CONCEPTUAL FRAMEWORK (Philippine Accounting Standards – PAS and Philippine

Financial Reporting Standards – PFRS) in the Philippines.

FRSC definition (formerly ASC)
Accounting is a service activity. Its function is to provide FINANCIAL REPORTING STANDARDS COUNCIL (FRSC) –
quantitative information, primarily financial in nature, now replaces the ASC, which will continue to function
about economic entities, that is intended to be useful in until the creation FRSC.
making economic decision.
Committee on Accounting Terminology (AICPA) INTERNATIONAL ACCOUNTING STANDARDS
COMMITTEE (IASC) – founded in 1973, is an
Accounting is the art of recording, classifying and independent private sector body, with the objectives of
summarizing in a significant manner and in terms of achieving the uniformity in the accounting principles,
money, transactions and events which are in part at which are used by business and other organizations for
least of a financial character and interpreting the results financial reporting around the world.
thereof.
The objectives of IASC:
American Accounting Association a. To formulate and publish in the public interest
Accounting is the process of identifying, measuring and accounting standards to be observed in the
communicating economic information to permit informed presentation of the financial statements and to
judgment and decision by users of the information. promote their worldwide acceptance and
observance.
b. To work generally for the improvement and
ACCOUNTING harmonization of regulations, accounting
1. Identifying – analytical component standards and procedures relating to the
2. Measuring – technical component presentation of financial statements.
3. Communicating – formal component
The basic purpose of accounting is IASC’s approved statements International Accounting
TO PROVIDE QUANTITATIVE FINANCIAL Standards – IAS
INFORMATION ABOUT A BUSINESS THAT IS
USEFUL TO STATEMENT USERS PARTICULARLY Factors considered in using the IAS:
OWNERS AND CREDITORS, IN MAKING a. Support of IASC standards by Philippine
ECONOMIC DECISIONS. organizations, such as SEC, BOA and PICPA.
b. Increasing internalization of business which has
heightened interest in a common language for
REPUBLIC ACT NO. 9298, also known as PHILIPPINE financial reporting.
ACCOUNTANCY ACT OF 2004 is the law regulating the c. Improvement of international accounting
practice of accountancy in the Philippines. standards or removal of free choices of
accounting treatments.
BOARD OF ACCOUNTANCY – is the body authorized by d. Increasing recognition of international
law to promulgate rules and regulation affecting the accounting standards by World Bank, ADB and
practice of the accountancy profession in the Philippines. World Trade Organizations.

Ø Public Accounting INTERNATIONAL ACCOUNTING STANDARDS BOARD

Ø Private Accounting (IASB) now replaces the International Accounting
Ø Government Accounting Standards Committee (IASC). It publishes its standards
*Research and Education in a series of pronouncements called INTERNATIONAL
FINANCIAL REPORTING STANDARDS (IFRS). The IFRS
Single practitioners and partnerships for the practice of is a global phenomenon intended to bring about greater
public accountancy shall be registered certified public transparency and a higher degree of comparability in
accountants in the Philippines. financial reporting, both of which will benefit the
investors and are essential to achieve the goal of one
Certificate of accreditation shall be issued to CPA in uniform and globally accepted financial reporting
public practice – registrant has acquired a minimum of standards.
three years of meaningful experience in any of the areas
of public practice including taxation. The IASB’s objective is to raise the quality and
consistency of financial reporting and to have a
SEC shall not register any corporation organized for the platform of high quality and improved standards.
practice of public accountancy.
ACCOUNTING ASSUMPTIONS are the basic notions or
Accreditation to practice public accountancy fundamental premises on which the accounting process
a) CPAs, firms and partnerships of CPAs including is based. Accounting assumptions are the “givens” and
partners and staff members are required to register with they exist without saying. Accounting assumptions
BOA and PRC serve as the foundation or bedrock of accounting in
b) Upon favorable recommendation of BOA, PRC shall order to avoid misunderstanding but rather enhance the
issue certificate of registration which shall be valid for 3 understanding and usefulness of the financial
years and renewable every 3 years upon payment of statements. Accounting assumptions are also known as
required fees. POSTULATES.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES CONCEPTUAL FRAMEWORK TWO ASSUMPTIONS:

