CONCEPTUAL FRAMEWORK

Conceptual Framework for Financial Reporting– • • faithful representation – financial reports

describes the objectives for and concepts for general represent economic phenomena or transactions in
purpose financial reporting words and numbers
Scope (Chapter #s): • - completeness – relevant information should
1. Objectives of Financial Reporting be represented in a way that facilitates understanding
2. Qualitative Characteristics of Useful Financial and avoids erroneous implication
Information • - neutrality – without bias in the preparation
3. Financial Statements and Reporting Entity and presentation
4. Elements of Financial Statements • - free from error – no errors or omissions in
5. Recognition and Derecognition the description of the phenomenon or transaction
6. Measurement
Enhancing Qualitative Characteristics
7. Presentation and Disclosure
• • Verifiability – consensus agrees to the
8. Concepts of Capital and Capital Maintenance similar amount
not all can be seen in the Accounting Standards, refer to • • Comparability – consistency
CFFR • • Understandability – can be easily interpreted
1. standards relating to particular transaction and understood by being complete (Notes to FS)
2. standards relating to similar transaction • • Timeliness – financial information must be
3. CFFR timely for users to produce useful decisions
4. other Generally Accepted Accounting Standards
Materiality – information is material if misstating,
(GAAP)
omitting, or obscuring it could reasonably be
expected to influence decisions that primary users of
Nothing in the Conceptual Framework overrides any
GPFR make on the basis of such reports
Accounting Standard.
Auditors must adhere to the doctrine of convenience.
General Purpose Financial Reports (GPFR)
Underlying Assumptions in Preparations of
• • resources and claims against the reporting
Financial Statements
entity (talks about Statement of Financial Position and
• • Going concern – that it continues in
Notes to Financial Statements)
operation for foreseeable future
• • effects of transactions and other events that
• • Accounting entity – that it is being prepared
change resources and claims of the reporting entity
by a reporting entity
(Statement of Comprehensive Income, Statement of
Cash Flow, Statement of Changes in Equity) • • Time period – at least 1 year (monthly, semi-
annually, annually)
Limitations of GPFR • • Monetary unit – measurement is
1. Do not and cannot provide all the information that quantifiable, monetary value is stable
primary users need. CONCEPTUAL FRAMEWORK AND ACCOUNTING
• primary users – investors, lenders, creditors
2. Not designed to show the value of a reporting entity
but provides information to primary users to estimate the
value of reporting entity.
• about forecasting/predicting
3. Are largely based on estimates, judgments, and
models rather than exact depictions.
• some assets are reflected in fair value (not exact,
amount expected to be received)

Fundamental Qualitative Characteristics

• • relevance – capacity of the information to
influence a decision
• - predictive value – can be used as an input to
processes employed by users to predict future outcome
• - confirmatory value – provides feedback of
previous evaluations
Elements of Financial Statements – removal of all or part of a recognized asset or
- Quantitative information liability from financial statements
- Basic building blocks Asset – lose control
Liability – settle
Financial Position Measurement
1. Asset – is a present economic resource – is the act of quantifying in monetary terms the
elements of financial statements
– that is controlled by an entity Historical Cost – entry price
– which arises from past events • • Asset – cost incurred in acquiring the asset
• • rights of use assets – assets that are not owned plus transaction costs
but controlled • • Liability – consideration received minus
• 2. Liability – is a present obligation to transfer an transaction costs

