CFAS Chapter 2-7 Conceptual Framework

 

Conceptual Framework (Qualitative Characteristi Characteristics) cs)

Conceptual Frmewok nd Aconting Snrs CHAPTERS 2-7

SCOPE OF REVISED CONCEPTUAL FRAMEWORK 

CHAPTER 2 Conceptual Framework (Objective of Financial Reporting) CONCEPTUAL FRAMEWORK

- is a complete, comprehensive, and single document promulgated by the IASB - summary of terms used in making general FS; this is an attempt to provide overall theoretical foundation for accounting - underlying theory for development  of  of accounting standards and revisions revisions of  of previously issued  It provides foundation for for Standards tha that: t:

1. Contribute to transparency 2. Strengthen accountability 3. Contribute to economic efficiency  Purposes of Revised Revised Conceptual Conceptual Framework: 1. Assist IASB to create IFRS 2. Assist preparers of FS to create policies for events that has no existing standards 3. Assist preparers of FS to create policies whenever standards allow choice of policy 4. Assist parties to understand and interpret IFRS

II. Qualitative Characterist Characteristics ics of useful financial info - these are the qualities and attributes that make info useful  Application of Qualitative Characterist Characteristics ics 1st, Identify a phenomena that has the potential to be useful 2nd, Iden Identify tify the type of info about phenomeno phenomenon n that could be relevant relevant and faithfully represented 3rd, Identify if info is available

A. Fundamental Qualitative Characteristics Characteristics - content  or substance  or substance of  of info 1. Relevance - capacity capacity of info to influence an economic decision; walang kwenta  pag hindi naman economic decision yung nag-iba; affected by nature nature   and materiality  Ingredients of Relevance  a. Predictive Value - info could be used to forecast. Previous info on the financial reports could be used to predict future profitability.  b. Confirmatory Confirmatory Value - used to check and confirm earlier predictions para ma adjust if needed 

 Authoritative Status of C  Authoritative Conceptual onceptual Fram Framework  ework  - kung may naka set naman sa policy sa standards, standards, yun ang susundin susundin.. THE IFRS PREVAILS OVER CONCEPTUAL FRAMEWORK USERS OF FINANCIAL INFORMATION

1. Primary Users - sa kanila naka direct d irect ang mga general FS a. Existing and Potential Investors - concern sila sa risk ng investments nila  b. Shareholders Shareholders - concern ssila ila kung mabi mabibigyan bigyan ba sila ng dividends c. Lenders and Other Creditors - concern sila kung nababayaran ba ang mga utang ng entity at kung mababalik ba sa kanila yung pinautang nila 2. Other Other Users - magagamit nila yung mga FS pero hindi sa kanila directed for them  primarily  primarily a. Employees - concern sila sa stability sa stability and profitabil and profitability ity of the entity para malaman kung mapapasweldo pa ba sila  b. Customers Customers - concern kung magtutuloy pa operations ni entity since dun sila bumibili ng needs nila c. Governments and their agencies - concern sila sa TAX d. Public - may mga activities ang entity that indirectly affects outside entities SCOPE OF REVISED CONCEPTUAL FRAMEWORK 

  (encompass (encompasses es FS, pwede siyang mag-inc mag-include lude ng I. O Objec bjective tive of  Financial Reporting  mga non financial information for example products nila and BOD) - why, purpose, goal of accounting Target Targ et Users Users  - Par Paraa tal talag agaa sa PRIMA PRIMARY RY USE USER R GRO GROUP UP da dahil hil sila yung may  pinakamalaking interes  pinakamalaking interestt sa info about tthe he entity. Plus Plus,, they are the one oness who provides the RESOURCES of the entity. - For the management of the entity, they rely on different financial reports dahil may access sila internally  Specific Objectives Objectives of Financial Financial Reporting  Reporting  1. Provide info useful in making economic decisions about providing resources - need nila ng general financial financial reports para mala malaman man kung bibili, magbebenta, or ihohold pa nila mga equity investments nila 2. Provide info useful in assessing cash flow prospects - when investors, creditors, or lenders give their resources to an entity, they measure the return of it. For example dividends and interests. Iniisip nila kung ano ang mabebenefit

