CONCEPTUAL FRAMEWORK & ACCOUNTING

STANDARDS

Introduction to the International Accounting Standards

Board (IASB)
March 2001- the International Accounting Standards Committee
(IASC) Foundation was formed as a not-for-profit corporation
incorporated in Delaware, USA. This foundation is the parent
entity of the IASB and independent accounting standards setter
based in London, UK.

Formation of IASB
Established in 2001- the IASB is an independent private sector
body.
Objective: To achieve convergence in the accounting
principles used by businesses and other organizations for Monitoring Board- serves as a mechanism for formal interaction
financial reporting around the world. between capital market authorities and the IFRS Foundation. It
Effective April 1, 2001- the IASB assumed accounting links the Trustees of the Foundation and public authorities.
standard-setting responsibilities from its predecessor body, the March 1, 2010- the Monitoring Board comprised relevant
IASC. members of the European Commission, the Chairs of the
Financial Services Agency of Japan, the US Securities and
Brief History Exchange Commission, and the Emerging Markets Committee
1973- the IASC was formed through an agreement between and Technical Committee of the International Organization of
professional accounting bodies from Australia, Canada, France, Securities Commissions (IOSCO). The Chair of the Basel
Germany, Japan, Mexico, the Netherlands, the UK and Ireland, Committee on Banking Supervision is a non-voting observer.
and the USA. Main Responsibilities of the Monitoring Board:
1983-2000- there was a membership link between the IASC and -​ Participate in the process of appointing trustees and
the professional accountancy bodies of the International approving the appointment of trustees according to the
Federation of Accountants (IFAC). However, there is no guidelines set out in the IFRS Constitution.
membership link between IASB and IFAC. -​ Review and provide advice to the trustees on their
2001- the IASB emerged and was initially based in London, UK. fulfillment of the responsibilities outlined in the IFRS
Goal: Create a single set of global accounting standards Constitution.
and issue the International Financial Reporting Standards
(IFRS) based on the Conceptual Framework. IFRS Foundation- has a total of 22 trustees to maintain
2008-2010- the foundation conducted a Constitution Review and geographical balance [Asia/Oceania, Europe, North America (6
concluded to enhance governance of the IFRS Foundation, each); Africa, South America (1 each); any area (2)]. These
splitting it into two parts. trustees come from various professional backgrounds.
January 1, 2010- the IASC changed its name to the IFRS Main Responsibilities of the Trustees:
Foundation. -​ Safeguarding the independence of the IASB
-​ Ensuring the financing of the organization.
Parts of the IFRS Foundation -​ Appoint or approve members of the IASB, IFRIC, and
Part 1- focused on the governance and public IFRS Advisory Council.
accountability of the IFRS Foundation, which resulted in -​ Monitor the effectiveness of approved budgets and
the creation of the Monitoring Board; and on the size and secure funding for the IASB.
composition of the IASB, which expanded the number of -​ Report to the Monitoring Board annually.
members from 14 to 16. -​ Consult the IFRS Advisory Council before proposing
Part 2- focused on enhancing public accountability, changes to the Constitution.
stakeholder engagement, and operational effectiveness.
This resulted in the creation of the IASB Board, Vice IFRS Foundation Principal Objectives
Chairs for Trustees of the IFRS Foundation, and the -​ Develop a single set of high-quality, understandable,
streamlining of the organization's names. enforceable, and globally accepted international
reporting standards (IFRS) through its standard-setting
IASB Structure- designed to support the attributes considered body, the IASB.
desirable to establish the legitimacy of a standard-setting -​ Promote the use and rigorous application of those
organization: the representativeness of the decision-making standards.
body, the independence of its members, and technical expertise. -​ Consider the financial reporting needs of emerging
economies and SMEs.
-​ Achieve convergence of national accounting standards
and IFRSs to high-quality solutions.
IASB- consists of 16 people (1 chairman and 15 members) to IASB Standard-Setting Process
maintain geographical balance [Asia/Oceania, Europe, North 1.​ Identify and review issues associated with potential
America (4 each); Africa, South America (1 each); any area (2)]. agenda topics and consider the application of the
These members have diverse professional backgrounds and the framework to the issues.
qualifications of being professional, with practical experience 2.​ Consult the IFRS Foundation Trustees and IFRS
representing technical expertise and international market Advisory Council about agenda topics and priorities.
experience. 3.​ Conduct public consultations, typically every three years.
Main Responsibilities of the Members: 4.​ Form an advisory group (working group) to provide
-​ Development and publication of IFRSs, including the advice.
IFRS for SMEs. 5.​ Draft and publish an exposure draft for public
-​ Approving interpretations of IFRSs as developed by the comment, including the Board’s preliminary views. This
IFRS Interpretations Committee. requires approval from 9 or 10 of the 16 IASB members.
-​ Hold meetings in public and webcast. Public comments and dissenting opinions are discussed
-​ Following an open and transparent due process involving in open meetings.
the publication of consultative documents, such as 6.​ Approve the standard. This requires 9 or 10 votes.
discussion papers and exposure drafts, for public Dissenting opinions are published alongside the standard,
comment is an important component. with the basis for conclusions explaining the process and
-​ Engage closely with stakeholders worldwide, including addressing comments from the exposure draft.
investors, analysts, regulators, business leaders,
accounting standard-setters, and the accountancy
profession.
-​ Consult the IFRS Advisory Council in advance of Board
decisions on major projects and any proposed changes to
the Constitution.
-​ Inform trustees of the result of the work.

IFRS Advisory Council- formerly known as the Standards

Advisory Council, it consists of 40 members. It provides a forum
for organizations and individuals interested in international
financial reporting to participate in the standard-setting process.
Main Responsibilities of the IFRS Advisory Council:
-​ Provide advice to the IASB members and IFRS
Foundation trustees.
​
IFRS Interpretations Committee- formerly known as the
International Financial Reporting Interpretations Committee
(IFRIC), it serves as the IASB's interpretative body. It comprises
14 voting members appointed by the trustees drawn from different
countries and professional backgrounds, along with non-voting
observers.
Main Responsibilities of the IFRS Interpretations Committee:
-​ Review widespread accounting issues under current
IFRS and provide authoritative guidance.
-​ Interpret and guide the IFRS Foundation.

