial reporting.
The Conceptual Framework is an attempt to provide an overall theoretical foundation
for accounting. It is intended to guide standard setters, preparers and users of financial
information in the preparation and presentation of statements. It is the underlying
theory for the development of accounting standards and revision of previously issued
accounting standards.

The Conceptual Framework will be used in future standard setting decision but no
changes will be made to the current IFRS.

The Conceptual Framework provides the foundation for Standards that:


o Contribute to transparency by enhancing international comparability
and quality of financial information.
o Strengthen accountability by reducing information gap between the
providers of capital and the people to whom they have entrusted their
money.
o Contribute to economic efficiency by helping investors to identify
opportunities and risks across the world

The PURPOSE of the Revised Conceptual Framework as outlined is to:

 To assist the International Accounting Standards Board to develop

IFRS Standards based on consistent concepts.
 To assist preparers of financial statements to develop consistent
accounting policy when no Standard applies to a particular
transaction or other event or where an issue is not yet addressed by
an IFRS.
 To assist preparers of financial statements to develop accounting
policy when a Standard allows a choice of an accounting policy.
 To assist all parties to understand and interpret the IFRS
Standards.

This Conceptual Framework is NOT an IFRS or PFRS, and hence, does

not define standards for any particular measurement or disclosure
issue.
If there is a standard or interpretation that specifically applies to a transaction, the
standard or interpretation overrides the Conceptual Framework. Nothing in the
Conceptual Framework overrides any accounting standard.
The SCOPE of the Revised Conceptual Framework:

 Objective of financial reporting;

 Qualitative characteristics of useful financial information
 Financial statements and reporting entity
 Elements of financial statements
 Recognition and derecognition
 Measurement
 Presentation and disclosure
 Concepts of capital and capital maintenance.

Objective of Financial Reporting

The objective of financial reporting forms the foundation of the
Conceptual Framework.
The overall objective of financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity.
The objective of financial reporting is the "why", purpose or goal of
accounting.

Specific Objectives of Financial Reporting

The Conceptual Framework places more emphasis on the importance of providing
information needed to assess the management stewardship of the entity's economic
resources.

Accordingly, the specific objectives of financial reporting are:

 To provide information useful in making decisions about providing resources to

the entity.
 To provide information useful in assessing the cash flow prospects of the entity.
 To provide information about entity resources, claims and changes in resources
and claims.

Limitations of Financial Reporting

 General purpose financial reports do not and cannot provide all

of the information that existing and potential investors, lenders and
other creditors need. These users need to consider pertinent
information from other sources, for example, general economic
conditions, political events and industry outlook.
  General purpose financial reports are not designed to show the
value of an entity but the reports provide information to help the
primary users estimate the value of the entity.
 General purpose financial reports are intended to provide
common information to users and cannot accommodate every
request for information.
 To a large extent general purpose financial reports are based on
estimate and judgment rather than exact depiction.

Qualitative Characteristics of Useful

Financial Information
These characteristics are the attributes that make the
information in financial statements useful to investors,
creditors, and others.
In deciding which information to include in financial statements, the
objective is to ensure that the information is useful to the
users in making economic decisions.
Under the Conceptual Framework for Financial Reporting, qualitative
characteristics are classified into “fundamental
(content/substance)” and “enhancing (presentation
form)” qualitative characteristics:
Fundamental Qualitative Characteristics

Relevance
- Information in financial statements is relevant when it
is capable of making a difference in the decisions made by the
users.

Ingredients of relevance:

o Predictive Value – Information can help
users increase the likelihood of correctly
predicting or forecasting the outcome of
certain events.
o Feedback Value – Information can help users
confirm or correct earlier expectations
(feedbacking).
**Note that the predictive and confirmatory roles of information
are interrelated.
Materiality – entity-specific aspect of relevance (nature or
magnitude)

 Information is material if omitting, misstating or

obscuring it could reasonably be expected to
influence the economic decisions that primary
users make on the basis of those statements which
provide financial information about a specific reporting
entity.
 A practical rule when items are not Significant enough
to affect the evaluation, decision and fairness
 is an entity-specific aspect of relevance based on the
nature or magnitude (relative size), or both, of the
items to which the information relates in the context of an
individual entity’s financial report.
 Also known as the “Doctrine of Convenience”
It is important to note that materiality, though frequently
associated and discussed with the previous topics, is not referred to
as an ingredient of relevance under the Framework.

