Conceptual Framework and Accounting Standards Note

By: Zeus Vernon Millan

Accounting is the “process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by users of the information “(AAA).

Important Activities in Accounting

1. Identifying – analyzing events and transactions to determine whether or not they will be

recognized Recognition – including the effects of an accountable event through journal entry

Accountable Events (Economic Activity) Non-Accountable Events

one that affects economic activities (ALEIE) -Not recognized but disclosed in the notes if
has accounting relevance.
-maybe recorded through a memorandum
entry -example:
1.Natural Disaster or Calamities after
reporting period
2.Major Business Expansion
3.Pending Mergers, Acquisition or
Divestitures 4.Lawsuit or Contingent
Liabilities (uncertain outcome)

Type of Events or Transactions

a. External Events – involve external party

1.Exchange (reciprocal transfer) – give and receive (ex: Sale, Payment of
liabilities) 2.Non-reciprocal transfer – give but not receive (e.g., donation, tax,
fines, theft,
provisions of capitals by owners, distribution to owners)
3.External event other than transfer- changes in economic resources or obligations
but no transfer happened (e.g., price levels, technological changes,
obsolescence)

b. Internal Events – do not involve external party

1.Production - resources are transformed into finished goods
2.Casualty – unanticipated loss from disaster (fire, flood)

2. Measuring – assigning numbers in monetary terms to the economic transactions and

events --FS are prepared using mixture of costs and values
(historical cost, current cost, replacement cost, inflation-adjusted cost)
(fair value, present value, realizable value)
---FS are mixture of fact and opinion
•Valued by Opinion – measurement affected by estimates
-estimated of uncollectible amounts of AR
-depreciation and amortization (estimates of useful life and residual value)
-estimated liabilities (ex: Provisions)
-retained earnings (various estimates of Income and Expenses)
•Valued by Fact – measurement not affected by estimates
-Ordinary share capital valued at Par Value
-Land stated at acquisition cost
 -Cash measured at Face Value
3. Communicating – transforming economic data into useful accounting information for dissemination and
interpretation

3 Aspects of Communicating Process in Accounting

1.Recording – writing the accountable events through journal entry
2.Classifying – grouping of similar items into their respective classes through posting
3.Summarizing – expressing in condensed form which include preparations of financial
statements and accounting reports

Interpreting –understanding what the numbers really say about a company’s financial
health, performance, and future potential.
-Involves computation of financial statement ratios (liquidity, profitability,
solvency) -Examining trends (e.g., revenue growth, profit margins)
-Comparing performance over time or against competitors
-Explaining why changes occurred (e.g., a drop in net income)
-Making informed judgments or decisions based on the data

BASIC PURPOSE OF ACCOUNTING - To provide information useful in making economic decisions

Economic entity – separately identifiable combination of people and property that uses economic
resources to achieve certain goals.

Types of economic entity:

➢ Not-for-profit entity -carries out socially desiarable needs of the community ➢
Business entity -operates primarily for profit

Economic activities are activities that affect the economic resources (A), obligations
(L) and the equity (E) of an economic entity.
Economic activities involve:
1.Production
2.Exchange
3.Consumption
4.Income Distribution
5.Savings
6.Investments

Types of Information Provided by Accounting

1.Quantitative Information – numbers, quantities or units
2.Qualitative Information – words or description form; usually found in notes
3.Financial Information – money

Types of Accounting Information Classified to User’s Need

1.General Purpose Accounting Information - common need of most statement
users -governed by GAAP reoresented by PFRS
2.Special Purpose Accounting Information- specific needs of particular users

The practice of accounting requires the exercise of:

Creative Thinking using imagination and insight identifies alternative solutions

Critical Thinking logical analysis evaluates alternative solutions

ACCOUNTING CONCEPTS - principles upon which the accounting process is based also knows as:
 -Accounting Assumptions/Postulates- basic notions that provide the foundation of the accounting
process
-Accounting Theory-logical reasoning in the form of a set of broad principles
a. provides a general frame of reference by which accounting practice can be
evaluated b. guides the development of new practices and procedures

