UNIVERSITY OF SAN JOSE – RECOLETOS

SCHOOL OF BUSINESS AND MANAGEMENT

FINANCIAL ACCOUNTING AND REPORTING
CONCEPTUAL FRAMEWORK AND FINANCIAL REPORTING

Discussion

The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective of, and the concepts for, general
purpose financial reporting. The purpose of the Conceptual Framework is to:

a. assist the International Accounting Standards Board (Board) to develop IFRS Standards (Standards) that are based on
consistent concepts.
b. assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or other event,
or when a Standard allows a choice of accounting policy; and
c. assist all parties to understand and interpret the Standards.

The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework overrides any Standard or any requirement in a
Standard.

Objective of General Purpose 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 relating to providing resources to the entity.

General purpose financial reports provide information about the financial position of a reporting entity, which is information about the
entity’s economic resources and the claims against the reporting entity. Financial reports also provide information about the effects of
transactions and other events that change a reporting entity’s economic resources and claims. Both types of information provide useful
input for decisions relating to providing resources to an entity.

Qualitative characteristics of useful financial information

The qualitative characteristics of useful financial information discussed in this chapter identify the types of information that are likely to
be most useful to the existing and potential investors, lenders and other creditors for making decisions about the reporting entity on the
basis of information in its financial report (financial information).

Fundamental Qualitative Characteristics (FaReMaRe)

• Relevance
• Materiality
• Faithful Representation
Additional note: Prudence is the exercise of caution when making judgements under conditions of uncertainty. The exercise of
prudence means that assets and income are not overstated and liabilities and expenses are not understated.

Enhancing Qualitiave Characteristics (VCUT)

• Verifiability
• Comparability
• Understanding
• Timeliness

Cost Constraint
Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial information imposes
costs, and it is important that those costs are justified by the benefits of reporting that information. There are several types of costs and
benefits to consider.

Basic Financial Statements

• Statement of Financial Position/Balance Sheet
• Statement of (Comprehensive) Income/Income Statement
• Statement of Changes in Equity/Partner’s Capital/Owner’s Capital
• Statement of Cash Flows
• Notes to Financial Statements

Reporting Period:

To help users of financial statements to identify and assess changes and trends, financial statements also provide comparative
information for at least one preceding reporting period.
Exception for Philippine reporting setting: 3 periods if there are prior period errors or listed companies.

Allowable presentation of FS not in full 12 months:

• Pre-operating in the prior year for only less than 12 months
• Entity merged to the acquirer within its 12 month reporting period
• Liquidating entities
Adjusting Events (PAS 10): Financial statements include information about transactions and other events that have occurred after the
end of the reporting period if providing that information is necessary to meet the objective of financial statements.

Going Concern Assumption

Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation
for the foreseeable future.

Elements to Financial Statements

Item Element Definition or description

Economic resource Asset A present economic resource controlled by the entity as a result of past
events.

An economic resource is a right that has the potential to produce economic

benefits.

Claim Liability A present obligation of the entity to transfer an economic resource as a result
of past events.

Equity The residual interest in the assets of the entity after deducting all its liabilities.

Changes in economic resources and Income Increases in assets, or decreases in liabilities, that result in increases in
claims, reflecting financial performance equity, other than those relating to contributions from holders of equity claims.

Expenses Decreases in assets, or increases in liabilities, that result in decreases in

equity, other than those relating to distributions to holders of equity claims.

Other changes in economic resources and – Contributions from holders of equity claims, and distributions to them.
claims

– Exchanges of assets or liabilities that do not result in increases or decreases

in equity.

Recognition and Derecognition

Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance
an item that meets the definition of one of the elements of financial statements—an asset, a liability, equity, income or expenses.