2. Faithful Representation
- Financial reports represent economic phenomena (substance)
in words and numbers. To be useful, financial information must
not only represent relevant phenomena, but it must
also faithfully represent the phenomena that it purports to
represent.
Ingredients of Faithful Representation
 Complete (Principle of Full Disclosure)
o A complete depiction includes all information
necessary for a user to understand the
phenomenon being depicted, including all
necessary descriptions and explanations.
o Also known as Principle of Full/Adequate
Disclosure
 Neutral
o A neutral depiction is without bias in the
selection or presentation of financial information.
o A neutral depiction is NOT: like a horizontal
line
 slanted,
 weighted,
 emphasised,
 de-emphasised or
 otherwise manipulated
to increase the probability that financial
information will be received favourably or
unfavourably by users

 Free from error

o means there are no errors or omissions in the
description of the phenomenon
o the process used to produce the reported
information has been selected and applied with no
errors in the process.
  Free from error does not mean a perfectly accurately
in all aspect due to estimates.

SUPPLEMENTARY CONCEPTS of
FUNDAMENTAL CHARACTERISTICS

Enhancing Qualitative Characteristics

Comparability, verifiability, timeliness and understandabili
ty are qualitative characteristics that enhance the usefulness of
information that is relevant and faithfully represented.

1. Comparability is the qualitative characteristic that

enables users to identify and understand similarities in,
and differences among, items.
2. Two Types: Horizontal & Dimesional

3. Verifiability -
o helps assure users that information faithfully
represents the economic phenomena it purports
to represent.
o Verifiability means that different knowledgeable
and independent observers could reach
consensus, although not necessarily complete
agreement, that a particular depiction is a
faithful representation. It could be direct /Indirect
o

4. Timeliness
 oHaving information available to decision-makers
in time to be capable of influencing their
decisions
o Quarterly or Interim Reports enhances
Timeliness to Financial Information
o The Older the Information the Less Useful Except
When assessing Trends
5. Understandability -
o Financial Information must be:
 Clear and Concise
 Presented & Expressed with terminologies
intended users readily understands

Note: Users must have “Reasonable knowledge of business &

economic activities”, other wise seek guidance from Advisors

Cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be
provided by financial reporting.
Reporting financial information imposes costs, and it is important
that those costs are justified by the benefits of reporting that
information. Cost Constraint- the benfit from information
should exceed the cost.
 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.
The financial statements provide financial information about an entity's
assets, liabilities, equity, income and expenses useful to users of
financial statements in:

 Assessing future cash flows to the reporting entity.

 Assessing management stewardship of the entity's economic
resources.

Types of Financial Statements

The Revised Conceptual Framework recognizes three types of financial
statements:

 Consolidated Financial Statements- These are the financial

statements prepares when the reporting entity comprises both the
parent and its subsidiaries.
 Unconsolidated Financial Statements- These are the financial
statements prepared when the reporting entity is the parent alone.
 Combined Financial Statements- These are 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 oone entity.
A reporting entity is not necessarily a legal entity.
Accordingly, the following can be considered a reporting entity:

 Individual corporation, partnership or proprietorship

 The parent alone
  The parent and its subsidiaries as single reporting entity
 Two or more entities without parent and subsidiary relationship as a
single reporting entity.
 A reportable business segment of an entity.

Reporting Period
The reporting period is the period when financial statements are prepared
for general purpose financial reporting. Financial statements may be
prepared on an interim basis, for example, three months, six months or nine
months. (Interim – 3, 6, 9)
Interim financial statements are not required but optional.
However, financial statements must be prepared on an annual basis or a
period of twelve months.