Working Groups- formed by the IASB to provide advice on

major agenda projects. These are formed only when needed for
specific IASB projects.
ACCOUNTING STANDARDS The ASC considered the following factors in deciding to move to
International Accounting Standards:
Accounting Standards (IFRS)- are authoritative statements that -​ Support of IAS by Philippine organizations
show how particular types of transactions and other events should The Philippine Securities and Exchange Commission’s Revised
be reflected in the financial statements. Securities Act Rule 48, Rules and Regulations Covering Form and
Content of Financial Statements, specifically include IAS in its
Are IFRSs Mandatory? hierarchy of GAAP.
-​ IASB is not a government institution, so it has no -​ Increasing internationalization of business
authority to require compliance. If the government does The increase in globalization and cross-border financing has
not require a company to follow IFRS, it has no legal increased interest in a common language for financial reporting.
obligation. More Philippine companies now seek capital abroad in countries
-​ A set of financial statements can only be described as other than the US, where International Accounting Standards have
complying with IFRSs if they comply with all existing increasing acceptability.
IFRSs and IFRICs, plus all existing IASCs and SICs. -​ Improvement of IAS
-​ Companies and/or securities legislation in many The IASC completed a comparability and improvements project
countries requires management and directors of publicly that aimed at removing free choices of accounting treatments
traded companies to prepare financial statements in permitted in the IAS. The IASC also reviewed and revised many
accordance with IFRS. of the standards for developments that had taken place since the
-​ The accountancy profession is committed to promoting standards were first issued.
and supporting compliance with IFRS by preparers and -​ Increasing recognition of IASB standards
auditors of financial information. International financial institutions like the World Bank prefer that
-​ Where IFRS are required accounting standards, or an borrowers use IAS. The World Trade Organization issued a
enterprise chooses to comply with IFRS, the statement of support for IASC initiatives to harmonize
requirements of all IFRS should be regarded as accountancy standards. The IOSCO has agreed to consider using
Mandatory. IAS in cross-border capital raising and listing purposes in all
global markets if IASC can complete certain core and other
The Need for International Accounting Standards standards.
Without IFRSs:
-​ Accounting reports can lack comparability since
World Philippines
principles and procedures can vary widely from country
to country.
IASC (International = Philippine Accounting
-​ Investment analysts and other users incur extra costs of
Accounting Standards IAS) Standards (PAS) of PFAS
analysis when the reports vary according to different
standards in different countries, causing confusion in
IASB (International Financial = Philippine Financial
their interpretation.
Reporting Standards IFRS) Reporting Standards (PFRS)
-​ Effective competition among the capital markets may be
impaired, and companies may have to bear higher capital
costs due to the difficulties involved in the analysis. Hierarchy of Issues - Philippines
-​ Accounting reports will significantly lose credibility if
companies report different profit numbers in different
countries for given transactions.
With IFRSs:
-​ Useful for developing countries that do not have a
national standard-setting body or do not have the As shown in the image above, the numbers represent the number
resources to undertake the full process of preparing of issues per standard. The PFRS, developed by the FRSC, is at
accounting standards. the top of the hierarchy, meaning that for any issue regarding the
-​ Due to the magnitude of cross-border financing standards seen above, the one on the left must be followed.
transactions in smaller and larger countries, the need for
a single set of rules by which assets, liabilities, and
income are recognized and measured is urgent.

Philippine Accounting Standards Council (PASC) Moves to

IAS
Accounting Standards Council (ASC)- precursor of the The same logic applies to the second image. This hierarchy
Financial Reporting and Standards Council (FRSC). It considered pertains to multinational corporations in the Philippines, which
standards issued by other standard-setting bodies, such as the US may encounter issues related to the standards used in other
Financial Accounting Standards Board (FASB) and the IASC. countries.

1996- the ASC issued accounting standards that were based on

international accounting standards.
1997- the ASC made a decision to move totally to international
accounting standards.
OVERVIEW OF THE CONCEPTUAL FRAMEWORK Foundations for Standards/Financial Statements
The CF provides the IFRS Foundation for Standards that:
Conceptual Framework
Transparency Contribute to transparency in enhancing the
-​ An analytical tool used to get a comprehensive
international comparability and quality of
understanding of a phenomenon that can be used in
financial information, enabling investors and
different fields of work and is most commonly used to
other market participants to make informed
visually explain the key concepts or variables and the
economic decisions.
relationships between them that need to be studied.
-​ It is a system of ideas and objectives that lead to the
Accountability Strengthen accountability by reducing the
creation of a consistent set of rules and standards.
information gap between the providers of capital
and the people to whom they have entrusted their
Example of a Conceptual Framework of a Process Flow
money.

Economic Contribute to economic efficiency by helping

Efficiency investors identify opportunities and risks across
the world, thus improving capital allocation.

Specific Objectives of the CF

Developing & Assist the FRSC/IASB in developing
Reviewing future PFRS/IFRS and reviewing existing
PFRS/IFRS.
Conceptual Framework in Accounting
-​ A body of concepts, terms, and assumptions set out the Promoting harmony Assists the FRSC/IASB in promoting
concepts that underlie the preparation and presentation of harmonization of regulations, accounting
financial statements for external users. standards, and procedures relating to the
-​ The rules and standards set the nature, functions, and presentation of FS by providing a basis for
limits of financial accounting and financial statements. reducing the number of alternative
-​ An overall theoretical foundation for accounting will accounting treatments permitted by
guide standard-setters, preparers, and users of financial FRSC/IASB.
information in the preparation and presentation of
statements. Developing national Assists the national standard-setting bodies
standards in the development of national standards.
Foundation in the Preparation of Financial Statements
Applying IFRS & Assists preparers of FS in applying the
Dealing PFRS/IFRS and dealing with topics that
have yet to form the subject of PFRS/IFRS.

Forming opinion Assists auditors in forming opinions on

whether the FS complies with PFRS/IFRS.

Interpreting info Assist users of FS in interpreting the

information continued in FS prepared in
compliance with the PFRS/IFRS.
In preparing the PFRS/IFRS, the Conceptual Framework is
considered. Consequently, we consider both the Conceptual Providing info Provide those interested in the work of the
Framework and the PFRS/IFRS in preparation for the financial FRSC/IASB with information about its
statements. approach to the formulation of the
PFRS/IFRS.
Outlined Definition of the CF
-​ Visual representation
-​ Body of concepts, terms, and assumptions Scope of the CF
-​ A system of ideas -​ Objectives of Financial Reporting
-​ Theoretical foundation as a guide to the setters, -​ Qualitative Characteristics of Useful Financial
preparers, and users Information
-​ Financial Statements and Reporting Entity
Purpose of the CF for Financial Reporting -​ Elements of Financial Statements
1.​ Assist the IASB in developing the IFRS that is based on -​ Measurement
consistent concepts. -​ Recognition and Derecognition
2.​ Assist preparers in developing consistent accounting -​ Presentation and Disclosure
policies when no standard applies to a particular -​ Concepts of Capital and Capital Maintenance
transaction or event or when a standard allows a choice
of accounting policy.
3.​ Assist all parties to understand and interpret the
Standards.
CHAPTER 1: OBJECTIVE OF FINANCIAL REPORTING Changes in Economic Resources and Claims (Statement of
Changes in Equity)- result from that entity’s financial
The objective of general-purpose financial reporting forms the performance and from other events or transactions such as issuing
foundation of the CF. debt or equity instruments.

Objective of CF: To properly assess the prospects for future net cash inflows to the
-​ To provide financial information useful to users in reporting entity and management’s stewardship of the entity’s
making decisions relating to providing resources to the economic resources, users need to be able to identify those two
entity. types of changes.

Users of Financial Information: Importance of Information on a Reporting Entity’s Financial

Primary Users Performance
●​ Existing and Potential Investors- are people who invest -​ Help users understand the return that the entity has
in the company and become owners. Their investment produced on its economic resources
increases the company’s assets and owner’s equity. -​ Help users assess management’s stewardship of the
●​ Lenders and other Creditors- are people who invest in entity’s economic resources
the company, leading to an increase in assets and -​ Help in assessing the uncertainty of future cash flows
liabilities. -​ Helps in predicting the entity’s future returns on its
economic resources
Other Users
●​ Employees Financial Performace Reflected by Accrual Accounting
●​ Customers (Income Statement)
●​ Governments and their Agencies Accrual Accounting- depicts the effects of transactions and other
●​ Public events and circumstances on a reporting entity’s economic
resources and claims in the periods in which those effects occur,
(1) User’s decisions involve: even if the resulting cash receipts and payments occur in a
-​ Buying, selling, or holding equity or debt instruments different period.
-​ Providing or settling loans and other forms of credit
-​ Voting or otherwise influencing management’s actions Importance of Information on a Reporting Entity’s Resources
and Claims and Changes in Economic Resources and Claims
(2) To make decisions, users assess: -​ Provide a better basis for assessing the entity’s past and
-​ Prospects for future net cash inflows to the entity future performance than information solely about cash
-​ Management’s stewardship of the entity’s economic receipts and payments during that period.
resources.
Importance of Information on a Reporting Entity’s Cash
Importance of Information on an Entity’s Nature and Flows
Amounts of Economic Resources and Claims (Statement of -​ Help users assess the entity’s ability to generate future
Financial Position) net cash inflows and assess management’s stewardship of
-​ Help users identify the reporting entity’s financial the entity’s economic resources
strengths and weaknesses -​ Indicates how the reporting entity obtains and spends
-​ Help users assess the reporting entity’s liquidity and cash, including information about its borrowing and
solvency, its needs for additional financing, and how repayment of debt, cash dividends, or other cash
successful it is likely to be in obtaining that financing distributions to investors, and other factors that may
-​ Help users assess management’s stewardship of the affect the entity’s liquidity or solvency
entity’s economic resources -​ Help users understand a reporting entity’s operations,
-​ Help users predict how future cash flows will be evaluate its financing and investing activities, assess its
distributed among those with a claim against the liquidity or solvency, and interpret other information
reporting entity about financial performance