Derecognition is the removal of all or part of a recognized asset or liability from an entity’s statement of financial position. Derecognition
normally occurs when that item no longer meets the definition of an asset or of a liability:
• for an asset, derecognition normally occurs when the entity loses control of all or part of the recognized asset; and
• for a liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of the recognized
liability.
Table 6.1—Summary of information provided by particular measurement bases

Assets
Statement of financial position
Historical cost Fair value (market- Value in use (entity-specific Current cost
participant assumptions) (a)
assumptions)
Carrying amount Historical cost (including Price that would be Present value of future cash flows Current cost (including
transaction costs), to the received to sell the asset from the use of the asset and from transaction costs), to the
extent unconsumed or (without deducting its ultimate disposal (after extent unconsumed or
uncollected, and transaction costs on deducting present value of uncollected, and
recoverable. disposal). transaction costs on disposal). recoverable.
(Includes interest
accrued on any financing
component.)
Statement(s) of financial performance
Event Historical cost Fair value (market- Value in use (entity-specific Current cost
participant assumptions)
assumptions)
Initial — Difference between Difference between consideration —
recognition (b) consideration paid and paid and value in use of the asset
fair value of the asset acquired.
acquired. (c) Transaction costs on acquiring the
Transaction costs on asset.
acquiring the asset.
Sale or Expenses equal to Expenses equal to fair Expenses equal to value in use of Expenses equal to
consumption of historical cost of the value of the asset sold or the asset sold or consumed. current cost of the asset
the asset (d) , (e) asset sold or consumed. consumed. Income received. sold or consumed.
Income received. Income received. (Could be presented gross or net.) Income received.
(Could be presented (Could be presented (Could be presented
gross or net.) gross or net.) gross or net.)
Expenses for transaction Expenses for transaction Expenses for transaction
costs on selling the costs on selling the costs on selling the
asset. asset. asset.

Statement(s) of financial performance

Event Historical cost Fair value (market- Value in use (entity- Current cost
participant specific assumptions)
assumptions)
Interest Interest income, at historical Reflected in income and Reflected in income and Interest income, at current rates.
income rates, updated if the asset expenses from changes expenses from changes in
bears variable interest. in fair value. value in use.
(Could be identified (Could be identified
separately.) separately.)
Impairment Expenses arising because Reflected in income and Reflected in income and Expenses arising because
historical cost is no longer expenses from changes expenses from changes in current cost is no longer
recoverable. in fair value. value in use. recoverable.
(Could be identified (Could be identified
separately.) separately.)
Value Not recognized, except to Reflected in income and Reflected in income and Income and expenses reflecting
changes reflect an impairment. expenses from changes expenses from changes in the effect of changes in prices
For financial assets—income in fair value. value in use. (holding gains and holding
and expenses from changes losses).
in estimated cash flows.
Liabilities
Statement of financial position
Historical cost Fair value (market- Fulfilment value (entity- Current cost
participant specific assumptions)
assumptions)
Carrying Consideration received (net Price that would be paid to Present value of future cash Consideration (net of
amount of transaction costs) for transfer the unfulfilled part flows that will arise in fulfilling transaction costs) that would be
taking on the unfulfilled part of the liability (not the unfulfilled part of the currently received for taking on
of the liability, increased by including transaction costs liability (including present the unfulfilled part of the
excess of estimated cash that would be incurred on value of transaction costs to liability, increased by excess of
outflows over consideration transfer). be incurred in fulfilment or estimated cash outflows over
received. transfer). that consideration.
(Includes interest accrued on
any financing component.)