UNDERLYING ASSUMPTION (POSTULATES)

Accounting assumptions are the basic notions or fundamental premises
on which the accounting process is based. Accounting assumptions are also
known as postulates. These serve as a 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 Financial Reporting mentions ONLY

ONE ASSUMPTION, that is GOING CONCERN.

Going concern means financial statements presume that an enterprise will

continue in operation indefinitely or if that presumption is not valid,
disclosure and a different basis of reporting are required. Its foundation is
the COST PRINCIPLE (assets are recorded at COST).
NOTE: If there is evidence that the entity would experience large losses or
subject for termination, GOING CONCERN IS ABANDONED.

The Accrual accounting, founding on the going concern

assumption, depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the
periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period.
The illustration below shows changes in economic resources and claims as
reflected by accrual basis and compared with cash basis of accounting:

INHERENT ASSUMPTIONS OF FINANCIAL STATEMENTS

Accounting Entity or Separate Entity Concept

This assumption means that the entity is separate from the owners,
managers and employees who constitute the entity. Personal
transactions of owners shall not be allowed to distort the financial
statements of the entity
Q: What is a "Single Economic Entity"?
A: This is where a Parent and Subsidiary (PS) Relationship exists.

o
 PS Relationship consolidates there Financial
Statements
 Consolidation, however, does not eliminate the
legal boundary segregating the affiliated entities
 Accounting will continue to be done separately for
each entity
Time Period
This assumption requires that the indefinite life of an entity is subdivided
into accounting periods, usually of equal length or time period, for the
purpose of preparing financial statements. The “one-year” period is
traditionally the accounting period.
The accounting period may be;

o Calendar year - A twelve (12) – month period that ends
on December 31
o Natural business year - A twelve (12) – month period
that ends on any month when the business at its lowest or
slack season
o Fiscal Year - A Twelve (12) - month period that starts
from any other month than January
o Interim Period - business period within an accounting
period. These are financial reports prepared at any date
even if the 12 month period is not yet due. ( weekly,
monthly, quarterly or semi annual)

Monetary Unit
This assumption pertains to (1) quantifiability of the peso and (2) stability of
the peso. Quantifiability of the peso means that the elements of the
financial statements should be stated under one unit of measure which is the
Philippine Peso. Stability of the peso means that the purchasing power
of the peso is stable or constant and that instability is insignificant and
therefore ignored. Stability is also an amplification of the going concern
assumption, that adjustments are unnecessary to account for nominal pesos
only and not for constant pesos

Components of Financial Statements

A complete set of financial statements comprises:
1) A statement of financial position as at the end of the period
2) A statement of comprehensive income for the period
3) A statement of changes in equity for the period
4) A statement of cash flows for the period
5) Notes, comprising a summary of significant accounting
policies and other explanatory information
6) A statement of financial position as at the beginning of the
earliest comparative period when an entity applies an accounting
policy retrospectively or makes a retrospective restatement of
items in its financial statements, or when it reclassifies items in its
financial statements.

Elements of Financial Statements (FS)

Refers to the quantitative information reported in the statement
of financial position and income statement
“Building Blocks” from which FS are constructed
With the use of the Elements of FS financial effects can
be grouped into classes according to characteristics
Statement of Financial Position/Financial
Condition
Shows the financial condition of an entity of a particular date.

ASSET - A resource controlled by the enterprise as a result of

past events and from which future economic benefits are
expected to flow to the enterprise.

LIABILITY- A present obligation of the enterprise arising from

past events, the settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic
benefits.

EQUITY- The residual interest in the assets of the entity after

deducting all of the liabilities.

Current/Noncurrent Distinction
An entity must normally present a classified statement of financial
position, separating current and noncurrent assets and liabilities.
Only if a presentation based on liquidity provides information that
is reliable and more relevant may the current/noncurrent split be
omitted.