nila don. - info also includes amount, timing, and prospects for future cash inflow 3. Provide info entity resources (assets), claims (liability), and changes in resources and claims   Financial Position Position - comprises the ALE at a particular mome moment nt in time that could show an entity’s strength and weaknesses and can assess liquidity (short term liab settlement)) and  solvency (long term liab settlement). It helps so that outside settlement  parties would would know the paym payment ent priorit priorities ies of the en entity. tity.  Changes in Resources and Claims Claims - results from change in financial performance (rev (revenue enue,, expe expense nse and net income/loss income/loss.. Called Called ‘results ‘results of operation operations’ s’ and is shown in the IS and SCI) Usefulness of financial performance - financial performance of an entity shows how it can have a return out of its economic resource resources. s. Nagiging basis siya ng future returns of  the entity, hence it could could show the enti entity’s ty’s abilit ability y of gene generati rating ng cash inflows. inflows. Mapapakita sa mga outside entity kung kaya magbayad.  Accrual Accounting Accounting - revenue is recognized once earned , expenses are recognized once incurred  regardless   regardless of not receiving or giving cash  Limitations  Limitati ons of Financial Financial Reporting (General Purpose Financial Reports…) 1. Do not and cannot provide all the needed info. Kailangan maghanap ng ibang sources. 2. Not designed to show the value of the entity, rather only an estimate. 3. Provides common information 4. Based on estimate and judgement and judgement rather than exact depiction  Management Stewardship  - it is a respon  Management responsib sibil ility ity of the managem management ent to provi provide de info informa rmation tion on how they efficien efficiently tly and effectiv effectively ely used economi economicc reso resource urcess by financial reporting

CHAPTER 3

Materiality Materiali ty (Doctrine of Convenience) - this shows that if an event does not affect the entity and the decisions of the users, it is not required to follow strictly with the standards; entity-specific - depends on RELATIVE on RELATIVE SIZE rather than ACTUAL than ACTUAL SIZE, because SIZE, because an event material to one entity may not be material to the other.   Factors of Materiality: Materiality: a. Size - size of an item as compared to the whole  b. Nature - may times na kahit hindi naman malaki yung amount or yung size, yung mismong event is note worthy at hindi pwedeng palampasin.

2. Faithful Representat Representation ion - should be written both in words and in numbers. Meaning, amounts and accounts should match and show what really happened.  Ingredients for Faithful Representation a. Completeness - adequate or full disclosure of necessary info para hindi maging erroneous yung mga info  Standard of Adequate Disclosure - declaring essential informa information tion in the crea creation tion of the financi financial al repo reports rts deemed to be rele relevant vant to the possible possible decisions of the outside entities. Para hindi maging misleading yung mga FS; for better understanding   Notes to FS - provide provide the nec necessary essary disclos disclosures ures by the PFRS - nakalagay din dito yung mga description kung bakit hindi nirecognized yung ibang accounts, also includes breakdown of line items  b. Neutrality Neutrality - info is fre freee from biase biasess and fair, pant pantay ay pantay for all users  Prudence - asset are not overstate overstated d and liabilities are not understated (Cost benefit Constraint Constraint - Cost shall not exc exceed eed the benef benefit) it)  Conservatism - in case of doubt, do not record any loss and gain - pag may dalawang possible values, choose the lower amount * Co Cont ntin inge gent nt Loss Loss - if loss loss is PR PROB OBAB ABLE LE and and amou amount nt CA CAN N BE MEASURED, record the loss and liability liability;; if POSSIBLE, journal entry not written but is disclosed in the notes; if REMOTE, walang irerecord * Contingent Gain - not recognized but disclosed c. Free from Error - no errors and no omissions on the trans transactions actions pero hindi naman required na lahat ng info accurate  Fraud - intentional Mistakes - not intentional  

Measurement Uncertainty - nangyayari kung hindi malaman yung exact Measurement amount ng isang transaction. Kapag yung estimate is clear and accurately described and explained, di naman nila maaapektuhan yung usefulness of  financial info

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Substance Over Form - reality over what should be

