CFAS LESSON 1: REVIEW

3. Statement of Changes in Equity

ACCOUNTING
(Accounting Standard Council) 4. Statement of Cash Flow
- inflow and outflow
Accounting is a service activity. Its function is to - operating – CA/CL, R and E
provide quantitative information, primarily - investing – NCA
financial in nature about economic entities that - financing - NCL
is intended to be useful in making economic
decisions, in making reasoned choices among 5. Notes to Financial Statement
alternative courses of action.” - disclosure
- break down
GOAL OF CORPORATION:
Maximize the wealth of shareholder HEDGING
Holder of ordinary shares Does to protect money from changes of peso

NORMAL OPERATING CYCLE ELEMENTS OF FINANCIAL STATEMENTS:

the time it takes for a business to convert cash
into inventory, then into sales, and finally back ASSETS
into cash again. The length of the operating -owned and controlled
cycle varies by industry.
LIABILITIES
CURRENT ASSETS AND LIABILITIES -Debt obligation
Part of operating cycle even though it takes
more than a year CAPITAL/EQUITY
-residual interest, claims, net worth
TYPES OF BUSINESS OPERATION:
1. Service Business REVENUE
2. Merchandising
3. Manufacturing EXPENSE

FORMS OF BUSINESS ORGANIZATION: DEGREE

1. Sole Proprietorship 1. PUBLIC – client, external
2. Partnership 2. PRIVATE
3. Corporation 3. GOVERNMENT
4. ACADEME
FINANCIAL STATEMENTS:
1. Statement of Financial Position GAAP
- Assets, Liability, Equity 1. Business Entity Concept
- Liquidity and Solvency - business is separated from owner
- Liquidity – ability to pay short-term debts
-Solvency – ability to pay long term-debts 2. Going concern
- business will continue
2. Statement of Comprehensive Income
- Performance 3. Monetary Unit Principle
-Profit/Loss or OCI - record in currency
4. Accrual basis
- Revenue is recognize as earned regardless of FAITHFUL REPRESENTATION
payment 1. Complete
- Expenses are recognized when incurred 2. Neutral
3. Free from error
5. Conservatism
- conservative in recognizing gains than loss ENHANCING QUALITATIVE CHARACTERISTICS
- recognize losses, avoid recognizing gain until
they are certain to occur 1. Verifiability
REMOTE, POSSIBLE, PROBABLE - pag nirecheck dapat same amount
REMOTE -MALABO
POSSIBLE – PWEDE 2. Comparability
PROABLE – disclose provision for losses - can be compared the FS in current and
previous year or month
ACCOUNTING CYCLE
3. Understandability
1. Analyze Business Transaction - present information clearly
2. Journal Entries
3. Posting to Ledger 4. Timeliness
4. Unadjusted Trial Balance - having information available in time
5. Adjusting Entries
6. Adjusted Trial Balance
7. Financial Statements
8. Closing Entries
9. Post-Closing Trial Balance
10. Reversing Entries

ADJUSTING ENTRIES
1. Prepayments- ASSET/EXPENSE
2. Deferrals (R under revenue)
3. Accrual – Income and Expense (R under exp)
4. Depreciation
5. Bad debts

