FINANCIAL ACCOUNTING

& REPORTING
CONCEPTUAL FRAMEWORK

 It is a complete, comprehensive and single

document promulgated by the International
Accounting Standards Board.
 A summary of the terms and concepts that
underlie the preparation and presentation of
financial statements for external users.
CONCEPTUAL FRAMEWORK

 An attempt to provide the overall

theoretical foundation for accounting
which will guide standard – setters,
preparers and users of financial
information in the preparation and
presentation of statements.
CONCEPTUAL FRAMEWORK

 The underlying theory for the development of

accounting , standards and revision of
previously issued accounting standards.
 Concerned with the general purpose financial
statements including consolidated financial
statements
 PURPOSES OF CONCEPTUAL
FRAMEWORK

 To assist the FRSC in developing accounting

standards and reviewing existing standards,
 To assist preparers of financial statements in
applying accounting standards and in dealing
with issues not yet covered by GAAP
 To assist FRSC in the review and adoption of the
International Financial Reporting Standards
 PURPOSES OF CONCEPTUAL
FRAMEWORK

 To assist users of financial statement in interpreting the

information contained in the financial statements
 To assist auditors in forming an opinion as to whether
financial statements conform with the Philippine GAAP.
 To provide information to those interested in the work
of FRSC in the formulation of PFRS.
AUTHORITATIVE STATUS OF CONCEPTUAL
FRAMEWORK

 If there is a standard or an interpretation that

specifically applies to a transaction, the standard of
interpretation overrides the conceptual framework.
 In the absence of a standard or an interpretation that
specifically applies to a transaction, management shall
consider the applicability of the conceptual framework
in developing and applying an accounting policy that
results in information that is relevant and reliable.
AUTHORITATIVE STATUS OF
CONCEPTUAL FRAMEWORK

 The Conceptual Framework is not a Philippine Financial

Reporting Standard
 The Conceptual Framework does not define standard
for any particular measurement or disclosure issue
 The conceptual framework does not override PFRS
 The requirements of PFRS shall prevail over the
conceptual framework
USERS OF THE FINANCIAL INFORMATION

 Primary Users
 Existing and potential investors
 Lenders and other creditors
 Other users
 Employees
 Customers
 Government and their agencies
 Public
Scope of Conceptual Framework

 Objective of Financial Reporting

 Qualitative characteristics of useful financial
information
 Definition, recognition and measurement of the
elements from which financial statements are
constructed
 Concept of capital and capital maintenance.
FINANCIAL REPORTING

 It is a provision of financial information about

an entity to external users that is useful to them
in making economic decisions and for assessing
the effectiveness of the entity’s management.
 The principal way of providing financial
information to external users is through the
annual financial statements.
FINANCIAL REPORTING

 Financial reporting encompasses not only financial

statements but also other means of communicating
information that relates directly or indirectly to the
financial accounting process.
 It includes financial highlights, summary of important
financial figures, analysis of financial statement and
significant ratios.
 Includes nonfinancial information such as description of
major products and listing of corporate officers and
directors.
OBJECTIVE OF FINANCIAL REPORTING

 The overall objective of financial reporting is to

provide financial information about the
reporting entity that is useful to existing and
potential investors, lenders and other creditors
in making decisions about providing resources
to the entity.
Target Users

 Financial reporting is directed primarily to the existing and

potential investors, lenders and other creditors which compose the
primary user group.
 They have the most critical and intermediate need for information
in financial reports.
 Primary users are parties that provide resources to the entity
 Information that meets primary users likely to meet the needs of
other users
Target Users

 The management of a reporting entity is also

interested in financial information about the
entity
 Management need not rely on general
purpose financial reports because it is able to
obtain or access additional financial
information internally.
 Specific objectives of financial
reporting

 To provide information useful in decision-

making about providing resources to the entity
 To provide information useful in assessing the
prospects of future net cash flows to the entity
 To provide information about entity resources,
claims and changes in resources and claims
Economic Decisions

 Existing and potential investors need general purpose

financial reports in order to enable them in making
decisions whether to buy, sell or hold equity
investments.
 Existing and potential lenders and other creditors need
general purpose financial reports in order to enable
them in making decisions whether to provide or settle
loans and other forms of credit.
Assessing future cash flows

 Decisions by existing and potential investors about

buying, selling or holding equity instruments depend on
the returns that they expect from an investment. (i.e.,
dividends)
 Decisions by existing and potential lenders and other
creditors about providing or settling loans and other
forms of credit depend on the principal and interest
payments or other returns that they expect.
Assessing future cash flows

 Financialreporting should provide

information that is useful in assessing
the amount, timing and uncertainty
of prospects for future net cash
inflows to the entity.
Economic resources and claims

 General purpose financial reports provide information

about the financial position of a reporting entity.
 Financial position is information about the entity’s
economic resources and the claims against the
reporting entity.
 The economic resources are the assets and the claims
are the liabilities and equity of the entity
 Economic resources and claims

 The financial position comprises the assets, liabilities, and

equity of an entity at a particular moment in time.
 Information about the nature and amounts of an entity’s
economic resources and claims can help users identify
the entity’s financial strength and weaknesses.
 Otherwise stated, information about financial position
can help users to assess the entity’s liquidity, solvency,
and the need for additional financing.
Economic resources and claims