Statement of Financial Position- the report that will provide Changes in Economic Resources and Claims not Resulting
information about an entity’s economic resources and claims. from Financial Performance
●​ Assets = resources -​ Issuing debt or equity instruments
●​ Liabilities = creditor’s claim
●​ Owner’s equity = owner’s claim Importance of Information on the Use of the Entity’s
Economic Resources
(3) To make both assessments, users need information about: -​ Helps users to assess management’s stewardship of those
-​ The entity’s economic resources, claims against the resources
entity, and changes in those resources and claims -​ Predicting how efficiently and effectively management
-​ How efficiently and effectively management has will use the entity’s economic resources in future periods
discharged its responsibilities to use the entity’s -​ Assessing the entity’s prospects for future net cash
economic resources. inflows
CHAPTER 2: QUALITATIVE CHARACTERISTICS OF Applying the Fundamental Qualitative Characteristics
USEFUL FINANCIAL INFORMATION The information must both be relevant and provide a faithful
representation of what it purports to represent if it is to be useful.
Qualitative Characteristics of Useful Financial Information Not abiding by the fundamentals will not help users make good
-​ identify the types of information that are likely to be decisions.
most useful to the existing and potential investors, ●​ Identify an economic phenomenon, information about
lenders, and other creditors for making decisions about which is capable of being useful to users of the reporting
the reporting entity based on information in its financial entity's financial information.
report. ●​ Identify the type of information about that phenomenon
-​ are qualities and attributes that make financial that would be most relevant.
accounting information useful to the users. ●​ Determine whether that information is available and
whether it can provide a faithful representation of the
Fundamental Concepts: Hierarchy of Accounting Qualities economic phenomenon.
(Revised in 2018)
2.​ Enhancing Qualitative Characteristics
a.​ Comparability- ability to bring together for the
purpose of noting points of likeness and
differences.
b.​ Verifiability- different knowledgeable and
independent observers could reach a consensus,
although not necessarily complete agreement,
that a particular depiction is a faithful
representation.
i.​ Direct Verification
ii.​ Indirect Verification
c.​ Timeliness- financial information must be
available or communicated early enough when a
Classification of Qualitative Characteristics decision is to be made.
1.​ Fundamental Qualitative Characteristics d.​ Understandability- requires that financial
a.​ Relevance- the capacity of the information to information be comprehensible or intelligible
influence a decision. The information must be and should be presented in a form and
capable of making a difference in the decisions expressed in a terminology that a user
made by users. It is related or pertinent to understands.
economic decisions.
i.​ Predictive Value- can be used as an Consistency- related to comparability. It refers to the use of the
input to processes employed by users same methods for the same items, either from period to period
to predict future outcomes. within a reporting entity or in a single period across entities.
ii.​ Confirmatory Value- provides
feedback about previous evaluations. Applying the Enhancing Qualitative Characteristics
​ ​ ​ Notes: Both values are interrelated ●​ Maximize to the extent possible.
iii.​ Materiality- is entity-specific. Unlike ●​ Iterative process with no prescribed order.
values, it measures how significant ●​ Trade-off between enhancing qualitative characteristics.
information depends on the enterprise.
b.​ Faithful Representation- financial reports Cost Constraint on Useful Information
represent economic phenomena or transactions The benefit derived from the information should exceed the cost
in words or numbers. The descriptions and incurred in obtaining the information (Benefit > Cost).
figures must match what really happened. It is a
necessity because most users have neither the Cost- a pervasive constraint on information that can be provided
time nor the expertise to evaluate the factual by financial reporting. It is imposed by reporting financial
content of the information. information, and is important that it is justified by the benefits of
i.​ Completeness- all relevant reporting that information.
information should be presented in a
way that facilitates understanding and
avoids erroneous implications.
ii.​ Neutrality- should not favor one to the
detriment of another party (neutral)
and should not overstate nor understate
any accounts (prudence).
iii.​ Free from Error- no errors/omissions
in the description of the phenomenon,
and the process used to produce the
report has been selected and applied
with no errors.
CHAPTER 3: FINANCIAL STATEMENTS & REPORTING (4)​ Perspective adopted in financial statements:
ENTITY (a)​ FS provides information about transactions and
other events viewed from the perspective of the
Objective and Scope of FS reporting entity as a whole, not from the
-​ To provide financial information about the reporting perspective of any particular group of the
entity’s ALE and income and expenses that is useful to entity’s existing or potential investors, lenders,
users of FS in assessing the prospects for future net cash or other creditors.
inflows to the reporting entity and in assessing
management’s stewardship of the entity’s economic Going Concern- the accounting entity is viewed as continuing in
resource. operation indefinitely. This is the very foundation of the cost
principle.
That information is provided:
(a)​ In the statement of financial position, by recognizing Reporting Entity- an entity that is required or chooses to prepare
assets, liabilities, and equity; FS. It can be a parent or subsidiary corporation.
(b)​ In the statement of financial performance, by ●​ Consolidated FS- provide information about the ALE
recognizing income and expenses; and and income and expenses of both the parent and its
(c)​ In other statements and notes, by presenting and subsidiaries as a single reporting entity.
disclosing information about: ●​ Unconsolidated FS- is designed to only provide
(i)​ Recognized ALE and income and expenses, information about the parent’s ALE and income and
including information about their nature and expenses, not about those of its subsidiaries.
about the risks arising from those recognized ●​ Combined FS- two or more entities that are not all
assets and liabilities; linked by a parent-subsidiary relationship.
(ii)​ Assets and liabilities that have not been
recognized, including information about their
nature and the risks arising from them;
(iii)​ Cash flows;
(iv)​ Contributions from holders of equity claims and
distributions to them; and
(v)​ The methods, assumptions, and judgments used
in estimating the amounts presented or
disclosed and changes in those methods,
assumptions, and judgments.

Reporting Period- is set because it is assumed that the indefinite

life of an enterprise is subdivided into time periods.
-​ Calendar Year
-​ Fiscal Year
-​ Natural Business Year
-​ Interim

(1)​ Financial statements provide information about:

(a)​ Assets and liabilities, including unrecognized
assets and liabilities, and equity that existed at
the end of the reporting period or during the
reporting period; and
(b)​ Income and expenses for the reporting period.

(2)​ Financial statements include information about possible

future transactions and events only if:
(a)​ Relates to the entity’s assets or liabilities,
including unrecognized assets or liabilities, or
equity that existed at the end of the reporting
period, or during the reporting period, or to
income or expenses for the reporting period;
and
(b)​ Is useful to users of financial statements.