CONCEPTUAL FRAMEWORK is not Accounting

Standard

QUALTITATIVE CHARACTERISTICS
Why need?
External and internal

FUNDAMENTAL QC

RELEVANT
if it influences decision making
1. Predictive Value -
2. Confirmatory Value
MODULE 1 6. Education and training of market participants
7. Common delivery systems
FINANCIAL ACCOUNTING 8. A common approach to corporate
- process in preparation of financial report governance and legal frameworks around the
world.
FINANCIAL STATEMENTS
- a company communicates financial info BRANCHES OF ACCOUNTING
outside.
1. Statement of financial position Financial Accounting
2. Income statement - focused on recording business transaction and
3. Statement of cash flow preparation of reports.
4. Statement of changes in owner's equity
5. Notes to financial statement Management Accounting
- involves in partnerning in management
OBJECTIVE OF FINANCIAL REPORTING decision making, devising planning and
The objective of general purpose financial performance management systems
reporting is to provide financial information
about the reporting entity that is useful to Cost Accounting
present and potential equity investors, lenders - collection, allocation and control of the cost.
and other creditors in making decisions about
providing resources to the entity. Auditing
- independent examination, ensures fairness
A.) General-purpose financial statements and reliability of reports.
- provide at the least cost the most useful info
possible to wide variety of users. Government Accounting
- identification of sources and uses of
B.) Equity investors and creditors government funds.
- primary user group and have critical needs for
info in financial statements. Tax Accounting
- preparation of tax returns
C.) Entity perspective
- company is separated and distinct from Accounting Education
investors - employ accountants as researcher, professor
and reviewer.
D.) Decision usefulness
- info included in FS should help investors asses STANDARD SETTING ORGANIZATION
the company. Info about economic resources,
claims to these resources and changes in them 1.) INTERNATIONAL ACCOUNTING STANDARD
BOARD (IASB)
ELEMENTS THAT MUST BE PRESENT IN - based in London, United Kingdom
FINANCIAL REPORTING - issued International Financial Reporting
Standard (IFRS)
1. A single set high quality accounting standard
2. Consistency in application and interpretation 2.) INTERNATIONAL ORGANIZATION OF
3. Common disclosures SECURITIES COMMISSIONS (IOSCO)
4. Common high quality auditing standards - does not set accounting standards
5. Common approach to regulatory review and - Ensure that global market can operate in
enforcement efficient and effective basis
INTERNATIONAL STANDARD SETTING - board consists of 16 well paid members from
STRUCTURE different countries

1.) IFRS FOUNDATION 2.) AUTONOMY

• 22 trustees - IASB not oart of any prof. org. , appointed by
• Monitor IASB, IFRS AC, IFRS IC, IFRS Foundation
• appoints members, review effectiveness and
help in fundraising 3.) INDEPENDENCE
- full time IASB members must sever all ties with
2.) INTERNATIONAL ACCOUNTING STANDARD former employer
BOARD
• 16 members 4.) VOTING
• Develop in the public interest, single set of - 9 outbof 16 votes are needed to issue new
high quality IFRS IFRS.

3.) IFRS ADVISORY COUNCIL 3 MAJOR TYPES OF PRENOUNCEMENTS

• 30 or more members
• Provide advice and council to IASB 1.) INTERNATIONAL FINANCIAL REPORTING
STANDARDS
4.) IFRS INTERPRETATIONS COMMITTEE • IASB issued 13 standards
• 22 members • IASC issued 41 International accounting
• Assist IASB through timely identification, standards
discussion and resolution of financial reporting
issues 2.) CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
MONITORING BOARD • IASB issued framework for the preparation
Link between accounting standard setters and and presentation of financial statements
public authorities • Intent to create a framework that will serve as
a tool for solving existing and emerging
STEPS TO DEVELOP IFRS problems
1. Topics are identified and placed on Board's • FRAMEWORK IS NOT IFRS AND STANDARD
Agenda
2. Research and Analysis are conducted, 3.) INTERNATIONAL FINANCIAL REPORTING
prelimenary views of pros and cons are issued INTERPRETATIONS
3. Public hearings are held on the proposed • Issued by IFRS IC, considered authorative and
standard must be followed
4. The Board evaluates research and public • 20 have been issued to date
responses and issues exposure draft • Interpretations covered:
5. The Board evaluates responses and changes 1. Newly identified FR issues not dealt with IFRS
exposure draft if necessary. Then final standard 2. issues where unsatisfactory or conflicting
is issued. issues have been developed.