Statement(s) of financial performance

Event Historical cost Fair value (market- Fulfilment value (entity- Current cost
participant assumptions) specific assumptions)
Initial — Difference between Difference between —
recognition (a) consideration received and consideration received and
the fair value of the the fulfilment value of the
liability. (b) liability.
Transaction costs on Transaction costs on
incurring or taking on the incurring or taking on the
liability. liability.
Fulfilment of Income equal to historical Income equal to fair value of Income equal to fulfilment Income equal to current cost
the liability cost of the liability fulfilled the liability fulfilled. value of the liability fulfilled. of the liability fulfilled
(reflects historical Expenses for costs incurred Expenses for costs incurred (reflects current
consideration). in fulfilling the liability. in fulfilling the liability. consideration).
Expenses for costs (Could be presented net or (Could be presented net or Expenses for costs incurred
incurred in fulfilling the gross. If gross, historical gross. If gross, historical in fulfilling the liability.
liability. consideration could be consideration could be (Could be presented net or
(Could be presented net or presented separately.) presented separately.) gross. If gross, historical
gross.) consideration could be
presented separately.)
Transfer of the Income equal to historical Income equal to fair value of Income equal to fulfilment Income equal to current cost
liability cost of the liability the liability transferred. value of the liability of the liability transferred
transferred (reflects Expenses for costs paid transferred. (reflects current
historical consideration). (including transaction costs) Expenses for costs paid consideration).
Expenses for costs paid to transfer the liability. (including transaction costs) Expenses for costs paid
(including transaction (Could be presented net or to transfer the liability. (including transaction costs)
costs) to transfer the gross.) (Could be presented net or to transfer the liability.
liability. gross.) (Could be presented net or
(Could be presented net or gross.)
gross.)
Interest Interest expenses, at Reflected in income and Reflected in income and Interest expenses, at current
expenses historical rates, updated if expenses from changes in expenses from changes in rates.
the liability bears variable fair value. fulfilment value.
interest. (Could be identified (Could be identified
separately.) separately.)
 Statement(s) of financial performance
Event Historical cost Fair value (market- Fulfilment value Current cost
participant (entity-specific
assumptions) assumptions)
Effect of events Expenses equal to the excess of Reflected in income Reflected in income Expenses equal to the excess of
that cause a the estimated cash outflows over and expenses from and expenses from the estimated cash outflows
liability to the historical cost of the liability, changes in fair value. changes in fulfilment over the current cost of the
become or a subsequent change in that (Could be identified value. liability, or a subsequent change
onerous excess. separately.) (Could be identified in that excess.
separately.)
Value changes Not recognized except to the Reflected in income Reflected in income Income and expenses reflecting
extent that the liability is and expenses from and expenses from the effect of changes in prices
onerous. changes in fair value. changes in fulfilment (holding gains and holding
For financial liabilities—income value. losses).
and expenses from changes in
estimated cash flows.

Fundamental Assumptions and Principles:

• Entity Assumption: economic activities can be accounted for when considering an identifiable set of activities.
• Going Concern Assumption: it is presumed the entity will continue to operate in the foreseeable future.
• Monetary Unit Assumption: money is the appropriate basis to measure economic activity
• Periodicity Assumption: economic activity to be divided into quarters or years
• Measurement Principle: assets & liabilities get measured in various ways
• Accrual Accounting
o Revenue Recognition Principle - Revenue recognized when the entity satisfies the performance obligation
o Expense Recognition Principle - "matching principle" - expenses incurred to generate the revenue in a period are
matched against that revenue.
• Full Disclosure Principle

Sustainability Reporting

The IFRS Foundation, which had been responsible for setting global accounting standards for several years, started to deliberate and
plan for the establishment of the International Sustainability Standards Board (or the ISSB). In April 2021, in response to demands from
global capital markets for the development of standards to provide a comprehensive global baseline of sustainability disclosures, the
Trustees of the IFRS Foundation published a proposal to amend the IFRS Foundation’s Constitution to accommodate the formation and
operation of the ISSB. The establishment of the ISSB was announced by the Trustees of the IFRS Foundation on 3 November 2021,
during the Finance Day of the COP26 climate change conference.