(3)​ Financial statements include information about

transactions and other events at the end of the reporting
period, providing that information is necessary to meet
the objective of financial statements.
CHAPTER 4: ELEMENTS OF FINANCIAL STATEMENTS Ways to Obtain Rights:
●​ Establish by contracts, legislation, or similar means
Statement of Financial Performance ●​ By acquiring or creating know-how that is not in the
●​ Income/Revenue public domain
●​ Expense ●​ Through the obligation of another party that arises, the
Statement of Financial Position other party has no practical ability to act in a manner
●​ Assets inconsistent with its customary practices, published
●​ Liabilities policies, or specific statements.
●​ Equity
Note: Not all of an entity’s rights are assets of that entity. To
be assets of the entity, the rights must both have the potential to
Items in Element Definition
produce economic benefits beyond what is already available to
Chap 1
all other parties and be controlled by the entity.
Economic Asset A present economic resource controlled
In principle, each of an entity’s rights is a separate asset.
Resource by the entity as a result of past events.
However, for accounting purposes, related rights are often
An economic resource is a right that has
treated as a single unit of account, a single asset. For example,
the potential to produce economic
legal ownership of a physical object may give rise to several
benefits.
rights, including:
(a)​ The right to use the object;
Claim Liability A present obligation of the entity to
(b)​ The right to sell rights over the object;
transfer an economic resource due to past
(c)​ The right to pledge rights over the object; and
events.
(d)​ Other rights not listed in a-c.
Equity The residual interest in the assets of the
b.​ Potential to produce economic benefits
entity after deducting all its liabilities.
For an asset’s potential to exist:
●​ It does not need to be certain or even likely
Changes Income Increases in assets or decreases in
●​ As long as the right already exists with at least one
in liabilities result in increases in equity
circumstance, it would produce economic benefits
economic other than those relating to contributions
resources from holders of equity claims. ●​ Even if the probability of producing economic benefit is
and claims low
Expenses Decreases in assets or increases in ○​ What information to provide about the asset
liabilities that result in decreases in ○​ How to provide that information
equity other than those relating to
distributions from holders of equity An economic resource could produce economic benefits for an
claims. entity by entitling or enabling it to do one or more of the ff:
(a)​ Receive contractual cash flows or another economic
Other — Contributions from holders of equity resource;
changes in claims and distributions to them. (b)​ Exchange economic resources with another party on
economic favorable terms;
resources — Exchanges of assets or liabilities that do (c)​ Produce cash inflows or avoid cash outflows by:
and claims not result in increases or decreases in (i)​ Using the economic resource either individually
equity. or in combination with other economic
resources to produce goods or provide services;
(ii)​ Using the economic resources to enhance the
Aspects of Asset value of other economic resources; or
a.​ Right that has the potential to produce economic (iii)​ Leasing the economic resource to another party;
benefits. (d)​ Receive cash or other economic resources by selling the
Rights that correspond to an obligation of another party: economic resource; or
-​ Rights to receive cash (e)​ Extinguish liabilities by transferring the economic
-​ Rights to receive goods or services resources.
-​ Rights to exchange economic resources with another
party on favorable terms c.​ Control- links an economic resource to an entity.
-​ Rights to benefit from an obligation of another party to It has the present ability to:
transfer an economic resource if a specified uncertain -​ Direct the use of economic resource
future event occurs -​ Obtain economic benefits that may flow from it.
Rights that do not correspond to an obligation of another party: It has the present ability to prevent other parties from:
-​ Rights over physical objects, such as PPE or investments -​ Directing the use of the economic resource
-​ Rights to use intellectual property -​ Obtaining economic benefits that may flow from it
Aspects of Liability/Obligation Executory Contract- a contract or potion of a contract that is
Obligation- a duty or responsibility that an entity has no practical equally unperformed, neither party has fulfilled any of its
ability to avoid. obligations, or both parties have partially fulfilled their
obligations to an equal extent.
Sources of Obligation:
-​ Contract, legislation, or similar means Substance of Contractual Rights & Contractual Obligation-
-​ Customary practices, published policies, or specific the substance of a transaction has to have more weight over its
statements legal form.

Constructive Obligation- when an entity feels bound to act a Aspects of Equity

certain way, even if not explicitly required. Different classes of equity claims, such as ordinary and
preference shares, may confer on their holders different rights to
a.​ Transfer an Economic Resource receive some or all of the following from the entity:
To satisfy this criteria: (a)​ Dividends, if the entity decides to pay dividends to
●​ Must have the potential to require the entity to transfer eligible holders;
an economic resource to another party (b)​ The proceeds from satisfying the equity claims, either in
●​ Does not need to be certain full on liquidation or in part at other times; or
●​ Obligation already exists, and in at least one (c)​ Other equity claims.
circumstance, it would require the transfer of economic
resource Aspects of Income and Expenses
●​ Even if the probability of a transfer is low Income and Expenses- are the elements of FS that relate to an
○​ What information to provide about the asset entity’s financial performance. Different transactions and other
○​ How to provide that information events generate income and expenses with different
characteristics, thus, information is necessary to help users of FS
Obligations to transfer an economic resource include: to understand the entity’s financial performance.
(a)​ Obligations to pay cash
(b)​ Obligations to deliver goods or provide services
(c)​ Obligations to exchange economic resources with
another party on unfavorable terms. Such obligations
include a forward contract to sell an economic resource
on terms that are currently unfavorable or an option that
entitles another party to buy an economic resource from
the entity.
(d)​ Obligations to transfer an economic resource if a
specified uncertain future event occurs
(e)​ Obligations to issue a financial instrument if that
financial instrument will oblige the entity to transfer an
economic resource.

Instead of fulfilling an obligation to transfer an economic resource

to the party that has a right to receive that resource, entities
sometimes decide to:
(a)​ Settle the obligation by negotiating a release from the
obligation;
(b)​ Transfer the obligation to a third party; or
(c)​ Replace that obligation to transfer an economic resource
with another obligation by entering into a new
transaction.

b.​ Present obligation as a result of past events

A present obligation exists as a result of past events only if:
-​ The entity has already obtained economic benefits or
taken action
-​ As a consequence, the entity will or may have to transfer
an economic resource that it would not otherwise have to
transfer
-​ Even if a transfer of economic resources cannot be
enforced until some point in the future

Assets and Liabilities

Unit of Account- a right or group of rights or an obligation or
group of obligations to which the recognition criteria and
measurement concepts are applied.
CHAPTER 5: RECOGNITION AND DERECOGNITION Derecognition- the removal of all or part of a recognized asset or
liability from an entity’s statement of financial position. It occurs
Recognition- is the process of capturing, for inclusion in the when it no longer meets the definition of an asset or liability:
statement of financial position or performance, an item that meets ●​ Asset- entity loses control of all or part of the asset
the definition of an asset, liability, equity, income, or expense. ●​ Liability- entity no longer has a present obligation

Recognition Process Accounting requirements for derecognition aim to faithfully

-​ Involves depicting the item in one of those statements, present both:
either alone or in aggregation with other items, in words (a)​ Any assets and liabilities retained after the transaction or
and by a monetary amount, and including that amount in other event that led to the derecognition; and
one or more totals in that statement. (b)​ The change in the entity’s assets and liabilities as a result
of that transaction or other event.
Carrying Amount- the amount at which an ALE is recognized in
the statement of financial position.

How recognition links the elements of financial statements

Recognition Criteria
-​ Only items that meet the definition of an ALE are
recognized in the statement of financial position.
-​ Only items that meet the definition of income or
expenses are recognized in the statement of financial
performance.
-​ However, not all items that meet the definition of one of
those elements are recognized.

An asset or liability is recognized only if recognition of that asset

or liability and of any resulting income, expense, or changes in
equity provides users of FS with information that is useful with:
a.​ Relevant information about the asset or liability and any
resulting income, expense, or changes in equity.
b.​ A faithful representation of the asset or liability and
any resulting income, expense, or changes in equity.

Note: Not recognized in the statements of financial position and

performance does not mean it is not recorded in the journal. It can
be presented in the notes or financial statements.

Cases With no Relevant Information

●​ Existence Uncertainty- it is uncertain whether an asset
or liability exists.
●​ Low Probability- an asset or liability exists, but the
probability of an inflow or outflow of economic benefits
is low.