CHARACTERISTICS OF IASB FINANCIAL REPORTING CHALLENGES

Link between accounting standard setters and
public authorities EXPECTATION GAP
- difference between what public thinks
1.) MEMBERSHIP accountants should do and what accountants
think they do
SIGNIFICANT CHALLENGES: 3. Professional Regulation Commission (PRC)
• through Board of Accountancy— which
1. Non-financial measurements such as supervises CPAs and auditors
customer satisfaction indexes, backlog
information and reject rates on good purchased 4. Financial Executives Institute of the
2. Forward looking information Philippines (FINEX)
3. Soft assets (intangibles) • Largest organization of financiak executives
4. Timeliness who are responsible for preparation of financial
statements.
SIGNIFICANCE OF HIGH-QUALITY STANDARDS
When accounting principles become generally
1. To facilitate efficient capital allocation accepted?
2. To ensure adequate comparability across
borders • If they have substanial authorative support
3. Identify elements involved: from the relevant parties interested in the
• Single set high quality accounting standard financial statements- the preparers ans users,
established by single standard setting body auditors and regilatory agencies.
• Consistency in application and interpretation
• Common disclosures FINANCIAL REPORTING STANDARD COUNCIL
• Common high quality auditing standard and
practices SECTION 9 (A)
• Common approach to regulatory review and Rules and Regulations Implementing Republic
enforcement Act No. 9298
• Education and training of market participants • Also known as PHILIPPINE ACCOUNTABCY ACT
• Common delivery systems OF 2004
• Common approach to corporate governance • FRSC shall be the new accounting standard
and legal frameworks around the world setting body.

ACCOUNTING STANDARDS IN THE PHILIPPINES FRSC

• Compose of 15 members with a chairman
NOVEMBER 18, 1981 who had been senior accounting practitioner in
• PICPA created ASC to improve accounting any of the scope of accounting practice
standards that will be generally accepted in the
Philippines • 14 representatives from: one each from BOA,
• Philippine Institute of Certified Public SEC, BIR, COA and major org compose of
Accountants (PICPA) preparers and users of financial statements
• Accounting Standard Council (ASC)
• 2 representative each from accredited
Accounting Standard Council (ASC) national prof org of CPAs in public patience,
• Composed of 8 members commerce and industry, education/academe
• 4 from PICPA including designated chairman and government.
• One each from SEC, CB, PRC, FINEX

1. Securities and Exchange Commission (SEC)

2. Central Bank of the Philippines (CB)

• regulatory agencies where financial
statements are filed
MODULE 2 2. Entity's management and the use of entity's
economic resources
CONCEPTUAL FRAMEWORK
- describe the objective of, and the concepts for FINANCIAL REPORTS ARE BASED ON:
general purpose financial reporting • Estimates
• Judgments
PURPOSE OF CONCEPTUAL FRAMEWORK • Models
A.) Assist the IASB to develop IFRS that are
based on consistent concepts ECONOMIC RESOURCES AND CLAIMS
B.) Assist preparers to develop consistent • Help users to identify the financial strength
accounting policies when no standard applied and weaknesses of the reporting entity
to a particular transaction • That info will help them to assess the entity's
C.) Assist all parties to understand and interpret LIQUIDITY AND SOLVENCY
the Standards. • Help users to assess management stewardship
• Help users to predict how future cash flows
CONCEPTUAL FRAMEWORK IS NOT A will be distributed to those who have claim in
STANDARD the entity

