Measuring – The process of assigning of peso

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amounts to the accountable economic
transactions and events. The measurement bases
FINANCIAL ACCOUNTING
are;
AND REPORTING 1  Historical Cost – the most common
Accounting Frameworks measure of financial transactions, and
 Current Value – includes fair value, value
Overview of the Handouts:
I. Concepts and Principles Relating to the in use, fulfillment value and current cost.
Presentation of Financial Statements
II. Financial Reporting Standards Council Communicating – The process of preparing
and Conceptual Preparation for the and distributing accounting reports to potential
Preparation and Presentation of users of accounting information. This process
Financial Statements includes the recording, classifying and summarizing
III. Introduction to Financial Instruments aspects of accounting.
 Recording or journalizing is the process of
systematically maintaining a record of all
I. Concepts and Principles Relating to the
economic business transactions after they
Presentation of Financial Statements
have been identified and measured.
 Classifying is the sorting or grouping of
NATURE, SCOPE AND PRINCIPLES OF
similar and interrelated economic
ACCOUNTING
transactions into their respective classes. It is
accomplished by posting to the ledger.
1. Accounting is a process. A process is a
 Summarizing is the preparation of financial
step by step performance of any specific
statements namely, statement of financial
job according to its objectives. Accounting
position, income statement, statement of
is identified as a process as it performs
comprehensive income, statement of changes
specific task of identifying, measuring, and
and equity and statement of cash flows.
communicating financial information.
2. Accounting is a service activity. Its
Accounting Theory
function is to provide quantitative
A set of assumptions, frameworks, and
information, primarily financial in nature,
methodologies used in the study and application of
about economic entities that is intended to
financial reporting principles.
be useful in making economic decision.
3. Accounting is an art. It is the art of
GENERALLY ACCEPTED ACCOUNTING
recording, classifying and summarizing
PRINCIPLES (GAAP)
financial data. Accounting requires
knowledge, skills, and expertise to properly
 Represents the accounting rules, procedures,
apply definite techniques in a systematic
practices and standards followed in the
manner.
preparation and presentation of financial
4. Accounting is an information system. It
statements.
measures business activities, process
information into reports and communicates
FINANCIAL STATEMENTS
the reports to decision makers. Thus,
characterized as a storehouse of
 Means by which the information
information.
accumulated and processed in financial
accounting is periodically communicated to
Identifying – The process of recognition or
the users.
nonrecognition of business activities as
“accountable” events. An event is accountable or
Financial Position comprises the assets, liabilities
quantifiable when it has an effect on assets,
and equity of an entity at a particular moment in
liabilities and equity. Thus, the subject matter of
time. It pertains to liquidity, solvency, and the need
accounting is economic activity or the measurement
of the entity for additional financing. Information
of economic resources and economic obligations.
are pictures in the statement of financial position.

AACONAPPS1 - Risk-based Audit Process, Preliminary Engagement Activities, and Performance of Risk Assessment Procedures
Financial performance comprises the revenue,

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expenses and net income or loss of an entity for a Board of Accountancy 1
period of time. Also known as results of operations Securities and Exchange Commission 1
and is portrayed in the income statement and Bangko Sentral ng Pilipinas 1
statement of comprehensive income. Bureau of Internal Revenue 1
Commission on Audit 1
Cash flows are the cash receipts ad cash payments Major organization of prepares & users of
arising from the operating, investing and financing financial statements – Financial Executives 1
activities of the entity. The information is presented Institute of the Philippines (FINEX)
in the statement of cash flow. Accredited national professional
organizations of CPAs:
PHILIPPINE FINANCIAL REPORTING Public Practice 2
STANDARDS (PFRS)/PHILIPPINE Commerce and Industry 2
ACCOUNTING STANDARDS (PAS) Academe or Education 2
Government 2
 The PFRS/ PAS are the new set of Generally
TOTAL 14
Accepted Accounting Principles (GAAP)
issued by the Accounting Standards Council
All members of the FRSC including the chairman
(ASC) to govern the preparation of
shall have a term of 3 years and is renewable for
financial statements.
another term.
 These standards are patterned after the
revised International Financial Reporting
Philippine Interpretations Committee (PIC)
Standards (IFRS) and International
The FRSC formed the PIC in August 2006 and has
Accounting Standards (IAS) issued by the
replaced the Interpretations Committee (IC) formed
International Accounting Standards Board
by the Accounting Standards Council (ASC) in May
(IASB).
2000.