Issuance of IFRS S1 and IFRS S2

On 26 June 2023, after a year of deliberations on the feedback received on the two Exposure Drafts, the ISSB issued its first two IFRS
sustainability disclosure standards (the ISSB standards). The standards are aimed to enable users of general purpose financial reports
to assess an entity’s exposure to and management of sustainability-related risks and opportunities over the short, medium and long
term, and inform their decisions relating to providing resources to an entity.

IFRS S1 and IFRS S2 are comprised of their main text, as well as five and three appendices respectively. The appendices are integral
parts of IFRS S1 and IFRS S2 and have the same authority as their main text. IFRS S1 and IFRS S2 are accompanied by Illustrative
Guidance, Illustrative Examples and Basis for Conclusions (BC), but these are not part of IFRS S1 and IFRS S2 nor are they intended
to provide interpretative guidance. In addition, IFRS S2 is accompanied by Industry-based Guidance on Implementing IFRS S2, which
is not intended to create additional requirements. The Implementation Guidance and Illustrative Examples of IFRS S1 and IFRS S2 as
well as the Industry-based Guidance on Implementing IFRS S2, accompany those standards and illustrate aspects of them, while the
BC summarizes the considerations of the ISSB in developing those standards.

The role of IFRS S1 in the ISSB standards

IFRS S1 sets out the general requirements for a complete set of sustainability-related financial disclosures and requires an entity to
disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s
prospects. The effect on the entity’s prospects refers to the effect on the entity’s cash flows, its access to finance or cost of capital over
the short, medium or long term.

The information required by IFRS S1 relates to general aspects of how an entity operates, in particular to the following:
• Governance
• Strategy
• Risk management, and
• Metrics and targets associated with sustainability-related risks and opportunities.
An entity is required to apply IFRS S1 in conjunction with all the other ISSB standards before it can assert compliance with
the ISSB standards.

• The other ISSB standards are intended to set out specific requirements for the sustainability-related topics with which they
deal.
• IFRS S1 establishes the basis of application of all topic-based ISSB standards that will be developed by the ISSB in the future,
• IFRS S2 is the first topic-based standard and covers disclosure requirements that are specific to climate. This purpose, in the
context of sustainability-related financial disclosures is similar, in some respects, to that of the IASB’s Conceptual Framework,
IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,
which are applicable to general purpose financial statements prepared in accordance with the IFRS accounting standards.

Relationship between IFRS S1 and IFRS S2

IFRS S2 is the first topic‑based standard issued by the ISSB and is to be applied in conjunction with IFRS S1. Although the ISSB
standards, in this first phase of their development, include IFRS S2 as the ISSB’s only topic-based standard, IFRS S1 requires entities
to disclose material sustainability-related financial information about all sustainability-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects. This requirement effectively covers sustainability-related topics beyond climate
(subject to the ‘climate first’ transition relief which allows an entity to provide only climate-related disclosures in its first year of applying
IFRS S1 and IFRS S2). IFRS S1 also provides a list of other sources of guidance to help entities identify the relevant sustainability-
related risks and opportunities and the material information about them, which includes references to pronouncements of other
standard-setting bodies.

Both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024.

However, the mandatory application of the ISSB standards depends on each jurisdiction’s endorsement or regulatory processes and it
is not linked to the application of the IFRS accounting standards.

Sustainability – Philippine Setting

• On October 4, 2023, the SEC issued the draft Memorandum Circular on the Revised Sustainability Reporting Guidelines, to
update SEC Memorandum Circular No. 4, Series of 2019 for publicly listed companies (PLCs) to submit sustainability reports
in two formats:
o SR Narrative – PLCs shall submit a narrative report following the format outlined in MC4, submitted in conjunction
with the Annual Report.
o Sustainability Report (SuRe) Form – PLCs will be required to submit their duly answered SuRe Form through the
SEC Electronic Filing and Submission Tool (eFAST). The template comprises three major sections: (1)
Sustainability and Climate-related Opportunities and Risks Exposures (SCORe); (2) Cross-Industry Standard
Metrics (CISM); and (3) Industry-Specific Metrics (ISM).
• On December 29, 2023, the SEC released a notice to the PLCs regarding the deferred implementation of the Revised SR
Guidelines.
• The Revised Sustainability Reporting Guidelines for PLCs and the SuRe Form is scheduled for release in 2024, subject to the
issuance of the corresponding Memorandum Circular(s) on the matter.
• Applicable to data covering the year 2024, with reporting due the following year or in 2025.
• For SRs in 2023 or those due in 2024, PLCs will follow the provisions of SEC Memorandum Circular No. 4, series of 2019.