ASPECTS CONCEPTUAL FRAMEWORK CHANGES IN ECONOMIC RESOURCES AND

• Qualitative Characteristics CLAIMS
• Cost constraint • Result from entity's financial performance,
• Useful financial information events, transaction
• Reporting entity concept • Such as issuing debt or equity instrument
• Elements of Financial Statements
• Recognition and Derecognition FINANCIAL PERFORMANCE REFLECTED BY
• Measurement ACCRUAL ACCOUNTING
• Presentation and Disclosure • Accrual accounting depicts the effects of
transaction and other events and circumstances
OBJECTIVE OF GPFR on a reporting entity's economic resources and
To provide financial information about the claims
reporting entity that is useful to potential
investors, lenders and other creditors to making QUALITATIVE CHARACTERISTICS
decisions relating to providing resources to the
entity Fundamental
Decisions involved FINANCIAL INFO IS USEFUL IF:
1. Buying, selling or holding equity and debt • RELEVANT
instruments • FAITHFULLY REPRESENTED
2. Providing or setting loans or other forms of
credit Enhancing
3. Exercising rights to vote on, or otherwise USEFULNESS IS ENHACED IF:
influence, management actions that affect the • VERIFIABLE
use of entity's economic resources. • COMPARABLE
• UNDERSTANDABLE
INFORMATION THAT LENDERS NEEDED: • TIMELY
1. Economic resources of the entity, claims
against the entity and changes in those
resources and claims
FUNDAMENTAL QUALI CAHARC COMPARABILITY
• Enable users to identify similarities and
RELEVANCE differences among items
• It makes a difference in the decisions made by • Requires at least 2 items
users • Consistency related to comparability, use of
• PREDICTIVE VALUE same methos for same items
- if it can be used to predict future outcomes • Comparability is the goal, consistency helps to
• CONFIRMATORY VALUE achieve the goal
- if it provides feedback about previous
evaluations UNDERSTANDABILITY
• MATERIALITY • Classifying, characterizing and presenting info
-if omitting or mistating can influence the clearly and concisely makes it understandable
decision of primary users.
TIMELINESS
FAITHFUL REPRESENTATION • Having information available to decision-
• Economic phenomenon and legal form should makers in time to influence their decisions
be the same, if not same it is NOT FAITHFULLY
REPRESENTED COST CONSTRAINT
• Financial report represented economic • Pervasive constraint or LIMIT on the
phenomena in words and numbers information that can be provided by financial
• COMPLETE reporting
-it includes all info necessary for users to • COST VS. BENEFITS
understand phenomenon - If cost is greater than benefits, it is not
• NEUTRAL included in financial records
- without bias of the presentation of • IT IS NOT POSSIBLE to GPFR to provide all the
information info that every user find relevant.
-supported by exercise of prudence (exercise of
caution when making judgments, there should FINANCIAL STATEMENTS
be no OS in A,R and US in L,E) • Provide info about economic resources of the
• FREE FROM ERROR reporting entity, claims against the entity and
- there are no errors or omissions in the changes in those resources and claims
description of the phenomenon, especially in • Provide info about ALCRE that is useful in
the process assesing the prospects of future net cash inflow
to reporting entity and management
ENHANCING QUALI CAHARCTERISTICS stewardship.

VERIFIABILITY Infos are provided in:

• 2 independent observers can reach consensus 1. Statement of financial position
• DIRECT VERIFICATION 2. Income Statement
- direct observation: counting cash 3. Other statements and notes
• INDIRECT VERIFICATION A. Recognition of ALCRE
- checking inputs to a model, formula or other B. DERECOGNITION
technique, recalculating output using same C. CASH FLOWS
methodology D. CONTRIBUTIONS FROM HOLDERS
- example: verifying the carrying amount of E. METHODS, ASSUMPTION USED IN
inventory, checking inputs, FIFO ESTIMATING AMOUNTS
REPORTING PERIOD LIABILITY
• Financial statements are prepared for a • Entity has an obligation
specified period of time and provide • Obli is to transfer economic resource
information about: • Obli is a present obli result from past events
ASSETS AND LIABILITIES
- including unrecognized A/L, Equity existed at EQUITY
the end or during the reporting period. • Residual interest in the asset after deducting
INCOME AND EXPENSES for reporting period liabilities
• Claims against the entity
GOING CONCERN ASSUMPTION • SHARES OF VARIOUS TYPES, ISSUED BY ENTITY
Entity will continue in operation for the • SOME OBLI TO ISSUES ANOTHER EQUITY
foreseeable future CLAIM

