Conceptual Framework

 Summary of terms and concepts that underlie the preparation and

presentation of financial statements
 Concerned with the General Purpose Financial Statements only
 Underlying theme: Usefulness of information in making economic
decisions

Purposes
 Basic purpose
o guide in developing future PFRS and resolving accounting issues
 Specific purpose
o IASB: based on consistent concepts resulting in financial information
useful to investors, lenders, and creditors
o Preparers of FS: develop consistent accounting policy for
transactions
o All parties: understand and interpret standards

Authoritative Status of CF
 not a PFRS and does not define standards for any particular
measurement/disclosure issue
 CF does not override any specific PFRS
 in case of conflict, PFRS shall prevail over CF
 in the absence of a standard or interpretation that specifically applies
to a transaction, management shall consider the CF in developing an
accounting policy that will result in relevant and reliable info

Underlying Assumptions
 Time Period Principle
 Going Concern
o Accounting entity is viewed as continuing indefinitely
o Applications: Assets, Liabilities, Depreciation of PPE, Amortization,
Accrual of income and expenses, Prepayments and unearned
income
 Accrual Principle
o Income is recognized when earned rather than received
o Expense is recognized when incurred rather than when paid
 Monetary Unit Principle
 o Accounting info is stated in common measurement basis to be
useful (PHP)
 Entity Concept
o Entity is separate from business

Scope of Conceptual Framework

 Objective of Financial Reporting
o Overall Objective
 Provide financial information abt the reporting entity
o Specific Objective
 Provide information useful in making decisions abt providing
resources
 Useful in assessing the prospects of future net cash
flows to the entity
 About entity resources, claims, changes in resources
and claims
 Limitations of Financial Reporting
o Gen. purpose financial reports do not provide all info to investors,
lenders, and creditors
o Gen. purpose financial reports aren't designed to show the value of
an entity but provide info to help primary users estimate the value
o Gen. purpose financial reports are intened to provide common info
to users and cannot accommodate all requests for info
o To a large extent, these are based on estimate and judgment rather
than exact depiction

Qualitative Characteristics of Useful Information

Qualitative Characteristics: makes info useful
 Fundamental Characteristics: qualities addressing content /
substance of info
o Relevance: capacity of info to make difference in decisions
 Predictive Value: help users increase likelihood of correctly
predicting outcome of events
 Confirmatory Value: enables users to confirm earlier
expectations
o Faithful Representation: info provides true, correct, and
complete depiction of economic phenomena it wants to
represent
 Completeness: all info necessary
 Neutrality: all FS should not be prepared to favor one party
  Free from error: doesn't mean perfectly accurate, but
means no errors or omissions in description of
phenomenon

 Enhancing Characteristics: qualities that enhance usefulness

o Verifiability: diff knowledgable observers can reach consensus,
but not complete agreement
 Comparability: if it helps users identify similarities and
differences between diff sets of info (intra-comparability:
same entity, diff period; inter-comparability: diff entity)
 Understandability: requires info to be comprehensible
 Timeliness: having info available to decision makers in time
to influence decisions
Materiality is not an ingredient but rather a specific aspect of relevance
All material amounts are relevant but not all relevant info are material

Financial Statement & Reporting Entity

 General purpose financial statements: provide info about reporting
entity's assets, liabilities, equity, income, and expenses that are useful in
assessing:
o Entity's prospects for future net cash inflows
o Management's stewardship over economic resources
 Reporting entity: chooses to prepare FS and not necessarily a legal entity
o Few types of FS:
 Consolidated: bigger companies
 Unconsolidated / Individual: sariling FS
 Combined: business with many branches