SEC Financial Reporting

Questionnaire:
1. The objective of general-purpose financial reporting in 7. In accordance with the PRC BOA Resolution No. 29,
accordance with the Conceptual Framework is to series of 2022 which amends some provision of
provide financial information about the reporting entity Republic Act 9298, how many is the current members
that is useful to existing and potential investors, of Financial Reporting Standards Council including
lenders and other creditors in making decisions the chairman?
relating to providing resources to the entity, those a. 16
decisions involve? b. 15
a. buying, selling or holding equity and debt c. 17
instruments d. 14
b. providing or settling loans and other forms of
credits 8. In accordance with PRC BOA Resolution No. 44,
c. exercising rights to vote on, or otherwise series of 2022, this council’s name is changed in
influence, management’s actions that affect accordance with the recent adoption of the IFRS
the use of the entity’s economic resources. Foundation of a new sets of disclosure standards that
d. All of the above could create or erode the enterprise value of a
Company, who is the financial reporting standard
2. Which of the following characteristics of Conceptual setting body of the Philippines?
Framework pertains to its enhancing qualitative a. Financial Reporting Standards Council
characteristics? b. Financial and Sustainability Reporting
a. Verifiability, Timeliness, Prudence, Standards Council
Understandability c. Philippine Financial and Sustainability
b. Verifiability, Completeness, Standards Board
Understandability, Timeliness d. None of the above
c. Relevance, Faithful Representation,
Materiality, Completeness 9. How many members of the Philippine Interpretations
d. Relevance, Faithful Representation, Council (PIC) comes from accounting and auditing
Materiality firms?
a. 10
3. Information available to decision-makers in time to be b. 8
capable of influencing their decisions. Generally, the c. 9
older the information is the less useful it is, what d. 6
qualitative characteristic does this pertain?
a. Cut-off 10. How many years does the members of PIC serve?
b. Timeliness a. 4 years
c. Understandability b. 3 years
d. Comparability c. 2 years
d. 5 years
4. Which of the following statements is true?
a. Comparability refers to the use of the same 11. Which of the following statements is true for the
methods for the same items, either from implementation of the Sustainability standards in the
period to period within a reporting entity or in Philippine-setting?
a single period across entities. a. IFRS S1 and S2 is already mandatory
b. Consistency is the qualitative characteristic enacted in the country for the year-ending
that enables users to identify and understand December 31, 2023.
similarities in, and differences among, items. b. IFRS S2 requires in its disclosure the Scope
c. Verifiability means that different 3 greenhouse emissions in the financial
knowledgeable and independent observers statements.
could reach consensus, although not c. IFRS S1 uses scenario analysis to
necessarily complete agreement, that a understand how resilient they are in the face
particular depiction is a faithful of uncertainty and risk.
representation. d. IFRS S1 plans to disclose physical and
d. None of the above. transition risks and their potential impact on
the move towards a low carbon economy.
5. It is a present economic resource controlled by the
entity as a result of past events or an economic 12. Which of the following statements are true?
resource is a right that has the potential to produce I. A reporting entity can be a single entity or a
economic benefits. portion of an entity but cannot comprise more
a. Asset than one entity.
b. Income II. A reporting entity is at all times a legal entity.
c. Liability III. Consolidated financial statements provide
d. Equity information about the assets, liabilities, equity,
income and expenses of both the parent and its
6. Which of the following is a duty or responsibility that subsidiaries as a single reporting entity.
an entity has no practical ability to avoid. a. I and II are true.
a. Asset b. II is true.
b. Income c. III is true.
c. Liability d. All are true.
d. Equity
13. Recognition of income occurs at the same time as: c. Laurence Co. must assess if the growth is