economic resource Current Value – exit price

– which arises from past events • • Fair Value – price that would be received to
3. Equity – is the residual interest in the assets sell an asset or paid to transfer a liability
• • Value in use – present value of cash flow
after deducting all liabilities derived from the use
• • net worth – an individual’s equity • • Fulfillment value – present value of cash that
an entity expects to transfer in settling a liability
Financial Performance
• • Current cost – cost of an equivalent asset at
1. Income – increase in assets
measurement date (consideration paid plus
transaction cost, consideration received minus
– or decreases in liabilities
transaction cost)
– that results to an increase in equity – other than
contributions from equity
Presentation and Disclosure
holders
– manner of presenting the elements of financial
• • revenue – arises from ordinary course of
statements
business
– promotes understandability
• • gains – other income Classification – sorting of assets, liabilities, equity,
• 2. Expense – decreases in assets income and expenses on the basis of shared or
similar characteristics
– or increases in liabilities Aggregation – adding together of assets, liabilities,
– that results to a decrease in equity – other than equity, income and expenses that have similar or
distributions to equity holders shared characteristics and are included in the same
• • expense – arises from ordinary course of classification
business Transaction approach – traditional preparation of an
• • losses – other expenses income statement
– write profit/loss
Recognition Capital maintenance approach – net income occurs
– is the process of capturing for inclusion in the financial only after the capital used from the beginning of the
statements an item that meets the definition of assets, period is maintained CONCEPTUAL FRAMEWORK
liability, equity, income or expenses AND ACCOUNTING STANDARDS
Income – recorded if earned (point of sale)
point of sale – when rights and obligations are
transferred
Expense – recorded if incurred (matching principle)
Cause and effect association – expense is recognized
when the revenue is recognized
Systematic allocation – some costs are expensed by
simply allocating them over the periods benefited
Immediate allocation – cost incurred is expensed
outright because of uncertainty of the future economic
benefits or difficulty of reliably associating certain costs
with future revenue
Derecognition
– only earn income if it exceeds the capital – formal statement showing the three elements
Financial capital concept – uses historical cost comprising financial position, namely assets,
Physical capital concept – uses current cost liabilities, and equity
Objectives of Financial Statements – financial position = wealth
– is to provide financial position, financial performance, Current Assets
and cash flows of an entity that is useful to a wide range – cash and cash equivalents unless restricted for
of users in making economic decisions long-term purposes
• • wide range of users – primary, secondary – held primarily for trading
– realized within 12 months after the reporting period
– financial statements provide information about: – realized within normal operating cycle
1. assets • • normal operating cycle – time between
2. liabilities acquisition of assets and their realization in cash
3. equity • • cash conversion cycle – time between sale
4. income and expenses, including gains and losses of assets and their realization in cash
5. contributions by and distributions to owners in their
capacity as owners Noncurrent assets
– all assets not classified as current assets
6. cash flows
1. Property, plant, and equipment
Mandatory requirements in PAS 1 2. Long-term investments
1. Going concern 3. Intangible assets
2. Accrual basis of accounting 4. Deferred tax assets
3. Consistency of reporting 5. Other noncurrent assets
4. Materiality and aggregation
Current Liabilities
5. Offsetting (only when permitted by PFRS)
– settled within normal operating cycle
– primarily used for trading
– deferred tax assets (DTA), deferred tax liabilities – settled within 12 months after the reporting period
(DTL), discontinued operations – does not have the right to defer settlement for at
6. Structure and content least 12 months after the reporting period
– if an agreement to refinance on a long-term basis is
Each type of FS and its notes Statement of FP completed after the reporting period and before the
– Name of the reporting entity ABC Company financial statements are authorized for issue
– Reporting period as of Dec. 31, 2022 • • defer – postpone, delay
– Presentation currency Accounts stated in PHP
– Level of roundings used In Millions • • grace period – extension of time in which
7. Comparative information payment can be made without penalty
• • refinance – to reschedule payment
– have previous period in every FS CONCEPTUAL FRAMEWORK
8. Reporting period

– at least annually (except PAS 2, Interim FS)

Financial Statements
1. Statement of Financial Position
2. Statement of Comprehensive Income

Income Statement – applicable only when the entity

uses two-statement approach
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements
6. Comparative Information
7. Third Statement – changes in accounting policy (apply
retrospective/retroactive adjustments)

– to fix prior period errors

Statement of Financial Position
Noncurrent Liabilities
– all liabilities not classified as current liabilities
– if the refinancing on a long-term basis is completed on or before the end of the reporting
period
1. Noncurrent portion of long-term debt
2. Finance lease liability
3. Deferred tax liability
4. Long-term obligations to company officers
5. Long-term deferred revenue

Equity
1. Share capital (Outstanding capital stock)
2. Share premium (additional paid-in capital)
3. Retained earnings – only in corporations
4. Non-controlling interest
5. Treasury shares (xx)

Statement of Comprehensive Income

– profit/loss
• • all income and expenses

– other comprehensive income

• • items of income and expense that are not recognized in profit or loss or not shown in
the traditional income statement
• 1. Unrealized gain or loss on equity investments at fair value through other
comprehensive income
• 2. Unrealized gain or loss on debt investments at fair value through other comprehensive
income
• 3. Gain or loss from translation of the financial statements of a foreign operation
• • presentation currency
• • functional currency
• 4. Revaluation surplus during the year
• • cost model
• • revaluation model
• 5. Unrealized gain or loss from derivative contracts as cash flow hedge
• 6. Remeasurements of defined benefit plan, including actuarial gain or loss
• 7. Change in fair value attributable to credit risk of a financial liability designated at fair
value through profit or loss

Single statement – PL + OCI

Two-statement approach – PL
– PL + OCI
– to emphasize PL
Computation of xx
Comprehensive
Income (func.)
Revenue, net
Less: Cost of (xx)
 goods sold
Gross margin xx
Add: Other xx
income
Total Income xx
Less: Selling costs (xx)
Administrative costs (xx)
Finance costs (xx)
Other expenses (xx)
Net income before xx
tax
Less: Provision for (xx)
income tax
Net income after tax xx
Discontinued (xx)
operations
P/L xx
OCI not closed to xx(xx)
P/L
OCI closed to P/L xx(xx)
Total xx
Comprehensive
Income