II. Financial Reporting Standards Council

Role: To prepare interpretations of PFRS for
and Conceptual Preparation for the
approval by the FRSC and to provide timely
Preparation and Presentation of Financial
guidance on financial reporting issues not
Statements
specifically addressed in current PFRS.

FINANCIAL REPORTING STANDARDS

INTERNATIONAL ACCOUNTING
COUNCIL (FRSC)
STANDARDS BOARD (IASB)

The FRSC is the successor of the Accounting

 IASB replaces the International Accounting
Standards Council (ASC) which initially
Standards Committee (IASC).
formalized the development of generally accepted
 It publishes standards in a series of
accounting principles in the Philippines.
pronouncements called International
Financial Reporting Standards (IFRS).
Creation: FRSC was established by the Professional
 The IASB standard-setting process includes
Regulation Commission (PRC) upon
in the correct order research, discussion
recommendation of the Board of Accountancy
paper, exposure draft and accounting
(BOA) to assist the Board in carrying out its power
standard.
and functions provided under R.A. No. 9298.
CONCEPTUAL FRAMEWORK FOR THE
Function: FRSC’s main function is to establish and
PREPARATION AND PRESENTATION OF
improve generally accepted accounting principles
FINANCIAL STATEMENTS
in the Philippines.
Users of Financial Information:
Composition: The FRSC is composed of 15
a. Primary Users – parties to whom general
members with a Chairman, who had been or
purpose financial reports are primarily
presently a senior accounting practitioner in any
directed, which includes existing and
scope of accounting practice, and 14 representatives
potential investors, lenders and other
from the following:
creditors

AACONAPPS1 - Risk-based Audit Process, Preliminary Engagement Activities, and Performance of Risk Assessment Procedures
 b. Other Users – parties that may find the 3. Faithful representation – the actual

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general purpose of financial reports useful effects of the transactions shall be
but the reports are not directed to them properly accounted for and reported in
primarily, which includes employees, the financial statements
customers, governments and their agencies,
and the public Ingredients of Faithful Representation:
a) Completeness – relevant
General Objective of Financial Statements: information should be presented in
To provide information about economic resources a way that facilitates understanding
of the reporting entity, claims against the entity and and avoids erroneous implication
changes in the economic resources and claims. b) Neutrality – without bias in the
preparation or presentation of financial
To provide information about an entity’s assets, information
liabilities, equity, income and expenses useful to c) Free from Error – there are no errors or
users in: omissions the description of the
a. Assessing future cash flows to the reporting phenomenon or transaction
entity.
b. Assessing management stewardship of the 4. Comparability – the ability to bring together
entity’s economic resources. for the purpose of noting points of likeness
and difference
Underlying Assumptions 5. Understandability – financial information
Going concern or continuity assumption means must be comprehensible or intelligible if it is
that in the absence of evidence to the contrary, the to be most useful
accounting entity is viewed as continuing in 6. Verifiability – different knowledgeable and
operation indefinitely. independent observers could reach
consensus, although not necessarily
Accounting entity assumption means that the entity complete agreement, that a particular
is separate from the owners, managers, and depiction is a faithful representation
employees who constitute the entity. 7. Timeliness – financial information must be
available or communicated early enough
Time period assumption requires that the indefinite when a decision is to be made
life of an entity is subdivided into accounting
periods which are usually of equal length for the Recognition and Measurement
purpose of preparing financial reports on financial Recognition is the process of capturing for
position, performance and cash flows. inclusion in the financial statements on item that
meets the definition of asset, liability, equity,
Monetary unit assumption has two aspects: income or expense.
 Quantifiability – assets, liabilities, equity,
income and expenses should be stated in Income recognition: Income are recognized when
terms of a unit of measure peso in the earned. The point of sale is the point of income
Philippines recognition with respect to sale of goods in the
 Stability of the peso – purchasing power of ordinary course of business.
the peso is stable or constant Expense recognition: Expenses are recognized
when incurred.
Qualitative Characteristics
 Qualities or attributes that make financial Matching Principle requires that those costs and
accounting information useful to the users. expenses incurred in earning a revenue shall be
reported in the same period. It has three
1. Relevance – capacity of the information to applications:
influence a decision  Cause and effect association – expenses
2. Materiality – a subquality of relevance recognized when the revenue is already
based on the nature or magnitude or both of recognized
the items to which the information relates;  Systematic and rational allocation – some
factors include size and nature of the item costs are expensed by simply allocating
them over the periods benefited

AACONAPPS1 - Risk-based Audit Process, Preliminary Engagement Activities, and Performance of Risk Assessment Procedures
  Immediate recognition – cost incurred is