I.Underlying Assumptions – explicitly provided in the Conceptual Framework

Going Concern Assumption – entity is assumed to carry on its operations for an indefinite period
of time
Accrual Basis – the effects of transactions are recognized when they occur and not as cash is
received or paid
II.Implicit Assumptions – not expressly provided in the Conceptual Framework but are generally accpeted
due to its long time use in the profession
Separate Entity/Accounting Entity/Business Entity Concept/Entity Concept – owners’ personal
transactions are separated from the business
Stable Monetary Unit /Monetary Unit Assumption
-accountable events are expressed in terms of common unit of measure
-purchasing power is considered stable regardless of instability
-to be useful, accounting information should be stated in a “common denominator”
Time Period/Periodicity/Accounting Period – life of reporting period of entity, usually 12
months

➢Calendar Year –starts at January 1, ends in Dec 31

➢Fiscal Year – starts on a date other than January 1

III.Pervasive – affects all items in the financial statements

-- influence all standards and are key qualitative characteristics or fundamental accounting ideas

Materiality Concept – a matter of professional judgment that is based on item’s size and
nature Cost-benefit/Cost Constraint/Reasonable Assurance – cost must equal os less than the
benefit Consistency Concept – using the same accounting principle of different periods
-changes in accounting policies are made ONLY when required of premitted by
PFRS -or when the change results to more relevant and reliable information
-Changes in Accounting Policies are DISCLOSED in the notes
Full Disclosure Principle – including enough details to make information understandable
Prudence/Conservatism – use of caution when making estimates under uncertainty -Such that
assets or income are not overstated and liabilities or expenses to be understated
-the one with the least effect on equity is chosen
Realization – converting non-cash assets into cash or claims for cash
-concept the deals with revenue recognition
Concept of Articulation – all the components of a complete set of financial statements are
interrelated
IV.Expense Recognition Principles – refers to the accounting principle that guides when and how expenses
should be recognized in the financial statements.

Matching/Direct Association of Costs and Revenues- costs are recognized as expenses when the
related revenue is recognized
-ex: Cost of Goods Sold (COGS) is matched with sales revenue.
1. Journal Entries : A business purchases inventory worth ₱40,000 on credit.
Inventory 40
 Acct Payable 40

2. Now, the business sells part of the inventory to a customer. Assume: Selling price:
₱50,000 (on credit); Cost of the inventory sold: ₱30,000
AccountsReceivable 50 Cost of Goods Sold 30

Sales Revenue 50 Inventory 30

*Inventory is recorded as an asset first; COGS is only recorded when the inventory
is sold (Matching Concept).

Systematic and Rational Allocation- cost that are not directly related to the revenue are
recognized are assets first and are recognized as expenses when consumed using some method
of allocation (e.g., depreciation, amortization)
- Used when expenses benefit multiple periods and cannot be directly matched to
specific revenue.
-The cost is allocated over time using a logical and consistent method.
-ex: Depreciation of equipment, Amortization of intangible assets, Prepaid
insurance allocated over policy life
Immediate Recognition - cost that do not meet or ceases to meet the definition of assets are
expensed immediately (e.g., casualty and impairment losses)
- Used when expenses cannot be directly linked to specific revenues or when there is
no future benefit. Recognized immediately in the period incurred.
-ex: Advertising expense, Office supplies used up, Losses from lawsuits
V.Other Concepts – affects all items in the financial statements
Double-entry system – debit and credit
Historical Cost Concept/Cost Principle – the asset value is based on the acquisition cost -Some
PFRS requires departure from this concept, such when Inventories at NRV rather
than cost when applying lower of cost and NRV
Entity Theory – objective is proper income determination (A=L+E): Income Statement
Propriety Theory – objective is proper valuation of assets (A-L=E) : Balance Sheet Residual
Equity Theory – applicable when there are two classes of shares issued (ordinary and
preferred
-Asset-Liabilities-Preferred Sharedholder’s Equity= Ordinary Shareholder’s
Equity (applied in the computation of book value per share and return on
Equity)
Fund Theory – custody and administration of funds (cash inflows - cash
outflows=funds) -used in government and fiduciary accounting
COMMON BRANCHES OF ACCOUNTING
1. Financial Accounting – focuses on general purpose financial statements
 Financial Statements-structured Financial Reporting-provision of financial
representation of entity’s financial position information about entity to help in
and results of its operations economic decision
-end product of accounting process -Objective:
1.Provide information about entity’s
economic resources, claims to those
resources and changes in those resources
2. Provide information about entity’s
management stewardship