Cost Constraint in Recognition Decision

●​ For Preparers- incur costs in obtaining relevant
measures of an asset or liability.
●​ For Users- incur costs in analyzing and interpreting the
information provided.
CHAPTER 6: MEASUREMENT OF ELEMENTS The historical cost of an asset is updated over time to depict, if
applicable: (Revised CF 2018, par. 6.7)
Measurement- quantifying the elements recognized in monetary a.​ The consumption of part or all of the economic resource
terms. It answers the question, “How much?” that constitutes the asset (depreciation or amortization)
b.​ Payments received that extinguish part or all of the asset
Measurement of Elements- the process of determining the c.​ The effect of events that cause part or all of the historical
monetary amounts at which the elements of the FS are to be cost of the asset to be no longer recoverable
recognized and carried in the balance sheet and income statement. (impairment)
d.​ Accrual interest to reflect any financing component of
Bases for Measurement of Elements the asset
1.​ Historical Cost
2.​ Fair Value Historical Cost of a Liability
3.​ Value in Use/Fulfilment Value ●​ Initial Measurement (at the time of acquisition)
4.​ Current Cost ○​ Vaule of the consideration received to incur or
take on a liability
Selection of Measurement Bases ●​ Subsequent Measurement (at reporting date)
Qualitative Characteristics + Cost Constraints = Measurement ○​ Amortized Cost or carrying amount
Basis
The historical cost of a liability is updated over time to depict, if
A standard may need to describe how to implement the applicable: (Revised CF 2018, par. 6.8)
measurement basis selected in that Standard. That description a.​ Fulfilment of part or all of the liability by making
could include: (Revised CF 2018, par. 6.3) payments that extinguish part or all of the liability or by
a.​ Specifying techniques that may or must be used to satisfying an obligation to deliver goods
estimate a measure applying a particular measurement b.​ The effect or events that increase the value of the
basis obligation to transfer the economic resources needed to
b.​ Specifying a simplified measurement approach that is fulfill the liability to such an extent that the liability
likely to provide information similar to that provided by becomes onerous
a preferred measurement basis i.​ A liability is onerous if the historical cost is no
c.​ Explaining how to modify a measurement basis longer sufficient to depict the obligation to
fulfill the liability.
Two Categories of Measurement Bases c.​ Accrual of interest to reflect any financing component of
1.​ Historical Cost- the cost at the initial recognition (Past). the liability
2.​ Current Value- the cost at measurement date (Present)
a.​ Fair Value Current Value Measures (Revised CF 2018, par. 6.14)
b.​ Value in Use/Fulfilment Value Provide monetary information about assets, liabilities, and related
c.​ Current Cost income and expenses, using information updated to reflect
conditions at the measurement date.
Historical Cost Measures (Revised CF 2018, par. 6.7 and 6.8)
Current Value Subsequent Measurement of
-​ Provide monetary information about assets, liabilities,
the Historical Cost
and related income and expenses, using information
derived, at least in part, from the price of the transaction
Current conditions Initial measurement plus or
or other event that gave rise to them.
minus changes
-​ Asset- cost incurred or value of the consideration given
Estimated future cash flows
for acquiring or creating the asset. It is past purchase
exchange price.
Other factors
-​ Liability- value of the consideration received to incur or
take on the liability.
A.​ Fair Value (Revised CF 2018, par. 6.12 and IFRS 13)
Historical Cost on an Asset -​ Is the price that would be received to sell an asset or paid
●​ Initial Measurement (at the time of acquisition) to transfer a liability in an orderly transaction between
○​ Past Purchase Exchange Price market participants at the measurement date.
●​ Subsequent Measurement (at reporting date) -​ It reflects the perspective of market participants,
○​ Net Realizable Value (AR) participants in a market to which an entity has access.
○​ Amortized Cost (LR) -​ It may or may not be equal to the Selling Price.
○​ Net Book Value (PPE/ITA)
○​ Carrying Amount (any asset reduced by B.​ Value in use for Assets/Fulfilment Value for
impairment) Liabilities
Value in Use- the present value of cash flows or other economic
benefits that an entity expects to derive from the use of an asset
and from its ultimate disposal.