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expensed outright because of uncertainty of Elements directly related in the measurement of
future economic benefits or difficulty of financial position:
reliability associating certain costs with 1. Asset – defined as a present economic
future revenue resource controlled by the entity as a
result of past events
Derecognition is the removal of all or part of a Essential Characteristics:
recognized asset or liability from the statement of  The asset is a present economic resource.
financial position.  The economic resource is a right that has
 Asset is derecognized when the entity loses potential to produce economic benefits.
control of all or part of the asset.  The economic resource is controlled by the
 Liability is derecognized when the entity no entity as a result of past event.
longer has a present obligation for all or
part of the liability. 2. Liability – defined as present obligation of
an entity to transfer an economic resource
Measurement is defined as quantifying in monetary as a result of past events
terms the elements in the financial statements. Essential Characteristics:
 The entity has an obligation.
Historical Cost:  The obligation is to transfer an economic
a. Historical cost of an asset is the cost resource.
incurred in acquiring or creating the asset  The obligation is a present obligation that
comprising the consideration paid plus exists as a result of past event.
transaction cost.
b. Historical cost of a liability is the 3. Equity – residual interest in the assets of
consideration received to incur the liability the entity after deducting all of the
minus transaction cost. liabilities

Current Value: Elements directly related in the measurement of

a. Fair value of an asset is the price that financial performance:
would be received to sell an asset in an 1. Income – defined as increases in assets or
orderly transaction between market decreases in liabilities as that result in
participants at the measurement date. increases in equity, other than those
Fair value of a liability is the price that relating to contributions from equity
would be paid to transfer a liability in an holders
orderly transaction between market  Revenue arises in the course of
participants at the measurement date. ordinary business and referred to by a
b. Value in use is the present value of the cash variety of different names including
flows that an entity expects to derive from sales, fees, interest, dividends, royalties
the use of an asset and from the ultimate and rent.
disposal.  Gains represent other items that meet
c. Fulfillment value is the present value of the definition of income and do not
cash that an entity expects to transfer in arise in the ordinary regular activities.
paying or settling a liability.
d. Current cost of an asset is the cost of an 2. Expense – defined as decreases in assets
equivalent asset at the measurement date or increases in liabilities that result in the
comprising the consideration paid and decreases in equity, other than those
transaction cost. relating to distributions to equity holders
Current cost of a liability is the  Expenses arises in the course of
consideration that would be received less ordinary regular activities include cost
any transaction cost at measurement date. of goods sold, wages and depreciation.
 Losses do not arise in the course of the
Elements of Financial Statements ordinary regular activities and include
 Refer to the quantitative information losses resulting from disasters.
reported in the statement of financial
position and income statement.

AACONAPPS1 - Risk-based Audit Process, Preliminary Engagement Activities, and Performance of Risk Assessment Procedures
 deliver cash or another financial asset to

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III. Introduction to Financial Instruments another entity.

FINANCIAL INSTRUMENTS Compound Financial Instrument

PAS 32, paragraph 28, defines a compound
PAS 32, paragraph 11, defines a financial financial instrument as “a financial
instrument as any contract that gives rise to both a instrument that contains both a liability and an
financial asset of one entity and a financial liability equity element from the perspective of the
or equity instrument of another entity. issuer.”
 Bonds payable issued with share
Financial asset is any asset that is: warrants
 cash or currency  Convertible bonds payable
 an equity instrument of another entity
 a contractual right to receive cash in the
future;
a) Trade accounts receivable
b) Notes receivable
c) Loans receivable
d) Bonds receivable
 a contractual right to exchange financial
instruments with another entity under
conditions that are potentially favorable to
the entity

Financial liability is any liability that is a

contractual obligation:
 to deliver cash or another financial asset to
another entity
 to exchange financial assets or financial
liabilities with another entity under
conditions that are potentially unfavorable
to the entity
 Trade accounts payable
 Notes payable
 Loans payable
 Bonds payable

Equity instrument is any contract that evidences a

residual interest in the assets of an entity after
deducting all of its liabilities.
 Ordinary share capital
 Preference share capital
 Warrants or options

Classification as Liability or Equity

PAS 32, paragraph 15, provides that a financial
instrument should be classified as either a financial
liability or an equity instrument according to the
substance of the contract and the definitions of
financial liability and equity instrument.

Paragraph 16 further provides that a financial

instrument is an equity instrument only if the
instrument includes no contractual obligation to

AACONAPPS1 - Risk-based Audit Process, Preliminary Engagement Activities, and Performance of Risk Assessment Procedures