# Financial Statements Financial Reports

1 Statement of Financial Position Statement of Financial Position

2 Statement of Profit or Loss and OCI Statement of Profit or loss and OCI

3 Statement of Changes in Equity Statement of Changes in Equity

4 Statement of Cash Flows Statement of Cash Flows

5 Notes Notes

6 Additional Statement of Financial position Additional Statement of

Financial position

Other Information

2. Management Accounting – communication of information for use by internal users 3. Cost

Accounting – systematic recording and analysis of cost of materials, labor and overhead
incident to production
4. Auditing – evaluating with established criteria and express opinion to ensure fairness and reliability
5. Tax Accounting – preparations of tax returns and rendering of tax advice
6. Government Accounting – custody of public funds, its purpose, and the responsibility and
accountability of entrusted individual
7. Fiduciary Accounting – handling accounts managed by a person for the benefit of another 8.
Estate Accounting – handling accounts for fiduciaries who wind up the affairs of deceased person 9.
Social Accounting – communicating the social and environmental effects of an entity’s economic
actions to the society
10. Institutional Accounting – for non-profit entities other than government
11. Acccounting Systems – installation of accounting procedures for the accumulation of financial data
and designing of accounting forms for data gathering
12. Acccounting Reserach – careful analysis of economic events and other variables to understand their
impact of decisions
Bookkeeping Accountancy
-process of recording the accounts or -profession or practice of accounting
transactions of an entity either public or private practice
-ends with preparation of Trial
balance -Does not require
Interpretation
PHILIPPINE ACCOUNTANCY ACT OF 2004 (R.A. 9298)
Sectors in the Practice of Accountancy
1.Practice in Public Accountancy – rendering service to more than one client on fee basis (Public
Practice) 2.Practice in Commerce and Industry – employment in private sector (Private Practice)
3.Practice in Education/Academe – employment in educational institutions (Private Practice) 4.Practice in
Government – employment in government or controlled corporations (Private Practice)

ACCOUNTING STANDARDS USED IN THE PHILIPPINES

- Reporting standard is necessary to:
-compare Financial Statments
-avoid fraudulent reporting
-reach correct economic decision
- Selection of appropriate accounting policies is the entity’s management
responsibility - Proper application of accounting principles is the accountant’s
responsibility.

The Generally Accepted Accounting Principles

(GAAP) in the Philippines are represented by the Philippine Financial Reporting Standards (PFRSs).
a. Philippine Financial Reporting Standards (PFRS)
PFRSs are accompanied by guidance to assist entities in applying their requirements.
Guidance that is an integral part of the PFRSs is mandatory while guidance that is not an
integral part of the PFRSs does not contain requirements for financial statements.
b. Philippine Accounting Standard (PAS)
c. Interpretations

Hierarchy of Reporting Standards

1.PFRSs
2.Management shall/must use its “judgment”
a. Requirements and guidance in PFRSs dealing with similar and related
issues
b. Conceptual Framework
c. May also consider most recent pronouncements of other standard-setting
bodies
d. May also other accounting literature and accepted industry practices

Accounting standard setting bodies and other relevant organizations

1.Financial and Sustainability Reporting Standards Council (FSRSC)
-formerly known as Accounting Standards Council (ASC), the official accounting standard setting
body in the Philippines created under RA 9298 by the PRC upon recommendation of BOA
-composed of 15 individuals – 1 chairperson and 14 members
Representing Organization Number
of
Members

Chairperson (appointed by BOA & PRC) 1

Board of Accountancy (BOA) 1

Securities and Exchange Commission (SEC) 1

Bangko Sentral ng Pilipinas (BSP) 1

 Bureau of Internal Revenue (BIR) 1

Commission on Audit (COA) 1

Philippine Institute of Certified Public Accountants

(PICPA) – 4 Sectors 4
Financial Executives Institute of the 1
Philippines (FINEX)

Association of CPAs in Public Practice (ACPAPP) 1

Other Accredited National Professional 2

Organizations of CPAs (as determined by BOA)

2.Philippine Interpretations Committee (PIC)

-committee formed by the ASC, the predecessor of FRSC
-the role of reviewing interpretations prepared by IFRIC for approval and adoption of
FSRSC 3.Board of Accountancy (BOA)
-professional regulatory board created under RA 9298 to supervise the registration, licensure and
practice of accountancy in the Philippines
-composed of a chairperson and 6 members appointed by the President of the Philippines
4.Securities and Exchange Commission (SEC)
- regulates corporations and partnership, capital and investment marks, and the investing
public 5.Bureau of Internal Revenue (BIR)
- administers the provisions of the National Internal Revenue Code
6.Bangko Sentral ng Pilipinas (BSP)
-influence the selection and application of accounting policies by banks and other entities
performingbanking functions
7.Cooperative Development Authority (CDA)
- influences the selection and application of accounting policies by cooperatives Regulatory