(GAAP) – encompass conventions, rules and procedures 1. ACCRUAL
to define what is accepted accounting practice. They 2. GOING CONCERN
represent the rules, procedures, practice and standards
followed in the preparation and presentation of financial UNDERLYING ASSUMPTIONS:
statements. • ACCOUNTING ENTITY
• TIME PERIOD
ACCOUNTING STANDARDS COUNCIL (ASC) – is the • MONETARY UNIT – quantifiability and stability of
body established on November 18, 1981 by PICPA to the peso
promulgate suitable financial accounting standards
A CONCEPTUAL FRAMEWORK is a summary of the terms Changes in equity other than those arising from
and concepts that underlie the preparation and transactions with equity holders acting in their capacity
presentation of financial statements. as equity holders;
Cash Flow Statement
It is the underlying theory for the development Notes, comprising a summary of significant accounting
of accounting standards and revision of previously policies and other explanatory notes.
issued accounting standards.
FINANCIAL POSITION (BALANCE SHEET)
The conceptual framework is an attempt to • Economic Resources
provide an overall theoretical foundation for accounting, • Liquidity
which will guide standard-setters, preparers and users of • Solvency
financial information in the preparation and presentation • Financial Structure
of statements. • Capacity for Adaptation

Basic Purpose of Conceptual Framework Performance of an Enterprise (INCOME STATEMENT

a. Assists the FRSC in developing accounting
standards that will represent Philippine GAAP. STATEMENT OF CHANGES IN OWNERS’ EQUITY
b. Assists preparers of financial statements in
applying accounting standards and in dealing CASH FLOW STATEMENT
with issues not yet covered by GAAP.
c. Assists the FRSC in its review and adoption of CONCEPTS IN CONJUNCTION WITH THE OBJECTIVE OF
IFRS. FINANCIAL STATEMENTS
d. Assists users of financial statements in • Entity Theory
interpreting the information contained in the (Assets = Liabilities + Capital)
financial statements. • Proprietary Theory
e. Assists auditors in forming an opinion as to (Assets – Liabilities = Capital)
whether financial statements conform with • Residual Equity Theory
Philippine GAAP. (Assets – Liabilities – Preference Shareholders’
Equity = Ordinary Shareholders’ Equity)
IMPORTANT NOTE: • Fund Theory
• If there is a standard or an interpretation that (Fund = Cash inflows – Cash outflows)
specifically applies to a transaction, the standard
or interpretation overrides the conceptual FINANCIAL REPORTING – encompasses financial
framework. statements and other means of communicating
• In the absence of a standard or an information that relates directly and indirectly to the
interpretation that specifically applies to a financial accounting process.
transaction, management should consider the
applicability of the conceptual framework in FINANCIAL REPORTS – represent the main product of
developing and applying an accounting policy financial reporting, they include financial statements,
that results in information that is relevant and other information such as financial highlights, summary
reliable. of important figures, analysis of financial statements and
significant ratios, and non financial information such as
NOTE: In case there is conflict, the requirements of the description of major products and a listing of corporate
PFRS shall prevail over the conceptual framework. officers and directors.

SCOPE OF CONCEPTUAL FRAMEWORK Objective of Financial Reporting

a. Objective of financial statements The overall objective of financial reporting is to provide
b. Qualitative characteristics that determine the information that is useful for decision making.
usefulness of information in financial Specifically, the AICPA Financial Accounting Standards
statements. Board in its Statement of Financial Accounting Concepts
c. Definition, recognition and measurement of the enumerates the following objectives of financial
elements from which financial statements are reporting:
constructed. Ø To provide information useful in investment,
d. Concepts of capital and capital maintenance credit and similar decisions
Ø To provide information useful in assessing cash
STAKEHOLDERS flow prospects
Ø Investors Ø To provide information about entity resources,
Ø Employees claims to those resources and changes in them.
Ø Lenders
Ø Suppliers and trade creditors QUALITATIVE CHARACTERISTICS are the qualities
Ø Customers or attributes that make financial accounting information
Ø Government useful to the users. The ASC in its conceptual
Ø Public framework enumerates four principal qualitative
characteristics, namely:
The objective of financial statements is to provide Ø CONTENT of FINANCIAL STATEMENTS -
information about the financial position, performance, Relevance & Reliability
and cash flows of an enterprise that is useful to a wide Ø PRESENTATION of FINANCIAL STATEMENTS -
range of users in making economic decisions. Understandability & Comparability

A Complete Set of Financial Statements: RELEVANCE – capacity of information to make a