Elements of Financial Statements

 Assets
o economic resource controlled by entity as a result of past event
o economic resource is a right that has potential to produce economic
benefits
o essential characteristics: controlled by entity, result of past
transaction, produce economic benefits
o tangibility and ownership are NOT essential characteristics
 Liabilities
 o present obligation of an entity
o essential characteristics: present obligation, transfer an economic
resource, present obligation is result of past event
o identification of payee and timing of settlement and amount of
liabilty are NOT essential characteristics
 Equity
 Income
o increase in economic benefit during accounting period
o inflow or increase of asset / decrease of liability
o increase in equity
o encompasses both revenue and gains
 revenue: arises from ordinary course of business, presents at
gross amt
 gain: arises from incidental or peripheral operations,
presents at net amt
o comprehensive income is classified into two
 profit/loss
 other comprehensive income
 unrealized gain or loss on asset
 gain or loss from translating FS of foreign operation
 reavaluation surplus
 unrealized gain or loss from derivative contracts
 remeasurements of defined benefit plan
 Expenses
o decrease in economic benefit
o outflow/decrease in equity other than distribution to equity
participants
o increase in liability, decrease in asset

Recognition & Derecognition

 Expenses are incurred in conformity with three applications of the
matching principle
o Cause and effect
 Expense is recognized when revenue is already recognized
o Systematic & Rational Allocation
 Some costs are expensed by simply allocating them over the
periods benefitted
o Immediate Recognition
 The cost incurred is expensed outright because of the
uncertainty of future economic benefits or difficulty of
reliability
 Derecognition
o opposite of recognition
 o removal of previously recognized asset or liability from entity's
statement of financial position (a hell hole)

Measurement
 process of determining monetary amounts at which the elements of
financial statement are recognized and carried in FS
 includes:
o Historical Cost: based on transaction price at the time of
recognition of the element
o Current Value: measures element updated to reflect the
conditions at the measurement date
Presentation of Financial Statements (PAS 1)
Class notes:
 PAS & PFRS are stronger than CF
 Gagamitin lang ang CF pag walang specific standard or related
standard or no choice
 PAS 1: basis for presentation of FS, guidelines for structure and
minimum requirements for content to ensure COMPARABILITY
 Types of Comparability
o Intra-comparability: comparing amounts from same entity but
different periods (Horizontal or Inter-period)
o Inter-comparability: two or more companies, same period
 Comparability requires consistency in the adoption and application of
accounting policies and in the depreciation and in presentation of FS
 Financial Statements
o End product of financial reporting process
o Information gathered and processed is periodically
communicated
o Structured presentation of an entity’s financial position
 General Purpose FS
o Concerned for common users
o Based on PFRS / PAS
o Those intended to meet the needs of users who aren’t in a
position to require an entity to prepare reports tailored to their
particular information needs
o Subject matter of CF and PFRS
 Primary Purpose of FS
o Provide info abt financial position (balance sheet), financial
performance (income statement), cashflows of an entity that is
useful to a wide range of users in making economic decisions
 Secondary Purpose
o Show results of management for entity resource
 Complete Set of FS
o Statement of Financial Position
o Statement of Comprehensive Income (Income statement + OCI)
o Statement of Changes in Owners’ Equity
o Statement of Cash Flows
o Notes with Comparative Statement
o Additional Statement of Financial Position (required only when
certain instances occur) (3rd Balance Sheet)
 General Features of FS
o Fair presentation and compliance with PFRS
 Faithfully representing, in the FS, the effects of
transactions and other events by the definitions and
recognition criteria
  Note: Fair Presentation also requires the proper selection
and application of accounting policies, proper presentation
of information, and provision of additional disclosure
 Compliance with PFRS – presumed to result in fairly
presented financial statements (as an accounting student,
PFRS is your bible)
 Note: PAS 1 requires an entity whose FS complies with
PFRSs to make explicit and unreserve statements of such
compliance in the notes
 There might be cases where an entity’s management
concludes that compliance with a PFRS requirement is
misleading
 In such cases, PAS 1 permits a departure from a
PFRS req if the relevant regulatory framework require
of allows such departure