Accounting Principles- Accounting policies prescribe by a regulatory body (CDA, BSP)

Standard-Setting Bodies in the Philippines, IFRS, US GAAP, and Norwalk Agreement

International Accounting Standards Board (IASB) - standard setting body of the IFRS Foundation with the
main objectives of developing and promoting global accounting standards. Standards issued:
1.International Financial Reporting Standards (IFRS)
2.International Accounting Standards (IASs)
3.Interpretations
Norwalk Agreement - a memorandum of FASB (USA) and IASB to produce a single set of global accounting
standards, in which they agree to make financial reporting standards that are:
a. Fully compatible; and
b. Coordinate future work programs
CONCEPTUAL FRAMEWORK for FINANCIAL REPORTING
ELEMENTS OF FINACIAL STATEMENTS
 PAS 1 PRESENTATION OF FINANCIAL STATEMENT

It prescribes the basis for the presentation of general purpose financial statements, its
structure guidelines and content9s minimum requirements to ensure comparability (inter
comparability and intra-comparability). The terminology of PAS 1 is suitable for profit
oriented entities.
STATEMENT OF CASH FLOWS (Refer to PAS 7)
NOTES
 PAS 2 INVENTORIES
Determination of costs to recognize as asset to expense is the primary issue in accounting
inventories. Hence, PAS 2 provides guidance in the determination of costs of inventories,
including use of cost formulas, and their subsequent measurement and recognition as asset
then expense.
PAS 7 STATEMENT OF CASH FLOWS
 Cash flows excluded from the
activities section
•Cash and cash equivalents are
not separately presented
•Bank overdrafts that cannot be
offset cash are presented to as
financing activities
• Cash flows in foreign currency
should be translated at the
exchange rate on the date the
transaction happens. Changes due
to exchange rate
movements are not cash flows, but
their impact on cash held in foreign
currency is included in a separate
reconciliation of cash balances at the
start and end of the period, shown
distinctly from operating, investing,
and financing activities.

PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

PAS 8 prescribes criteria for selecting, applying, and changing accounting policies and the
accounting and disclosure of changes in accounting policies, changes in accounting
estimates, and correction of prior period errors. Intended to enhance relevance, reliability
and comparability of FS.
Accounting Policies
 PAS 12 INCOME TAXES
Not all income is liable for tax, only those that are taxable profit (taxable loss). Hence,
government don’t base taxes on accounting profit (loss). Income taxes refers to taxes that
are based on taxable profits.
PAS 12 permits offsetting of deferred tax assets and liabilities only if,
➢ Legally enforceable right to offset current tax and liability; and
➢ Levied by the same taxation authority
➢ Legally enforceable right;
➢ Intention to realize in net basis
Presentation in Statement of Comprehensive Income

Tax consequences are accounted for the same way as the related transactions or events.
Thus,
➢ If transaction is recognized in profit or loss, as well as its tax effect ➢ If transaction is
recognized outside profit or loss (e.g., OCI and equity), as well as its tax effect Tax effect
recognized directly in equity is accounted for as direct adjustment to related component
of equity.

PAS 16 PROPERTY, PLANT AND EQUIPMENT

Subsequent Measurement
a. Cost Model
b. Revaluation Model
Entity can choose either the two, and then applies the accounting policy to an
entire class of PPE

COST MODEL - cost less any accumulated depreciation and any accumulated
impairment losses Depreciation

• Each significant part of item of PPE is depreciated separately. • Depreciation

is recognized as expense, unless it is included in the cost of producing another
asset.
• Depreciation starts when used.
• Depreciation stops when:
a. Derecognized (sold or disposed); or
b. Classified as held for sale; or
c. Fully depreciated; however, if the residual value decreases below the
carrying amount, the decrease is recognized as an additional depreciation •
Carrying amount (Book Value) – recognized asset amount after deducting
accumulated depreciation and impairment loss
• Depreciation does not cease when the asset becomes idle or is retired
from active use.
• Land and building are accounted separately. Land is not depreciated
while building is depreciated.