Balance Sheet – Statement of Financial Position difference in a decision by helping users form predictions
Income Statement – Statement of Comprehensive about the outcome of past, present and future events,
Income or confirm and correct prior expectations. It is the
Statement of Changes in Equity, showing either capacity of the information to influence a decision.
All changes in equity, or
Ingredients of Relevance
Ø Predictive Value
 Ø Feedback Value
Ø Timeliness ACCOUNTING CONSTRAINTS- are factors that may
affect the relevance and reliability of financial accounting
RELIABILITY – is the degree of confidence users place information.
upon the truthfulness of the representations in the Ø Timeliness
financial statements. It is the quality of information that Ø Cost-Benefit
assures users that the information is free from bias and Ø Materiality
error, and faithfully represents what it purports to Ø Balance between relevance and reliability
represent.
The following factors enhance the reliability of financial Timeliness – requires that the accounting information
statements: must be available or communicated early enough when
Ø Faithful Representation a decision is to be made.
Ø Substance over form Cost-benefit – the benefit derived should exceed the
Ø Neutrality cost incurred in obtaining the information.
Ø Conservatism or Prudence Materiality – information is material if its omission or
Ø Completeness misstatement could influence the economic decision of
the users taken on the basis of the financial statements.
Faithful representation – actual effects of the Factors of materiality: SIZE OF THE ITEM & NATURE OF
transactions should be properly accounted and reported THE ITEM
in the financial statements. Balance between relevance and reliability – in achieving
Substance over form – the economic substance of a balance between relevance and reliability, the
transactions and events are usually emphasized when overriding consideration is how best to satisfy the
economic substance differs from legal form. economic decision making needs of the users.
Neutrality – information should be free from bias. It is
synonymous with the all encompassing “principle of RECOGNITION is a term, which means the process of
fairness.” reporting an asset, liability, income or expense on the
Conservatism – under this when alternative exists, the face of the financial statements of an enterprise. In
alternative which has the least effect on equity should other words, it involves the inclusion of peso amount in
be chosen. Possible errors in measurement be in the the enterprise’s financial statements.
direction of understatement rather than overstatement Elements of Financial Statements
of net income and net assets. Ø Assets
Prudence is the desire to exercise care and caution when Ø Liabilities
dealing with the uncertainties in the measurement Ø Equity
process. Ø Revenue
Ø Expenses
Contingent loss is recognized as a provision if the loss is
probable and the amount can be reasonably estimated. Assets are resources controlled by the entity as a result
Contingent gain is not recognized but disclosed only. of the past transactions or events and from which future
economic benefits are expected to flow to the entity.
Completeness is the result of the adequate disclosure Liabilities are present obligations of the entity arising
standard or the principle of full disclosure from past transactions or events the settlement of which
Ø Standard of adequate disclosure is expected to result in an outflow from the entity of
The rule is that the accountant should disclose a resources embodying economic benefits.
material fact known to him which is not disclosed in the Equity is the residual interest in the assets of the entity
financial statements but disclosure of which is necessary after deducting all of its liabilities.
in order that the statements would not be misleading. Income is increase in economic benefit during the
Ø Notes to financial statements accounting period in the form of inflow or increase in
The purpose is to provide the necessary asset or decrease in liability that results in increase in
disclosures required by the Philippine Financial Reporting equity, other than contribution from equity participants.
Standards. They provide narrative description or Expense is decrease in economic benefit during the
disaggregation of the items presented in the financial accounting period in the form of an outflow or decrease
statements and information about items that do not in asset or increase in liability that results in decrease in
qualify for recognition. equity, other than distribution to equity participants.

UNDERSTANDABILITY requires that information should Four Main Recognition Principles