o Going concern
 When preparing FS, management shall assess the entity’s
ability to continue as a Going concern
 Taking into account all available info about the future,
which is at least but not limited to 12 months from the
reporting date
o Accrual Basis of Accounting
 Opposite is the Cash Basis
 All FS shall be prepped using Accrual basis of accounting
except for the statement of cash flows, which is prepared
using the cash basis
 This is what we are usually following when making General-
purpose FS
 Cash basis is when revenue is recorded when cash is
received
o Materiality and Aggregation
 Similar accounts
 Each material class of similar items (line item) is presented
separately. Dissimilar items are presented separately
unless they’re immaterial
 Individually immaterial items are aggregated with other
items
o Offsetting
 Assets, Liabilities, Income or Expenses are presented
separately and are not offset unless offsetting is required
or permitted by a PFRS
 Examples
 Presenting gains or losses from sales of assets net of
the related selling expenses
 o Example: sold PPE at 500k, commission is 5k,
freight is 10k, so it becomes 500k – 5k -10k =
485k, so the record is 485k and debit the PPE,
the gain is 85k
 Presenting at net amt until the unrealized gains and
losses arising from trading securities (higher
accounting, more complicated)
o If u bought SM stocks, the purpose of stocks is
to sell for more, the value goes up, and you
subtract the cost of the stocks and other
expenses
o Trading is Buy & Sell
 Presenting a loss from a provision net of
reimbursement from third-party
o Frequency of Reporting
 At least annually
 If an entity changes its reporting period to a period longer
or shorter than 1y, it shall disclose:
 The period covered by FS
 Reason for using longer or shorter period
 Fast that the amounts presented in the fs are not
entirely comparable
 Can’t compare longer periods to shorter periods
o Comparative Information
 As a minimum, an entity presents two of each statement
and related notes
 PAS 1 permits entities to provide comparative information
in addition to the minimum
o Consistency of Presentation
 Presentation nd classification of items in the FS is retained
from one period to the next unless a change in
presentation
 Is required by PFRS
 Results in info that is reliable and more relevant
o Okay lang na hindi sundin ang PFRS if this is
the case
 Structure and content of FS
o Header contains
 Name of the reporting entity
 Whenever the statements are for the individual entity or
group of entities
 Date of the end of the reporting period or the period
covered by the FS
 Starts with “as of” “for the period ended”
 Presentation currency
  Level of rounding used
 Example:

 Management’s responsibility over the FS

o The one who has ultimate responsibility over FS is the
management
 Accountants only prepare and make the FS
o Preparation and fair presentation of FS following PFRSs
o Internal control over Financial reporting
 To make sure objectives are being met
o Going concern assessment
 If the company will still exist in the following years
o Oversight over the financial reporting process
o Review and approval of FS
 Statement of Financial Position (Balance Sheet)
o Shows the entity’s financial condition as of a certain date
o Can be presented either:
 Classified
 Current assets and non-current assets/liabilities
 Unclassified
 Based on liquidity
o Nearness to cash
o PAS 1 does not prescribe the order or format of presenting items
in the statement of financial position
 Bro does not care if u do classified or unclassified
o Current assets
 Cash and cash equivalents
 Accounts receivable / trade receivable
 Nontrade receivable collectible within 12 months
 Held for trading securities
 Inventory
 Prepaid assets
o Current liabilities
 Accounts payable
 Salaries payable
 Dividends payable
 Income tax payable
  Unearned revenue
 Portions of notes/loans/bonds payable due within 12
months
o Noncurrent assets
 PPE
 Nontrade receivable collectible beyond 1y
 Investment in associate
 Investment property (buildings)
 Intangible assets
 Deferred tax assets
o Noncurrent liabilities
 Portions of notes/loans/bonds payable due beyond 1y
 Deferred tax liabilities
o PAS 1 does not prescribe the order or format of presenting items
 Current assets
 Expected to be realized, sold, or consumed in the
entitys normal operating cycle
 Held primarily for trading
 Expected to be realized within 12 months after
reporting period
 Cash/cash equivalent unless restricted from being
exchanged or used to settle a liability for 12 months
after reporting period
 Current liabilities
 Expected to be settled in the identity’s normal
operating cycle
 Held primarily for trading
 Due to be settled within months after the reporting
period
 The entity does not have the unconditional right to
defer settlement of the liability for at least 12 months
after reporting period
o Refinancing agreement
 A long-term obligation that is maturing within 12 months
after the reporting period is classified as current even if a
refinancing agreement to reschedule payments on a long-
term basis is completed after the reporting period but
before the FS are authorized to issue
 However, the obligation is classified as noncurrent if the
entity expects and has the discretion to refinance it on a
long-term basis
 Statement of Comprehensive Income
o Combination of Income statement and OCI
o Profit or loss
 Income – Expenses
 o Other comprehensive income