 Enhancing Qualitative Qualitative Characteristics Characteristics - increase the usefulness of financial info - hindi dapat SAPILITAN na gawing magkamukha o magkaiba yung mga items 1. Comparability - identifies the similarities and differences among items a. Comparabilit Comparabilityy within an entity (Horizontal Comparability or Intracomparability) - compares info from one period to another   b. Comp Comparabi arability lity betwe between en and across across entities entities (Dimensiona (Dimensionall Comparabili Comparability ty or  Intercomparability) Intercompa rability) - between two or more entities of THE SAME INDUSTRY  Consistency - use of the SAME METHOD on the SAME ITEMS between DIFFERENT PERIODS or DIFFERENT ENTITIES “COMPARABILITY is the GOAL, CONSISTENCY HELPS to ACHIEVE the goal.” - Hindi naman ibig sabihin hindi pwedeng baguhin yung mga past methods, kung meron naman mas better alternatives, magbigay lang ng full disclosure and effects 2. Understandability Understandab ility - presenting info should be “clearly and concisely” concisely” - it should be readily understandable to the users, pero hindi naman lahat ng tao maiintindihan maiintindi han yun. Financial Reports are intended for those users who has the basic knowledge of terminolo terminologies gies 3. Verifiability - implies CONCENSUS  - kapa kapag g ang informatio information n ay chineck ng iba’t-iba iba’t-ibang ng mga users, they may not completely completel y agree, users who evaluates the informat information ion with the basis of evidences could come up with the same conclusion - OBJECTIVITY  Types of Verificati Verification on

a. Direct Verification - verifies through direct observation, may evidence that could  be seen. Ex., counting counting cash.  b. Indirect Verificatio Verification n - verifies th through rough formul formulas, as, methods methods,, mode c. ls, techniques 4. Timeliness Timeliness - dapat magrelease ng info before decisions are to be made, wala nang halaga ang info kung nakapag decide na

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- the older the info, the less useful - pero may mga past info na malaki ang effect sa pagpredict/forecast ng mga future events. “What “What happened in the past would be the basis of what would happen in the  future.””  future. Cost Constraint on Useful Information - benefit should exceed the cost - the problem is that cost is easy to compute, the benefit on the other hand is more of   professionall judgement  professiona

  CHAPTER 4 Conceptual Framework (Financial Statements and Reporting Entity)

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Control of an economic resource - an entity has the present ability to direct the asset and pwede sila makakuha ng benefit out of it. They can also  prevent others others from benef benefiting. iting.

2. Liability Liabilit y - 1) present obligation obligation to 2) transfer economic resource as a result of 3)  past events   Obligation - duty or responsibil responsibility ity na hindi pwedeng iwasan a. Legal - out of contract, from normal operating activities b. Constructive - out of conduct, from regular business practices

3. Equity - residual interest of asset less that liability

III. FINANCIAL STATEMENTS AND REPORTING ENTITY

B. Financial Performance - STATEMENT OF FINANCIAL PERFORMANCE (Includes SPL and SOCI)

GENERAL OBJECTIVE OF FINANCIAL STATEMENTS

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Financial Statements shows the resources, claims, and changes in claims and resources of the entity. It also shows the ALEREx useful for assessing assessing CAS CASH H FLOW FLOWS S and  MANAGEMENT STEWARDSHIP  STEWARDSHIP  Types of Financial Statements   1. Consolidated Consolidated FS - considers parent (has the control) and subsidiaries as a SINGLE REPORTING ENTITY - it is useful for the parent’s the  parent’s existing and potential investors, lenders, and creditors for  them to figure the parents’ future cash inflows dahil included dun ang contributions ng mga subsidiaries 2. Unconsoli Unconsolidate dated d FS - info about the PARENT PARENT ONLY hindi kasa kasama ma ang mga subsidiaries - it is useful for parent’s for  parent’s existing and potential investors, lenders, and creditors dahil ang claims ni parent ay kay parent lang, hindi siya damay kay subsidiary 3. Combined FS - may relationship pero hindi parent subsidiary, for example joint ventures  Reporting Entity Entity - entity required or chooses to prepare FS, does not necessaril necessarily y need to  be a legal entity. entity. It ca can n be: 1. Individual corporation, partnership or sole proprietorship 2. Parent alone 3. Parent and subsidiary as a single reporting entity