REPORTING ENTITY INCOME

An entity that is required or chooses to prepare • Inc assets, decrease lia, inc equi
financial statements
EXPENSE
CONSOLIDATED FS • Dec assets, inc lia, dec equi
- info of both parent and subsidiaries
RECOGNITION AND DERECOGNITION
UNCONSOLIDATED FS
-info or parent alone RECOGNITION
• Process of capturing items that meets the def
ELEMENTS OF FINANCIAL STATEMENTS of elements of FS
CARRYING AMOUNT
ECONOMIC RESOURCE - A/L/E amount is recognized in SFP
Asset
-present economic resource controlled by entity RECOGNITION OF ITEM ARE LINKED TO
as result of past events DERECOGNITION OF ONE
-produce economic resources
-rights and control RECOGNITION OF INCOME
Recognition of asset
CLAIM Derecognition of liability
Liability
-present obligation RECOGNITION OF EXPENSE
Equity Recognition of liability
-residual interest Derecognition of asset

CHANGES IN ECONOMIC RESOURCE AND RECOGNITION CRITERIA

CLAIMS • Only items that meet the def of ALE are
Income included in SFP
- increase asset, dec liability, inc equity • Only items that meet the def of IE are
Expenses included in SOCI
- dec assets, inc lia, dec equity
DERECOGNITION
ASSET • Removal of all or part of recognized ALE in SFP
• Right and control
• Item no longer meets the def of ALE
MEASUREMENT BASES CLASSIFICATION
• sorting of ALCRE based on shared
HISTORICAL COST characteristics for presentation and disclosure
using information derived, at least in part from purposes
the price of transaction
• Cost occured in acquiring or creating asset CLASSIFICATION OF ASSETS AND LIABILITIES
plus transaction cost • Separate asset and liability from current and
• Original cost of asset non current
• Does not reflect changes in values
• A liability is onerous if historical cost is no OFFSETTING
longer sufficient to depict the obligation • Occurs when an entity recognize both an asset
• Measure them at amortized cost and liability as separate units of account but
• Amortized cost - estimate of future cash flow groups them into single net amount
discounted
• HC of asset + transaction cost CLASSIFICATION OF EQUITY
• HC of liability - transaction cost • Classify or Separate equity claims with
different characteristics
CURRENT VALUE
- using information updated to reflect condition CLASSIFICATION OF INCOME AND EXPENSE
at measurement date • Classify or Separate equity claims with
-not derived different characteristics
• FAIR VALUE
- price that would be received to sell an asset AGGREGATION
-exit price • Adding together of ALCRE that have shared
• VALUE IN USE FOR ASSETS AND FULLFILMEMT characteristics and included in same
VALUE FOR LIABILITIES classification
- present value of cash or other economic • Summarizing large volume of detail
resources
-reflect entity specific assumption rather than CONCEPTS OF CAPITAL
assumption by market CONCEPTS OF CAPITAL MAINTENANCE AND THE
-no transaction cost DETERMINATION OF PROFIT
-exit price
• CURRENT COST FINANCIAL CAPITAL MAINTENANCE
- cost of an equivalent asset at the • Profit is earned only if the financial amount of
measurement date plus transaction cost net assets at the end the of the period EXCEEDS
- entry price financial amount of beg period
• Can be measured either nominal monetary
MEASUREMENT EQUITY units or units of constant purchasing power
• Total carrying amount equity = carrying • Equity of the entity
amount of all recognized assets less the total
carrying amount of all recognized liabilities PHYSICAL CAPITAL MAINTENANCE
• Profit is earned only if the physical productive
PRESENTATION AND DISCLOSURE AS capacity at the end of period EXCEEDS physical
COMMUNICATION TOOLS productive capacity at the beg
• Output per day