Fulfilment Value- the present value of the cash or other economic

resources that an entity expects to be obliged to transfer as it
fulfills a liability.
 C.​ Current Cost 2.​ Fair Value (Exit Value) (Market-Participant
-​ The cost of an equivalent asset at the measurement date, Assumptions)
comprising the consideration that would be paid at the a.​ Asset - Statement of Financial Position
measurement date plus the transaction costs that would Price that would be received to sell the asset (without deducting
be received for an equivalent liability at the measurement transaction costs on disposal).
date minus the transaction costs that would be incurred at -​ Statement of Financial Performance - Initial
that date. Recognition
-​ Like historical cost, it is an entry value. It reflects prices Difference between consideration paid and fair value of the asset
in the market in which the entity would acquire the asset acquired.
or would incur the liability. -​ Statement of Financial Performance - Sale or
-​ It is different from fair value, value in use, and fulfilment Consumption of the Asset
value, which are exit values. Expenses equal to the fair value of the asset sold or consumed.
-​ Unlike historical cost, it reflects conditions at the Income received is recorded using gross or net, including
measurement date. expenses for transaction costs on selling the asset.
-​ Statement of Financial Performance - Interest Income
Summary of Information Provided by Measurement Bases Reflected in income and expenses from changes in fair value
1.​ Historical Cost (Entry Value) (could be identified separately).
a.​ Asset -​ Statement of Financial Performance - Impairment
Historical cost (including transaction costs), to the extent Reflected in income and expenses from a change in fair value
unconsumed or uncollected and recoverable. (could be identified separately).
-​ Statement of Financial Performance - Sale or
Consumption of the Asset b.​ Liability - Statement of Financial Position
Expenses are equal to the historical cost of the asset sold or Price that would be paid to transfer the unfulfilled part of the
consumed. Income received is recorded using gross or net, liability (not including transaction costs that would be incurred on
including expenses for transaction costs on selling the asset. transfer).
-​ Statement of Financial Performance - Interest Income -​ Statement of Financial Performance - Initial
Interest income, at historical rates, is updated if the asset bears Recognition
variable interest. Difference between consideration received and fair value of the
-​ Statement of Financial Performance - Impairment liability. Transaction costs on incurring or taking on the liability.\
Expenses arise because the historical cost is no longer -​ Statement of Financial Performance - Fulfillment of
recoverable. the Liability
Income is equal to the fair value of the liability fulfilled. Expenses
b.​ Liability for costs are recorded in fulfilling the liability (could be presented
Consideration received (net of transaction costs) for taking on the gross or net. If gross, historical consideration could be presented
unfulfilled part of the liability, increased by the excess of separately).
estimated cash outflows over consideration received (includes -​ Statement of Financial Performance - Transfer of the
interest accrued on any financing component). Liability
-​ Statement of Financial Performance - Fulfillment of Income is equal to the fair value of the liability transferred.
the Liability Expenses for costs paid (including transaction cost) to transfer the
Income is equal to the historical cost of the liability fulfilled liability (could be presented gross or net).
(reflects historical consideration). Expenses for costs are recorded -​ Statement of Financial Performance - Interest
in fulfilling the liability (could be presented gross or net). Expenses
-​ Statement of Financial Performance - Transfer of the Reflected in income and expenses from changes in fair value
Liability (could be identified separately).
Income is equal to the historical cost of the liability transferred -​ Statement of Financial Performance - Effect of
(reflects historical consideration). Expenses for costs paid Events that Cause a Liability to Become Onerous
(including transaction cost) to transfer the liability (could be Reflected in income and expenses from changes in fair value
presented gross or net). (could be identified separately).
-​ Statement of Financial Performance - Interest -​ Statement of Financial Performance - Value Changes
Expenses Reflected in income and expenses from changes in fair value.
Interest expenses, at historical rates, is updated if the liability
bears variable interest. 3.​ Value in Use of Asset / Fulfilment Value of Liability
-​ Statement of Financial Performance - Effect of (Exit Value) (Entity-Specific Assumptions)
Events that Cause a Liability to Become Onerous a.​ Asset - Statement of Financial Position
Expenses equal to the excess of the estimated cash outflows over Present value of future cash flows from the use of the asset and
the historical cost of the liability or a subsequent change in that from its ultimate disposal (after deducting the present value of
excess. transaction costs pn disposal).
-​ Statement of Financial Performance - Value Changes -​ Statement of Financial Performance - Initial
Not recognized except to the extent that the liability is onerous. Recognition
For financial liabilities, income and expenses from changes in Difference between consideration paid and the value in use of the
estimated cash flows. asset acquired.
-​ Statement of Financial Performance - Sale or
Consumption of the Asset
Expenses are equal to the value in use of the asset sold or
consumed. Income received is recorded using gross or net.
 -​ Statement of Financial Performance - Interest Income -​ Statement of Financial Performance - Transfer of the
Reflected in income and expenses from changes in value in use Liability
(could be identified separately). Income is equal to the current cost of the liability transferred
-​ Statement of Financial Performance - Impairment (reflects current consideration). Expenses for costs paid (including
Reflected in income and expenses from a change in value in use transaction cost) to transfer the liability (could be presented gross
(could be identified separately). or net).
-​ Statement of Financial Performance - Interest
b.​ Liability - Statement of Financial Position Expenses
Present value of future cash flows that will arise in fulfilling the Interest expenses, at current rates.
unfulfilled part of the liability (including the present value of -​ Statement of Financial Performance - Effect of
transaction costs to be incurred in fulfillment or transfer). Events that Cause a Liability to Become Onerous
-​ Statement of Financial Performance - Initial Expenses equal to the excess of the estimated cash outflows over
Recognition the current cost of the liability or a subsequent change in that
Difference between consideration received and fulfilment value of excess.
the liability. -​ Statement of Financial Performance - Value Changes
-​ Statement of Financial Performance - Fulfillment of Income and expenses reflecting the effect of changes in prices
the Liability (holding gains and losses).
Income is equal to the fulfilment value of the liability fulfilled.
Expenses for costs are recorded in fulfilling the liability (could be Factors to consider when selecting a measurement basis:
presented gross or net. If gross, historical consideration could be ●​ Relevance
presented separately). ●​ Characteristics of Assets and Liabilities
-​ Statement of Financial Performance - Transfer of the ●​ Contribution to future cash flows
Liability
●​ Faithful representation
Income is equal to the fulfilment value of the liability transferred.
Expenses for costs paid (including transaction cost) to transfer the ●​ Enhancing qualitative characteristics and the cost
liability (could be presented gross or net). constraint
-​ Statement of Financial Performance - Interest
Expenses More than one measurement basis
Reflected in income and expenses from changes in fulfilment In most cases of more than one measurement basis, the most
value (could be identified separately). understandable way to provide that information is:
-​ Statement of Financial Performance - Effect of a.​ To use a single measurement basis both for the asset or
Events that Cause a Liability to Become Onerous liability in the balance sheet and for related income and
Reflected in income and expenses from changes in fulfilment expenses in the income statement;
value (could be identified separately). b.​ To provide in the notes additional information applying a
-​ Statement of Financial Performance - Value Changes different measurement basis.
Reflected in income and expenses from changes in fulfilment
value. However, in some cases, that information is more relevant or
results in a more faithful representation of both the entity’s
4.​ Current Cost (Entry Value) financial position and performance through the use of:
a.​ Asset - Statement of Financial Position a.​ A current value measurement basis for the asset or
Current cost (including transaction costs) to the extent liability of the statement of financial position; and
unconsumed or uncollected and recoverable. b.​ A different measurement basis for the related income and
-​ Statement of Financial Performance - Fulfilment of expenses in the statement fo financial performance.
the Liability
Expenses equal to the current cost of the asset sold or consumed. Measurement of Equity
Income received is recorded using gross or net, including -​ The total carrying amount of equity is not measured
expenses for transaction costs on selling the asset. directly.
-​ Statement of Financial Performance - Interest Income -​ It equals the total carrying amounts of all recognized
Interest income, at current rates. assets minus the total carrying amounts of all recognized
-​ Statement of Financial Performance - Impairment liabilities.
Expenses arise because the current cost is no longer recoverable. -​ Measure directly the individual classes of equity and
some components but not all.
b.​ Liability - Statement of Financial Position -​ Since the equity is a residual, it can be positive or
Current cost (net of transaction costs) that would be currently negative.
received for taking on the unfulfilled part of the liability,
increased by the excess of estimated cash outflows over that
consideration.
-​ Statement of Financial Performance - Fulfilment of
the Liability
Income is equal to the current cost of the liability fulfilled
(reflects current consideration). Expenses for costs are recorded in
fulfilling the liability (could be presented gross or net. If gross,
historical consideration could be presented separately).
CHAPTER 7: PRESENTATION & DISCLOSURE Classification of Liabilities
a.​ Current Liabilities- expected to be paid within a year
Why is Proper Presentation and Disclosure Important? from the reporting date.
●​ Effective Communication i.​ Accounts payable
●​ Relevance ii.​ Accrued liabilities
●​ Faithful Representation iii.​ Short-term debt
●​ Understandability iv.​ Current portion of a long-term debt
●​ Comparability b.​ Non-Current Liabilities- expected to be paid beyond
one year from the reporting date.
Effective Communication of Information in FS requires: i.​ Long-term debt
a.​ Focusing in presentation and disclosure objectives and ii.​ Bonds payable
principles rather than focusing on rules. iii.​ Mortgage payable
b.​ Classifying information in a manner that groups similar
items and separates dissimilar items; and Classification of Equity
c.​ Aggregating information in such a way that it is not a.​ Ordinary Shares- without preferential rights.
obscured either by unnecessary detail or by excessive b.​ Preference Shares- with preferential rights.
aggregation.
Classification of Income & Expenses
Benefits Greater Than Costs a.​ Through Profit or Loss- income/expenses from normal
operations. This is an indicator of financial performance.
Presentation and Disclosure Objectives and Principles b.​ Through Other Comprehensive Income- gains/losses
●​ Relevance not from normal operations.
●​ Faithful Representation
●​ Comparability Aggregation- is the adding together of ALE and income and
expenses that have shared characteristics and ar included in the
Principles of Effective Communication of FS: same classification.
a.​ Entity-specific information is more useful than
standardized descriptions, sometimes referred to as Aggregation of Assets
“boilerplate”; ●​ Cash and cash equivalents
b.​ Duplication of information in different parts of the FS is ●​ Trade and other receivables
usually unnecessary and can make FS less ●​ Financial assets at fair value
understandable. ●​ Prepayments

Classification- is the sorting of ALE and income and expenses Principle of Materiality and Aggregation
based on shared characteristics for presentation and disclosure
purposes.

Characteristics of Classification
●​ Nature of the item
●​ Role (or function) within business activities conducted
by the entity
●​ How it is measured

Classification of Assets
a.​ Current Assets- expected to be useful within a year or
operating cycle from the reporting date.
i.​ Cash readily available for use
ii.​ Accounts receivable and other receivables
iii.​ Inventories
iv.​ Prepayments
v.​ Short-term investments
vi.​ Other current assets
b.​ Non-Current Assets- expected to be useful for more
than a year from the reporting date.
i.​ Cash that is set aside to buy property
ii.​ Long-term receivables
iii.​ Long-term investments
iv.​ PPE
v.​ Intangible assets
vi.​ Other non-current assets
CHAPTER 8: CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE

Financial Concept of Capital

-​ Capital is regarded as the invested money or invested
purchasing power
-​ Capital is synonymous with equity, net assets, or net
worth

Physical Concept of Capital

-​ Capital is regarded as the entity’s productive capacity
-​ E.g. units of output per day

The choice of an appropriate concept is based on the user’s needs.