4. or more entities that does not the parent-subsidiary relationship 5. 2 Reportable business segment of have an entity  Reporting Period - it is when FS are prepared to provide info about the A,L,E, Income and Expense - FS are REQUIRED are  REQUIRED to be prepared prepared  ANNUALLY, however pwede din magpresent ng mga I  mga I nterim FS that are prepared on the 3 rd, 6th, or 9th month na hindi naman required. - FS also include comparative info for at least one preceding reporti reporting ng year para makita yung changes in the trends - Pwede rin mag include ng info that happened happened AFTER the repo reportin rting g period period kung significant siya sa outstanding info UNDERLYING ASSUMPTIONS (Also called postulates called postulates))

- basic notions or fundamental premises on where accounting is based; serves as a foundation for better understanding of FS 1. Going Going Conce Concern rn (Cont (Continui inuity ty Assu Assumpti mption) on) - assumes assumes a busi business ness of continuing operations indefinitely - assets are measured at COST 2. Accounting Entity - the business is an entity separate from its owners, managers and employees - kailangan to for fair presentation of the fs dahil may mga personal transactions ang mga owner unrelated to the business 3. Time Period - dahil may assumption of going concern, an entity’s financial position and performance needs to be evaluated regularly kaya naman hinahati ang indefinite life of the entity into several accounting periods   Natural Business Business Year (Fiscal Ye Year) ar) - 12 month period period that ends upon the entit entity’s y’s decision, normally normally it is when business is at its lowest  Calendar Year - January 1 to December 31 4. Monetary Mone tary Unit Un it Quantifiability ity Aspect - all amounts should be stated in a common unit of measure, in a. Quantifiabil this cash, Philippine Peso.  b. Stability Stability of the Peso - purcha purchasing sing power of pes peso o is stable or cconstant onstant and it itss instabilit instability y is insignificant

CHAPTER 5 Conceptual Framework (Elements of Financial Statements)

Statement of Profit and Loss - generally dapat nandito lahat ng income and expense, main source of info about financial performance  Statement of Other Comprehensive Income - may mga items na nandito at wala sa P/L. May mga amount dito na pwedeng irecycle for the next  periods. 1. Income - increase sa asset or decrease sa liab na nagreresult sa increase in equity, other than outside contributions (investments) a. a. Revenue  Revenue - ordinary course of business; essence is REGULARITY  b. Gains - hindi siya from ordinary business activities 2. Expense - decrease sa asset or increase sa liab pero hindi kasama yung mga distributions to owners/shareholders/withdrawals a. Expenses - ordinary course of business  b. Losses  b. Losses  - hindi siya from regular business acts, mostly disasters

CHAPTER 6 Conceptual Framework (Recognition and Measurement)

V. RECOGNITION AND MEASUREMENT RECOGNITION - pag iidentify sa mga items na nakameet ng definition of the

ele eleme ments nts and includ including ing them in the SFP (t (they hey are record recorded ed at CARRYING  AMOUNT ) - sa recogn recogniti ition, on, nilili nililink nk niya niya yung yung Fin Perf sak sakaa Fin Fin Pos Positi ition. on. Kas Kasii pag nagrecognize ka ng Income sa Perf, may increase sa asset or decrease sa liab; pag nagrecognize ng Expenses sa Perf, may decrease sa asset or increase sa liab - it is recogni recognized zed if the info would give the users reports reports that are relev relevant ant and faithfully represented  Point of Sale Income Recognition Recognition - income is recognized when earned, when sold - pero pwede rin point of production, during production production,, or point of collectio collection n  Expense Recognition  - recognized recognized when incurred incurred,, following following the  MATCHING  PRINCIPLE (3 application): application): 1. Cause and Effect Association “Strict Matching Concept”- pag nirecognize si revenue, recognize na si expense; simultaneous 2. Systemat Systematic ic and Rational Rational Allocat Allocation ion - divides divides the expense expense over periods that would benefit from the asset 3. Immediate Immediate Recognition - outright expensed dahil hindi naman sigurado kung may makukuhang benefit in the future; karamihan ng mga administrative, selling and advertising expenses saka losses DERECOGNITION - for asset, entity doesn’t have control of a part or the entire

asse asset; t; for liab, the entity entity has no obligation obligation for a part or the entire liab. liab. Pag nagdederecognize, nagdederecogni ze, isama lahat ng related accounts (ex. Depreciation) MEASUREMENT - quantifying quantifying in monetary terms the elements of FS