10/19/2024 CLASS NOTES

 Other comprehensive income
o Changes in revaluation surplus
o Remeasurement of pension plan
o Gains and losses in investments measured at fvoci
o Effective portion of hedging instruments
o Gains or losses arising from translating the fs of foreign
operations
 Presentation of other comprehensive income
o Grouped into the following:
 Reclassification adjustment is allowed
 Reclassification is not allowed

o Income and expenses may be presented in either

 Single statement – only one statement, starts with
revenue, expense, profit and loss, then oci
 Two statements – literal na dalawa, revenue, expense,
profit and loss, then the other statement starts with profit
 and then oci / ocl

 Statement of changes in equity

o Beginning balance
o Movement
o Ending balance
 Shows the following:
o Effects of change in accounting policy
o Effects of correction of prior period error
o Total comprehensive income for the period
o Transactions with the owners

o
 Notes
o Provides info in addition to those presented in the other financial
statements
1. General information on the reporting entity
2. Statement of compliance with the pfrs and basis of
preparation of financial statement
3. Summary of Significant Accounting Policies
4. Disaggregation of the line items in the other financial
statements and other supporting information
a. Example: PPE  Land, building, vehicle, etc.
5. Other disclosures required by pfrs  minimum disclosure
10/19/2024 PAS 2: Inventories
 PAS 2 Inventories
o Provides guidance in the determination of the cost of inventories,
including the use of cost formulas, and their subsequent
measurement and recognition as expense
 PAS 2 applies to all inventories EXCEPT:

 Inventories
o Held for sale in the ordinary course of business
o In the process of production for such sale
o In the form of materials or supplies to be consumed in the
production process or in the rendering of services
 Measurement
o Lower of cost or Net realizable value (LCNRV)
 Cost
o Includes:
 Purchase cost – purchase prices (net of trade discounts and
other rebates) import duties, non-refundable or non-
recoverable purchase taxes, and transport, handling and
other costs directly attributable to the acquisition of
inventory
 Conversion Cost – costs necessary in converting raw
materials into finished goods
 Other costs – other necessary costs in bringing the
inventories to their present location and condition
o Excludes
 Abnormal cost
 Storage cost (unless necessary in the production)
 Administrative overheads
 Selling costs (commissions)
 Cost Formulas
 Computation of cost inventories that are charged as expense when
related revenue is recognized as well as the cost of unsold inventories

 4. LIFO (last in, first out, not included in PAS)

 Specific Identification
o Large, valuable
o Used for inventories that are not interchangeable and those that
are segregated for specific projects
 First in First Out
o Assumed that inventories that were purchased or produced first
are sold first and therefore unsold inventories at the end of the
period are those most recently purchased or produced
o Two types: Periodic (we only get the ending balance, pag nakuha
na, that’s when you get cogs) and Perpetual (every movement is
tracked)
 Weighted average
o Cost of sales and ending inventory are determined based on
weighted average cost of beginning inventory and all inventories
purchased or produced during the period
 Last in First Out
o Costs of the most recent products purchased / produced are the
first to be expensed