If the users are primarily concerned with the maintenance of
nominal invested capital or the purchasing power of the invested
capital, the financial concept should be used.

However, if the primary concern of the entity is the operating

capability, then the physical concept is to be used.

Most entities adopt the financial concept of capital in preparing

the FS.

Concepts of Capital- gives rise to the concepts of Capital

Maintenance.

Concepts of Capital Maintenance

Financial Capital Maintenance
-​ Absolute monetary amount of the net assets contributed
by shareholders and the amount of the increase in net
assets resulting from earnings retained by the entity. It is
based on historical cost.
-​ Net income occurs when the nominal amount of the net
assets at the end of the period exceeds the nominal
amount of the net assets at the beginning of the period,
after excluding distributions to and contributions by
owners during the period.
-​ Net Assets- Ending > Net Assets Beginning (Profit)
-​ Capital- Ending > Capital Beginning (Profit)

Physical Capital Maintenance

-​ The quantitative measure of the physical productive
capacity to produce goods and services
-​ Productive assets shall be measured at current cost rather
than historical costs.
-​ Income occurs when the physical productive capital at
the end of the period exceeds the physical productive
capital at the beginning of the period after excluding
distributions ro and contributions from owners during the
period.
CASH ON HAND Negotiable Instruments Included as Cash
a.​ Ordinary Check (Customer’s Checks)- a negotiable
Cash instrument that calls for a bank to pay the amount shown
-​ In layman’s terms, it means money. from the maker’s account.
-​ Money is a term most commonly used to describe cash. b.​ Certified Check- a check for which the issuing bank
It is the paper currency and coins in circulation and the guarantees payment by certifying that there are sufficient
standard medium of exchange used to buy goods and funds available in the account from which the check is
services and to pay obligations. drawn to cover it.
-​ In accounting, this includes money and any other c.​ Cashier’s Check- an instrument of payment generally
negotiable instrument that is payable in money and considered the same as cash. It is drawn on the bank’s
acceptable by the bank for deposit and immediate credit. own funds and signed by an officer of the bank.
-​ It can be money in other forms like checking accounts, d.​ Traveler’s Checks- a check or draft issued by an express
traveler’s checks, bank drafts, money orders, etc. company or bank bearing the signature of the purchaser
and to be cashed when countersigned in the presence of a
Nature of Cash payee.
a.​ Cash as Financial Instrument e.​ Bank Drafts- refers to a bill of exchange drawn by a
-​ Cash is a financial asset for the holder and a bank on another bank.
financial liability for the Bangko Sentral ng f.​ Money Orders- an order granted upon payment of a sum
Pilipinas (BSP). and a small commission by one post office, bank, or
b.​ Cash as a Medium of Exchange telegraph company, and payable to another.
-​ Cash is used for exchange transactions.
c.​ Unrestricted Cash on Hand Recognition/Derecognition
-​ Cash is available for use anytime. -​ Debit: receipt of cash
d.​ Acceptable by Banks and Other Institutions at Face -​ Credit: disbursement of cash
Value
Cash on Hand Measurement
PAS 1, Paragraph 66 -​ At face value
“An entity shall classify an asset as current when the asset is cash
or cash equivalent unless it is restricted from being exchanged or Cash on Hand Presentation
used to settle a liability for at least 12 months after the end of the -​ Classification: Current asset
reporting period.” -​ Line item: Cash & Cash Equivalents
Interpretation: To be reported as cash, an item must be
unrestricted in use.
-​ Cash must be readily available in the payment
of current obligation and not be subject to any
restrictions, contractual or otherwise.

Cash Items (General Ledger Accounts w/ Subsidiaries)

1.​ Cash on Hand
-​ No subsidiary ledger accounts
2.​ Cash in Bank
-​ Cash in Bank - (Bank No. 1)
-​ Cash in Bank - (Bank No. 2)
3.​ Cash Funds
-​ Petty Cash Fund
-​ Tax Fund
-​ Change Fund

Cash on Hand
-​ Refers to unrestricted money items such as coins and
currency or their equivalent (negotiable instruments) that
have not been deposited in the bank or are still waiting
for a deposit.
-​ Most negotiable instruments can qualify as cash because
they can be converted into cash on demand, or they are
acceptable by financial institutions for immediate deposit
and withdrawal.

Cash on Hand Includes:

a.​ Undeposited Cash Collections
i.​ Bills and Coins
b.​ Cash Awaiting Deposits
i.​ Customer’s checks, travelers’ and managers'
checks, bank drafts, and money orders.
CASH IN BANK

Cash in Bank
-​ The cash items mentioned in cash on hand that are
already deposited in the bank.
-​ To be classified as cash, they should be unrestricted and
immediately available for use in the current operations.

Types of Cash in Bank

1.​ Savings Deposit
-​ Accounts that pay interest at low and
below-market rates compared to other
investment options.
-​ It does not have a fixed maturity date, they are
open-ended accounts.
-​ Funds can usually be withdrawn upon demand,
but payments via checks are not allowed.

2.​ Checking Account/Demand Deposit

-​ Allows you to withdraw money at any time
without advance notice.
-​ This can include accounts that technically
require at least six days of notice before
withdrawal, but most banks do not enforce this
practice.
-​ Checkable Deposits refer to any demand
deposit account that allows the account holder
to write checks or make payments.

3.​ Current Account

-​ A bank account that keeps your money secure
and helps you manage your finances. It also
facilitates payments and allows individuals,
businesses, and organizations to pay you easily.
-​ It is mostly opened by businessmen who have a
higher number of regular transactions with the
bank.
-​ Funds held in a transaction account are regarded
as secret funds.

Cash in Bank Recognition/Derecognition

-​ Debit: deposits/net interest on deposit
-​ Credit: withdrawals/service charges

Cash in Bank Measurement

-​ At face value

Cash in Bank Presentation

-​ Classification: Current Assets
-​ Line Item: Cash and Cash Equivalents in the Statement
of Financial Position
-​ Details and Disclosures in the notes to FS
OTHER CASH ITEMS
5.​ Compensating Balance- minimum checking or demand
Other Cash in Bank related Items deposit account balance that must be maintained in
1.​ Foreign Currency- cash deposited in the Philippines but connection to borrowing arrangement with the bank.
not in the form of pesos, instead of other currencies. a.​ Classification
However, it is translated to the Philippine peso using the -​ Legally restricted
current exchange rate in the FS. -​ cash held as a compensating
a.​ Accounting Treatment balance under current assets
-​ Cash (if the related loan is
short-term).
2.​ Deposits in Foreign Countries- cash deposited outside -​ Long-term investment under
the Philippines but using the currency of another country. non-current asset (if the
It is translated to the Philippine peso using the current related loan is long-term)
exchange rate in the FS. -​ Not legally restricted
a.​ Accounting Treatment -​ Cash
-​ Cash: not subject to foreign exchange
restrictions (can be used anytime)
-​ Non-current Financial Asset: subject to
foreign exchange restrictions

3.​ Cash from Closed Banks- part of receivables up to the

recoverable amount with an estimated realizeable value
after a bank closes. Those unrecovered receivables from
the bank is considered loss.

4.​ Bank Overdraft- cash in a bank having a credit balance.