be comprehensible or intelligible to be useful. • ASSET RECOGNITION PRINCIPLE
Users are assumed to have a reasonable knowledge of • LIABILITY RECOGNITION PRINCIPLE
the economic activities of accounting and a willingness • EVENUE RECOGNITION PRINCIPLE
to study the information with reasonable diligence. • EXPENSE RECOGNITION PRINCIPLE
COMPARABILITY means the ability to bring together for
the purpose of noting points of likeness and difference. Asset Recognition Principle: Asset is recognized
• Horizontal Comparability or Intracomparability – when it is probable that future economic benefits will
comparability within the entity. flow to the entity and the asset has a cost or value that
• Dimensional Comparability or Intercomparability can be measured reliably. Inherent in asset recognition
– comparability between and across entities. is the COST PRINCIPLE, which means that assets should
be recorded initially at original acquisition cost.
PRINCIPLE OF CONSISTENCY Liability Recognition Principle: Liability is
The accounting methods and practices should be applied recognized when it is probable that an outflow of
on a uniform basis from period to period. Consistency resources embodying economic benefits will be required
does not mean that no change in accounting method for the settlement of a present obligation and the
can be made. If the change will result to more useful amount of the obligation can be measured reli
and meaningful information, then such change should be Income Recognition Principle: The basic principle is
made. But there should be full disclosure of the change that income should be recognized when earned. Income
and the peso effect thereof. is recognized when it is probable that an increase in an
It is inappropriate for an entity to leave its accounting asset or a decrease in a liability has arisen and that the
policies unchanged when more relevant and reliable increase in economic benefits can be measured reliably.
alternative exist.
Revenue arises in the course of the ordinary regular consideration given to acquire an asset at the
activities of an entity and is referred to by a variety of time of acquisition
different names. b. Current Cost – amount of cash or cash
Gains represent other items that meet the definition of equivalent that would have to be paid if the
income and do not arise in the course of the ordinary same or equivalent asset was acquired currently
regular activities of an entity. c. Realizable Value – amount of cash or cash
equivalent that could currently be obtained by
Revenue from Sale of Goods selling the asset in an orderly disposal.
PAS 18 on revenue provides the ff. conditions: d. Present Value – is the discounted value of
Ø The entity has transferred to the buyer the future net cash inflows that the item is expected
significant risks and rewards of ownership of to generate in the normal course of business.
goods
Ø The entity retains neither continuing CAPITAL MAINTENANCE
managerial involvement nor effective control The performance of an entity is determined using two
over the goods sold approaches, namely:
Ø The amount of revenue can be measured Ø Transaction approach – traditional
reliably preparation of income statement
Ø It is probable that economic benefits Ø Capital maintenance approach – net
associated with the transactions will flow to the income occurs only after the capital used from
entity. the beginning of the period is maintained. Net
Ø The costs incurred or to be incurred in respect income is the amount an entity can distribute to
of the transaction can be measured reliably. its owners and be as well off at the end of the
year as at the beginning.
Exceptions to the Point of Sale
Ø Installment method – point of collection. 2 CONCEPTS OF CAPITAL MAINTENANCE
Amount of revenue equals gross profit rate 1. Financial Capital (based on historical cost) –
times amount of collections. absolute monetary value of the net assets
Ø Cost recovery or sunk cost method – point contributed by shareholders and the value of the
of collection, all collections are first applied to increase in net assets resulting from earnings
the costs of merchandise sold. retained by the entity.
Ø Cash method – revenue is recognized when
received regardless of when earned. 2. Physical Capital (measured at current cost) –
Ø Percentage of completion method – when quantitative measure of the physical productive
the outcome of a construction contract can be capacity to produce goods and services.
estimated reliable, contract revenue and
contract costs associated with the construction
contract shall be recognized as revenue and
expenses respectively, by reference to the stage
of completion of the contract activity.
Ø Production method – point of production.

Expense Recognition Principle: This means that

expenses are recognized when incurred. Expenses are
recognized when it is probable that a decrease in future
economic benefits related to decrease in an asset or an
increase in liability has occurred and that the decrease in
economic can be measured reliably.
Expenses encompass losses as well as those expense
that arise in the course of the ordinary regular activities
of the entity.
Matching principle requires that those costs and
expenses are incurred in earning a revenue should be
reported in the same period. There should be
simultaneous or combined recognition of the revenues
and expenses that result directly from the same
transactions and events.

THREE APPLICATIONS OF MATCING PRINCIPLE

Ø Cause and Effect Association Principle –
expense is recognized when the revenue is
already recognized.
Ø Systematic and Rational Allocation
Principle – some costs are expensed by simply
allocating them over the periods benefited.
Ø Immediate Recognition Principle – costs
are expensed outright.

MEASUREMENT OF ELEMENTS
Measurement is the process of determining the
monetary amounts at which the elements of financial
statements are to be recognized and carried in the
balance sheet or statement of financial position and
income statement.

DIFFERENT MEASUREMENT BASES

a. Historical Cost – amount of cash or cash
equivalents paid or fair value of the