 Liquidity is the availability of cash in the near future to

cover currently maturing obligations.
 Solvency is the availability of cash over a long term to
meet financial commitments when they fall due
 Information about priorities and payment requirements
of existing claims can help users to predict how future
cash flows will be distributed among those with a claim
against the reporting entity.
 Changes in economic resource and
claims

 General purpose financial reports also provide information

about the effects of transactions and other events that
change the economic resources and claims.
 Changes in economic resources and claims result from
financial performance and from other events or
transactions, such as issuing a debt or equity instruments
 The financial performance of an entity comprises revenue,
expenses, and net income or loss for a period of time.
 Changes in economic resource and
claims

 Financial performance is the level of income

earned by the entity through the efficient and
effective use of its resources.
 The performance of an entity is also known as
results of operations and is portrayed in the income
statement and statement of comprehensive
income.
Usefulness of Financial Performance

 Information about financial performance helps

users to understand the return that the entity
has produced on the economic resources.
 Information about the return the entity has
produced provides an indication of how well
management has discharged its responsibilities
to make efficient and effective use of the
entity’s economic resources.
 Usefulness of Financial Performance

 Information about the past performance helps users to

understand the return that the entity has produced on the
economic resources.
 Information about the return the entity has produced
provides an indication of how well management has
discharged its responsibilities to make efficient and effective
use of the entity’s economic resources.
Usefulness of Financial Performance

 Information about past financial performance and how

management discharged its responsibilities is usually
helpful in predicting the future returns on the entity’s
economic resources.
 Information about financial performance during a
period is useful in assessing the entity’s past and future
ability to generate net cash inflows from operations.
ACCRUAL ACCOUNTING

 Accrual accounting depicts the effects of transactions

and other events and circumstances on an entity’s
economic resources and claims in the periods in which
those effects occur in a different period.
 Under the accrual basis, the effects of transactions and
other events are recognized when they occur and not
as cash is received or paid.
 ACCRUAL ACCOUNTING

 Accrual accounting means that income is recognized when

earned regardless of when received and expense is
recognized when paid.
 Information about financial performance measured in
accordance with accrual accounting provides a better
basis for assessing past and future performance than
information solely about cash receipts and payments during
a period.
LIMITATIONS OF FINANCIAL REPORTING

 General purpose financial reports do not and cannot

provide all of the information that existing and potential
investors, lenders and other creditors need.
 General purpose financial reports are not designed to
show the value of an entity but the reports provide
information to help the primary users estimate the value
of the entity.
LIMITATIONS OF FINANCIAL REPORTING

 General purpose financial reports are intended

to provide common information to users and
cannot accommodate every request for
information.
 To a large extent, general purpose financial
reports are based on estimate and judgement
rather than exact depiction.
 UNDERLYING ASSUMPTIONS

 Accounting assumptions are the basic notions or

fundamental premises on which the accounting process is
based. Accounting assumptions are also known as
postulates.
 Accounting assumptions serve as the foundation or
bedrock of accounting in order to avoid
misunderstanding but rather enhance the understanding
and usefulness of the financial statements.
 GOING CONCERN

 In the absence of evidence to the contrary, the accounting

entity is viewed as continuing in operation indefinitely.
 The financial statements are normally prepared on the
assumption that the entity will continue in operations for the
foreseeable future.
 Going concern postulate is the very foundation of the cost
principle.
 GOING CONCERN

 Assets are normally recorded at cost. As a rule, market values are

ignored.
 Some new standards require measurement of certain assets at fair
value.
 If there is evidence that the entity would experience large and
persistent losses or that the entity’s operations are to be terminated,
the going concern assumption is stipulated.
 The users of the statements will have a great interest in the amount of
cash that will be generated from the entity’s assets in the short term.
ACCOUNTING ENTITY

 Under this assumption, the entity is separate from the

owners, managers, and employees who constitute the
entity
 The transactions of the entity should not merged with
the transactions of the owners
 The reason for this assumption is to have a fair
presentation of financial statements
 Each business an independent accounting entity
 TIME PERIOD

 The indefinite life of an entity is subdivided

into accounting periods which are usually of
equal length for the purpose of preparing
financial reports on financial position,
performance and cash flows.
 By convention, the accounting period or
fiscal period is one year or a period of twelve
month.
 MONETARY UNIT

 The monetary unit assumption has two aspects: the

quantifiability and the stability of peso.
 The quantifiability aspects means that the assets, liabilities,
equity, income and expenses should be stated in terms of
a unit of measure which is Philippine peso.
 The stability of the peso assumption means that the
purchasing power of the peso is stable or constant and
that its instability is insignificant and therefore may be
ignored.
MONETARY UNIT

 The stable peso postulate is actually an amplification of the going

concern assumption so much so that adjustments are unnecessary to
reflect any changes in purchasing power.
 Example: Consider an equipment that was imported 10 years ago from
the US for $ 100,000 when the exchange rate was P35 to $1 or an
equivalent of P3,500,000.
 If the same equipment is purchased now and assuming there is no
change in the $100,000 purchase price, the replacement cost in terms of
pesos would be in the vicinity of P4,500,000 considering a current
exchange rate of P45 to $1.