1. Historical Cost - recorded at original transaction price (book value; entry price or entry value   Historical Cost Cost Updated a. Historical cost of an asset is updated because of: - Depreciation and amortization - Payment received because of disposing asset - Impairment - Accrual of interest  b. Historical cost of liabi liability lity is updat updated ed because of: - Payment made or satisfying an obligation - Increase in value - Accrual of interest - Amortized cost

IV. ELEMENTS OF FINANCIAL STATEMENTS

- this refers to the quantitative info reported in the SFP and IS - ginaga ginagami mitt an ang g mga eleme elements nts to gro group up eve events nts accord according ing to the their ir econo economic mic characteristics that serves as a building block in creating the FS A. Financial Position 1. Asset  - 1) present economic economic resource resource as  as a 2) result of a past event  that  that is a right that has 3) the  potential to to produce eco economic nomic benefits  

Right - has the potential to produce economic benefits a. Rights that correspond to an obligation of another entity

 b. Rights that that do not corre correspond spond to an obl obligation igation of aanother nother entit entity y c. Rights established by contract or legislation 

Potential to produce economic benefits - the right has the potential, hindi naman required na may makukuha talagang economic benefits in the future

2. Current Value a. Fair Value  Ass Asset et - sel seller ler willing willing to se sell ll an ass asset et in an ord order erly ly tra transa nsacti ction on at measurement date  Liability - price to be paid to transfer a liability in an orderly transaction at a measurement date - It is the exit price or exit value na hindi gawa ng adjustment to the historical cost. Ibang value kasi siya. Out of transaction; the market price.  b. Value in Use - net present value of an asset’s asset’s cash flow while it is being used or  when disposed (Exit price/value price/value)) c. Fulfillment Value - present value of cash that the entity expects to transfer to pay liab (Exit price/value) d. Current cost - based on HISTORICAL COST and on the market conditions on current times  Asset - transaction cost + considerations paid  Liability - transaction cost

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 Selecting a Measurement Measurement Basis  - walang specific na minamandate ang standards sa kung ano ang pipiliin or ano ang gagamitin gagamitin.. Basta relevant and faithfully represe represented nted and results.

CHAPTER 7 Conceptual Framework   (Presentation and Disclosure and Concepts of Capital) VI. PRESENTATION AND DISCLOSURE

- It is an effect effective ive com commu munic nicat ation ion tool tool since since finan financia ciall inf info o is nonsen nonsense se if not communicated through the FS -  Effective Communication Communication makes the info more relevant and faithfully represented and enhances comparability and understandability - wag paulit-ulit ang info sa FS, once lang i-state Classification  - grouping of SIMILAR elements Classification of Income and Expense Classification Statement of Financial Performance = Statement of Profit or Loss + Statement of OCI  Aggregation (Concealing Method) Method) - pwede pagsama-samahin sa iisang line item ang iba ibang mga accounts - The FS more often gives condensed or summarized info, the full disclosure are made in the notes para maging concise yung mga FS VII. CAPITAL MAINTENANCE

- The financial performance could be determined using: 1. Transaction Approach Appro ach - traditional way in presenting the IS Appro ach (Well-Offness) - magkaka net income lang kapag nag 2. Capital Maintenance Approach exceed na yung end capital sa beg capital  Return on Capital - makukuha ni investor dahil sa investment niya  Return of Capital - makukuha ni investor yung mismong investment Two Concepts of Capital Maintenance 1. Financia Financiall Capi Capital tal - income income is reco recogniz gnized ed when net assets at the end of the year  exceeds net assets at the beg of the year. Net assets = capital. Profit = End, Net Assets - Beg, Net Assets + Distributions during the year - Inv during

thePhysical year  Capital - parang financial capital lang din, but amounts used are those in 2. current cost and not historical - used kung ang goal ay malaman ang operational capability ng entity

Padayon, Padayon , Future CPA CPA! ! In God’s perfect time time Reviewer prepared by: Cael, Michelle Karen Joy