a. the initial recognition of an asset, or an significant and continuing and change the
increase in the carrying amount of an asset. framework in the next reporting period.
b. the initial recognition of a liability, or an d. Laurence Co. must not assess for its growth
increase in the carrying amount of a liability. and opts to stay at PFRS for SEs framework.
c. the derecognition of an asset, or a decrease
in the carrying amount of an asset. 18. Jorimar Co. (a full PFRS entity) purchased LPV Co.
d. All of the above during the year, which is reporting under PFRS for
SMEs, it purchased 99% of its shares thus making it a
14. Which of the following statements are true? wholly-owned subsidiary of Jorimar Co. (JC) In
a. All items that meet the definition of assets, December 31, which of the following are false for the
liabilities and equity are recognized. appropriate framework of the Company?
b. Not recognizing an item that meets the a. LPV Co. can avail of the exemption
definition of one of the elements makes the mandated by Revised SRC Rule 68 to
statement of financial position and the implement Full FRS in its reporting.
statement(s) of financial performance still b. LPV Co. can still report its financial
makes the financial statements complete at statements under PFRS for SMEs.
all times. c. LPV Co. cannot avail of the exemption as its
c. Whether or not the asset or liability is reporting is PFRS for SMEs instead of PFRS
recognized, explanatory information about for SEs.
the uncertainties associated with it may need d. A and B is false.
to be provided in the financial statements.
d. All of the statements above are true. 19. Which of the following statements are true?
a. Financial statements are normally prepared
15. Which of the following statements are true? on the assumption that the reporting entity is
a. Unlike current value, historical cost does not a going concern and will continue in
reflect changes in values, except to the operation for the foreseeable future.
extent that those changes relate to b. If there are indicators for material uncertainty
impairment of an asset or a liability of going concern, the financial statements
becoming onerous. may have to be prepared on a different
b. At all cases, fair value can be determined basis. If so, the financial statements do not
directly by observing prices in an active need to describe the basis used.
market. c. Financial statements provide information
c. If the value of an asset or liability is sensitive about transactions and other events viewed
to market factors or other risks, its historical from the perspective of the reporting entity
cost will not differ from its current value. as a whole and from the perspective of any
d. All of the statements above is false particular group of the entity’s existing or
potential investors, lenders or other
16. Which of the following statements are false regarding creditors.
executory contracts? d. All of the statements above are true.
a. An executory contract is a contract, or a
portion of a contract, that is equally 20. Which of the following statements are false?
unperformed—neither party has fulfilled any a. Verifiability helps assure users that
of its obligations, or both parties have information faithfully represents the
partially fulfilled their obligations to an equal economic phenomena it purports to
extent. represent.
b. All terms in a contract—whether explicit or b. Verification cannot be performed indirectly.
implicit—are considered unless they have no c. Although a single economic phenomenon
substance. can be faithfully represented in multiple
c. A group or series of contracts may achieve ways, permitting alternative accounting
or be designed to achieve an overall methods for the same economic
commercial effect. phenomenon diminishes comparability.
d. An executory contract establishes a separate d. All of the statements above are true.
right and obligation to exchange economic
resources.

17. Laurence Co., a rising BPO Company in Cebu is

currently reporting its financial statements at PFRS for
Small Entities (SEs). During the year, the Company’s
total assets exceed 100 million, which of the following
statements are true?
a. Laurence Co. must transition to PFRS for
SMEs immediately in the current year.
b. Laurence Co. must assess first if the growth
is significant and continuing before it
transition to PFRS for SME for the current
year.