CFAS Units 1 to 3 Detailed Reviewer
UNIT 1: Development of Financial Reporting Framework and Standard-
Setting Bodies
This unit focuses on the purpose of accounting and the development of financial reporting
standards, as well as the organizations that influence standard setting. It emphasizes the
evolution of the frameworks and the importance of globally accepted accounting practices.
1. Objective of Financial Reporting
The objective is to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders, and creditors in making decisions. This involves
assessing the entity’s ability to generate future cash flows and management’s stewardship
of resources.
Key Concepts:
- General-purpose financial statements serve a broad range of users at the least cost.
- Decision-usefulness is key to informing investment, credit, and similar decisions.
- Entity perspective means that the business is separate from its owners.
2. Branches of Accounting
- Financial Accounting: External reporting focused on historical data and compliance with
standards.
- Management Accounting: Internal use for planning, control, and decision making.
- Cost Accounting: Tracks cost of producing goods/services to aid pricing and efficiency.
- Auditing: Provides assurance about the accuracy and fairness of financial statements.
- Tax Accounting: Deals with tax return preparation and implications of transactions.
- Government and Education Accounting: Used in public sector and academia.
3. Standard-Setting Bodies
Internationally, the IASB sets IFRS with oversight from the IFRS Foundation. IOSCO plays a
supporting role to encourage high standards globally. The IASB operates with due process
involving public participation, transparency, and global consultation.
In the Philippines, the ASC (now FSRSC) was established to develop standards aligned with
IFRS. The Board of Accountancy (BOA) and PRC support implementation.
4. Challenges and Ethical Dilemmas
The expectation gap arises from differing views of what accountants should do versus what
they can do.
Challenges include:
- Non-financial measurements (e.g., customer satisfaction)
- Forward-looking information
- Intangibles/soft assets
- Timeliness of reporting
Ethical pressures arise from clients, employers, peers, and time constraints.
...continued with UNIT 2 and UNIT 3
UNIT 2: Conceptual Framework for Financial Reporting (2018 Version)
This unit discusses the underlying principles that guide the preparation and presentation of
financial statements. It includes the objective of general-purpose financial reporting, the
elements of financial statements, and the qualitative characteristics of useful financial
information.
1. Purpose and Status of the Conceptual Framework
The Conceptual Framework is not a standard itself, but a theoretical foundation used by the
IASB to develop and revise IFRSs. It also helps preparers develop consistent accounting
policies when no specific standard applies.
2. Objective of General-Purpose Financial Reporting
To provide financial information that is useful to current and potential investors, lenders,
and other creditors in making decisions about providing resources to the entity. It focuses
on assessing management’s stewardship and the entity’s future net cash inflows.
3. Qualitative Characteristics of Useful Financial Information
A. Fundamental Characteristics:
- Relevance: Has predictive and confirmatory value.
- Faithful Representation: Complete, neutral, and free from error.
B. Enhancing Characteristics:
- Comparability: Enables users to identify similarities/differences between entities or
over time.
- Verifiability: Assures users that the information faithfully represents the economic
phenomenon.
- Timeliness: Available in time to influence decisions.
- Understandability: Presented clearly and concisely.
4. Elements of Financial Statements
- Assets: Present economic resources controlled due to past events.
- Liabilities: Present obligations to transfer resources.
- Equity: Residual interest in the assets after deducting liabilities.
- Income: Increases in assets or decreases in liabilities not related to owner
contributions.
- Expenses: Decreases in assets or increases in liabilities not related to owner
distributions.
5. Recognition and Derecognition
Recognition is the process of including items in the financial statements when it meets the
definition and provides useful information. Derecognition removes a previously recognized
item when the entity loses control or obligation.
6. Measurement Bases
- Historical Cost: Based on original transaction amount.
- Current Value: Reflects updated conditions (includes fair value, value in use, fulfillment
value).
7. Capital and Capital Maintenance Concepts
- Financial Capital: Maintains nominal monetary units (e.g., invested money).
- Physical Capital: Maintains operating capability (e.g., productive capacity).
UNIT 3: Presentation of Financial Statements (IAS 1 & IAS 7)
This unit explains the structure and content of financial statements, their general features,
and specific presentation and disclosure requirements under IAS 1 and IAS 7.
1. Objective and Components of Financial Statements
The purpose is to provide financial information that helps users assess financial position,
performance, and cash flows. Components include: Statement of Financial Position,
Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in
Equity, Statement of Cash Flows, and Notes to FS.
2. Statement of Financial Position
- Current assets: Expected to be realized within 12 months or operating cycle (e.g., cash,
receivables, inventory).
- Non-current assets: Not expected to be realized within 12 months (e.g., PPE, intangibles).
- Current liabilities: Expected to be settled within 12 months (e.g., payables, current debt).
- Non-current liabilities: Obligations beyond 12 months.
- Equity: Residual interest. May be labeled as Owner’s Equity, Partners’ Equity, or
Shareholders’ Equity depending on entity form.
3. Statement of Profit or Loss and Other Comprehensive Income
Shows entity’s financial performance. Income and expenses are reported, with profit or loss
and other comprehensive income (OCI) components. OCI is split between items that may
and may not be reclassified to profit or loss.
4. Statement of Changes in Equity
Reconciles opening and closing equity, showing changes due to profit/loss, OCI, and
transactions with owners (e.g., dividends, new shares).
5. Statement of Cash Flows
- Operating activities: Main revenue-generating activities.
- Investing activities: Buying/selling long-term assets or investments.
- Financing activities: Debt and equity funding transactions.
Cash flows can be reported using direct or indirect method.
6. General Presentation Features
- Accrual Basis
- Going Concern
- Consistency and Comparability
- Materiality and Aggregation
- No Offsetting unless allowed
7. Notes to Financial Statements
Disclose accounting policies, supporting info, contingencies, judgments, and risk-related
info. Notes must be cross-referenced to the relevant FS items.