Current assets

An entity shall classify an asset as current when:

(a) It expects to realize the asset, or intends to sell or consume it,
in its normal operating cycle
(b) It holds the asset primarily for the purpose of trading
(c) It expects to realize the asset within twelve months after the
reporting period
(d) The asset is cash or a cash equivalent (as defined in IAS 7)
unless the asset is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting
period.
An entity shall classify all other assets as
non-current.

Normal Operating Cycle – The time between the

acquisition of assets for processing and their realization cash or
cash equivalents. When the entity’s normal operating cycle is not
clearly identifiable, its duration is assumed to be twelve months.

Current liabilities
An entity shall classify a liability as current when:
(a) It expects to settle the liability in its normal operating cycle
(b) It holds the liability primarily for the purpose of trading
(c) The liability is due to be settled within twelve months after the
reporting period
(d) The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period
An entity shall classify all other liabilities as
non-current.

SHAREHOLDERS’ EQUITY

I. CONTRIBUTED (PAID-IN / INVESTED

CAPITAL) CAPITAL
Represent the amount invested or contributed by owners.
This is divided into:
1. Capital Share – the contributions equal to the par or stated
value of the share purchased by owners; or the total contribution
by owners in case of no-par share.
2. Share Premium – contribution in excess of the par or stated
value, gains from share transactions and “other” equity items
that are not included in earnings or other comprehensive income.

II. RETAINED EARNINGS

Accumulated profits and losses that have not been declared as
dividends.
Classified into retained earnings that are prohibited from being
declared as dividends due to legal and contractual requirements
or upon the decision of the Board of Directors, “appropriated” and
retained earnings available as dividends to shareholders,
“unappropriated”.
1. Increases – Effect of changes in accounting policy and
correction of prior period errors, Net Income and Quasi re-
organization.
2. Decreases - Effect of changes in accounting policy and
correction of prior period errors, Dividends, Losses on share
transactions like retirement and reissuance of treasury shares,
conversion of preference shares and recapitalization of par value
other than share splits.

Forms of Statement of Financial Position

[Link] Form -
This form set forth the three (3) major sections in Downward
sequence of Assets, Liabilities and Equity
SAMPLE

[Link] Form
Assets are shown in the Left side and the liabilities and equity on the Right

SAMPLE
NOTE: In the Philippines, the common practice is to present current assets/liabilities
before non-current assets/liabilities

Income Statement / Statement of

Comprehensive Income
An entity shall present all items of income and expense
recognized in a period:
(a) In a single statement of comprehensive income, or
(b) In two statements: a statement displaying components of
profit or loss (separate income statement) and a second
statement beginning with profit or loss and displaying
components of other comprehensive income (statement of
comprehensive income).

Components of Comprehensive Income

INCOME- Increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
EXPENSE- Decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets
or incurrence of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants.

1. Profit and Loss - Income minus Expenses including Tax

expense and any Income or Loss from Discontinued Operations.

2. Other Comprehensive income – –Items of income

and expenses including reclassification adjustments (RA) that are
not included in Profit and Loss as required by a standard or
interpretation. There are two types of OCI items, those that are
reclassified to profit or loss (RA) and those that are reclassified to
Retained Earnings (RE). OCI includes the following;
 Unrealized gain or loss on equity investments measured at
FVOCI (RE)
 Unrealized gain or loss on debt investments measured at
FVOCI (RA)
 Unrealized gain or loss from derivative contracts designated
as cash flow hedge (RA)
 Revaluation Surplus (RE)
 Remeasurement Gains and losses for defined benefit plans
(RE)
 Change in fair value arising from credit risk for financial
liabilities measured at FVPL (RE)
 Translation gains and losses of foreign operations

An entity shall present either an analysis of expenses using a

classification based on either;

 the nature of expenses or

 their function within the entity,

whichever provides informationthat is reliable and more relevant.

Nature of expense method – Expenses are aggregated
in the income statement according to their nature and are not
reallocated among various functions within the entity.
SAMPLE

Function of expense or cost of sales method –

Classifies expenses according to their
function as part of cost of sales or, for example, the cost of
distribution or administrative
activities.
SAMPLE

RECOGNITION OF THE ELEMENTS of the FS