It is the issuance of a check in excess of the deposit and
should not be offset against other bank accounts
a.​ Classification
-​ Current Liability
Exception to the Rule of Overdraft
-​ When the company maintains two or more accounts in
one bank and one account results in an overdraft, such
overdraft may be offset.
-​ An overdraft may also be offset against the other bank
account if the amount is not material or a small amount.
 6.​ Undelivered or Unreleased Checks- issued by the
company and are only drawn and recorded but not given
to the payees before the end of the reporting period.
a.​ Accounting Treatment
-​ There must be an adjusting entry to
restore the cash balance and set up
liability:

7.​ Postdated Checks- issued by the company and are not

considered cash as of the period. It is drawn, recorded,
and already given to the payees but bears a date
subsequent to the balance sheet date.

a.​ Note: If received from the customer, it is treated

as receivables

8.​ Stale Checks- checks not encashed by the payees within

a relatively long period of time. In determining a
reasonable time, it can be within 6 months from the time
of issuance or a matter of company policy.
To Record Stale Checks
●​ Immaterial Amount:

●​ Material Amount and Liability is expected to

continue:

Accounting Treatment of Other Cash Related Items

1.​ No Sufficient Fund
2.​ Drawn Against Insufficient Fund
3.​ Draw Against Uncollected Deposits- the account has
sufficient funds but not yet available to the drawer
because the check has not been cleared

All three above are treated as Account Receivables.

CASH FUNDS
Cash Funds Recognition/Derecognition
Cash Funds- are funds segregated by the management to finance -​ Debit: upon establishment/increase of fund
specific operating activities of the business enterprise for payment -​ Credit: decrease or close of the fund
of obligation.
Cash Funds Measurement
Types of Cash Funds -​ At face value
1.​ Working Funds- used for financing current operations
and paying current obligations. It is part of cash. Cash Funds Presentation
2.​ Cash Funds for Non-current purpose -​ Current Assets at Line Item: Cash and Cash Equivalent
-​ Used for financing non-current operations and -​ Non-current Assets at Line Item: Long-term
payment of long-term obligations. It is part of Investments/NCFA
long-term investments.
-​ Cash set aside for long-term specific purposes
and is part of non-current financial assets.
-​ It is shown as a long-term investment under
non-current assets of the statement of financial
position.

Types of Working Funds

a.​ Petty Cash Fund- cash set aside for petty or small
expenses.
b.​ Change Fund- cash set aside for giving change to a
customer during a transaction.
c.​ Payroll Fund- cash set aside for the salaries of
employees.
d.​ Dividend Fund- cash set aside for the payment of
dividends.
e.​ Tax Fund- cash set aside for the payment of taxes.
f.​ Interest Fund- cash set aside for the payment of interest.
g.​ Travel Fund- cash set aside for travel expenses.

Types of Cash Funds for Non-current purpose

a.​ Preference Share Redemption Fund- cash set aside for
the payment to the shareholders for the maturity of
preference shares.
b.​ Contingent Fund- cash set aside for whatever
emergency purpose in the future.
c.​ Insurance Fund- cash set aside for insurance.
d.​ Sinking Fund- cash set aside for payment of long-term
debt or obligation. However, if the non-current liability is
paid within reporting period, it is now considered cash.
e.​ Fund for Acquisition of Property- cash set aside for
buying equipment, property, expansion of a building, etc.
These are not included as cash and cash equivalents. They are
Non-current Financial Asset (NCFA)

Classification of Cash Funds for Non-current purpose

-​ Generally considered as non-current financial assets.
-​ Fund Acquisition of non-current property:
-​ To be considered as non-current even the
property will be acquired the following year.

-​ Fund for Payment of long-term debt

-​ The classification of a cash fund as current or
non-current should parallel or be the same as
the classification applied to the related liability.
CASH EQUIVALENTS

Definition (PAS 7, par. 6)

Cash Equivalents- short-term and highly liquid investments that
are readily convertible into cash and so near it’s maturity that they
present insignificant risk of changes in value because of changes
in interest rates. It is acquired three months before maturity date.

Nature of Cash Equivalents

●​ Easily convertible to cash
●​ Highly liquid financial instrument
●​ Has a maturity date
○​ Equity shares are not considered cash
equivalent, except for redeemable preference
shares as it has a maturity date.
○​ The purchase date of the share must be within 3
months or less before maturity.

Examples of Cash Equivalent

-​ Three-month BSP treasury bill
-​ Three-year BSP treasury bill purchased three months
before maturity date
-​ Three-month time deposit
-​ Three-month money market instrument

Investment of Excess Cash- the cash accumulated in excess of

what is needed for current operations that is invested temporarily
in some type of revenue earning investment, such as:
-​ Time deposits
-​ Commercial paper and money market instruments Financial Statement Presentation
-​ Short-term trust funds held in banks -​ The caption “Cash and Cash Equivalents” should be
-​ Philippine treasury bills shown as the first line item among the current assets.
-​ This caption includes all cash items such as COH, CIB,
Classification of Investment of Excess Cash CF, and cash equivalents which are unrestricted in use
1.​ Maturity Date from Date of Acquisition is ≤ 3 Months for current operations.
-​ Cash Equivalents -​ The details comprising “cash and cash equivalents”
2.​ Maturity Date from Date of Acquisition is > 3 Months should be disclosed in the notes to financial statements.
-​ ≤ One-year: Short-term Investments or Current
Financial Assets
-​ > One-year: Long-term Investments or
Non-current Financial Assets
-​ If, at the end of the reporting period,
the investment's maturity date falls
within the next year, it will be
reclassified as Short-Term
Investments/Current Financial Assets.

Cash Equivalents Recognition/Derecognition

-​ Debit: acquisition/investment
-​ Credit: encashment/conversion to cash

Cash Equivalents Measurement

-​ At face value

Cash Equivalents Presentation

-​ Classification: Current Assets
-​ Line Item: Cash & Cash Equivalents
CASH SHORTAGE & PETTY CASH FUND -​ To adjust the petty cash fund at the end of the period

Accounting for Cash Shortage

Where the Cash Count shows:
-​ If the Cash is less than the Balance per book, a cash -​ Note: The entry is reversed at the beginning of
shortage is to be recorded. the next accounting period.
-​ To increase the fund:

-​ If the cashier or cash custodian is held responsible for the

cash shortage: -​ To decrease the fund:

-​ If reasonable efforts fail to disclose the cause of the

shortage: 2.​ Fluctuating Fund System- the checks drawn to
replenish the fund does not necessarily equal the petty
cash disbursements. The replenishment checks are
simply drawn upon the request of the petty cashier. Petty
If cash shortage is immaterial, Debit to Miscellaneous Expense. cash disbursements are immediately recorded, thus
resulting in a fluctuating petty cash balance per book
Accounting for Cash Overage timely.
Where the Cash Count shows: -​ To establish the fund:
-​ If the Cash is more than the Balance per book, a cash
overage is to be recorded:

-​ Payment of expenses out of the fund:

-​ Note: The disbursements from the petty cash
-​ Cash overage is treated as miscellaneous income if there fund are immediately recorded.
is no claim on the same:

-​ To replenish or increase the fund:

-​ If properly found to be the money of the cashier:

-​ Note: The replenishment checks may or may

Cash short or over- only serves as a temporary account. In the not be the same as the petty cash disbursements.
preparation of FS, whether Cash Shortage or Cash coverage, it
should be adjusted. -​ To decrease the fund:

Imprest System- a system of cash control that requires all cash

receipts to be deposited intact and all cash disbursements to be
made by check. It is necessary to establish a petty cash fund. -​ No adjustment is necessary at the end of the reporting
period because the petty cash expenses are recorded
Methods of Handling Petty Cash Fund outright.
1.​ Imprest Fund System- usually followed in handling
petty cash transactions.
-​ To establish the fund:

-​ Payment of expenses out of the fund:

-​ No formal entry
-​ To replenish the fund:

-​ Note: Petty cash disbursements should be

replenished only by check and not from
undeposited collections.
PETTY CASH FUND - ILLUSTRATIVE PROBLEM
ADDITIONAL DOCUMENT: CFAS Prelims Reviewer - this is only short quiz-based. Meaning the recent zip graded quiz
is noy here.