CONCEPTUAL FRAMEWORK

• a complete, comprehensive and single document

promulgated by the IASB

• a summary of the terms and concepts that underlie

the preparation and presentation of financial
statements for external users

• it attempts to provide an overall theoretical

foundation for accounting which will guide standard
setters, preparers and users of financial information
in the preparation of financial statements
CONCEPTUAL FRAMEWORK

• it is the underlying theory for the development of

accounting standards and revisions of previously
issued accounting standards

• it is concerned with general purpose financial

statements, including consolidated financial
statements
• it aims to narrow the differences in financial reporting
of different entities by harmonizing regulations,
accounting standards and procedures relating to the
preparation and presentation of financial statements
CONCEPTUAL FRAMEWORK
Purpose of the Conceptual Framework
• To assist the FRSC in developing accounting standards
that will represent Philippine GAAP.
• To assist prepapers of financial statements in applying
accounting standards and in dealing with issues not yet
covered by GAAP.
• To assist the FRSC in the review and adoption of IFRS.
• To assist users of financial statements in interpreting the
information contained in the financial statements.
• To assist auditors in forming an opinion as to whether
financial statements conform with Philippine GAAP.
• To provide information to those interested in the work of
the FRSC in the formulation of PFRS.
CONCEPTUAL FRAMEWORK
Authoritative Status of the Conceptual Framework

• If there is a Standard or an Interpretation that

specifically applies to a transaction, the Standard or
Interpretation overrides the Conceptual Framework

• The Conceptual Framework is not a PFRS and

therefore does not define Standards for any particular
measurement or disclosure issues.
CONCEPTUAL FRAMEWORK
Scope of the Conceptual Framework

• The Conceptual Framework deals with:

1. The objective of financial statements;
2. The qualitative characteristics that determine the
usefulness of information in financial statements;
3. The definition, recognition and measurement of
the elements from which the financial statements
are constructed; and
4. Concepts of capital and capital maintenance
CONCEPTUAL FRAMEWORK
Definitions of Accounting
Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events
wwhich are in part at least of a financial character and interpreting the
results thereof – American Institute of Certified Public Accountants (AICPA)

Accounting is the process of identifying, measuring and communicating

economic information to permit informed judgement and decision by
users of the information – American Accounting Association

Accounting is a service activity. Its function is to provide quantitative

information, primarily financial in nature, about economic entities, that
is intended to be useful in making economic decision. – Accounting
Standards Council (ASC)
CONCEPTUAL FRAMEWORK
Components in the Definitions of Accounting
1. Identifying
• The phase of recognition or nonrecognition of business
activities as internal or external accountable events
2. Measuring
• The phase of assigning peso values to the accountable
events
3. Communicating
• The phase of preparing and distributing accounting reports
to potential users of the accounting information
• Implicit in this process are the recording, classifying and
summarizing aspect of accounting
CONCEPTUAL FRAMEWORK

Basic Purpose of Accounting

To provide quantitative financial information about a business
that is useful to statement users in making economic decisions

Objectives of Financial Statements

The general purpose financial statements is to provide
information about the financial position, financial performance
and cash flows of an entity that is useful to a wide range
of users in making economic decisions.
CONCEPTUAL FRAMEWORK
Objective of Financial Reporting
The objective of financial reporting is to provide financial
information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making
decisions about providing resources to the entity.
Specific Objectives of Financial Reporting
A. To provide information useful in making decisions about
providing resources to the entity
B. To provide information useful in assessing the prospects of
future net cash flows to the entity
C. To provide information about entity resources, claims and
changes in resources and claims
CONCEPTUAL FRAMEWORK
Limitations of Financial Reporting
• general purpose financial reports do not and cannot provide all
of the information that users need
• general purpose financial reports are not designed to show the
value of a reporting entity (but they provide information to help
the primary users estimate the value of the reporting entity)
• general purpose financial reports are intended to provide
common information to users and cannot accommodate
every specific request for information
• General purpose financial reports are based on estimates and
judgments rather than exact depictions to a large extent
CONCEPTUAL FRAMEWORK
The Accountancy Profession
• Republic Act No. 9298 otherwise known as the Philippine
Accountancy Act of 2004 is the law regulating thee practice
of accountancy in the Philippines
• The Board of Accountancy is the body authorized by law to
promulgate rules and regulations affecting the practice of the
accountancy profession in the Philippines
• Only single practice and partnerships shall be the only form of
organization allowed to be registered with the government
regulatory bodies, agencies and bureaus.
• Accreditation is a requirement to practice public accountancy
CONCEPTUAL FRAMEWORK
The Accountancy Profession
• Certified Public Accountants generally practice the profession
in three (3) main areas, namely:
1. Public Accounting
• Auditing
• Taxation
• Management Advisory Services
2. Private Accounting
3. Government Accounting
• Continuing Professional Education (CPE)
CONCEPTUAL FRAMEWORK
Generally Accepted Accounting Principles (GAAP)

• GAAP encompass the conventions, rules and procedures

necessary to define what is accepted accounting practice

• GAAP are conventional – they became GAAP by agreement often

implicit agreement rather than formal derivation from a set of
postulates and basic concepts

• GAAP have developed on the basis of experience, reason,

custom, usage and practical necessity
CONCEPTUAL FRAMEWORK
Generally Accepted Accounting Principles (GAAP)

• Initially the accounting standards promulgated by the

Accounting Standards Council (ASC) constitute the Statements
of Financial Accounting Standards (SFAS)

• These SFAS are now called the Philippine Accounting Standards

or PAS and Philippine Financial Reporting Standards or PFRS

• The overall purpose of the accounting standards is “to identify

proper accounting practices for the preparation and presentation
of financial statements”
CONCEPTUAL FRAMEWORK
Financial Reporting Standards Council
• The Financial Reporting Standards Council (FRSC) replaced
the Accounting Standards Council (ASC) under the R.A. 9298

• The Philippine Interpretation Committee (PIC), form by the

FRSC in August 2006 replaced the Interpretation Committee
(IC) formed by the ASC (PICs European Counterpart is the
IFRIC)

• FRSC’s main function is to establish and improve accounting

standards that will be generally accepted in the Philippines
CONCEPTUAL FRAMEWORK
Financial Reporting Standards Council
• It is composed of 15 members with a Chairman who has been
or is presently a senior accounting practitioner and 14
representatives from who will have a term of 3 years:
Board of Accountancy 1
SEC 1
BSP 1
BIR 1
COA 1
Major organization of prepaprers/users of financial statements 1
Accredited national professional orgs of CPAs
Public Practice 2
Commerce and Industry 2
Academe/Education 2
Government 2
CONCEPTUAL FRAMEWORK
Philippine Financial Reporting Standards (PFRS)
• FRSC issues standards in pronouncements called the “Philippine
Financial Reporting Standards” or PFRS
• PFRS collectively include all of the following:
a. PFRS which correspond to International Financial
Reporting Standards (IFRS)
b. Philippine Accounting Standards (PAS) which correspond
to International Accounting Standards (IAS)
c. Philippines Interpretations which correspond to
Interpretations of the IFRIC and the Standing Interpretation
Committee (SIC), and Interpretations developed by the PIC
CONCEPTUAL FRAMEWORK
Underlying Assumptions
• Accounting assumptions or accounting postulates are the basic
notions or fundamental premises on which the accounting
process is based.
• Accounting assumptions serve as the foundation of accounting
in order enhance the understanding and usefulness of financial
statements
• The new Conceptual Framework for Financial Reporting mentions
only one assumption, which is the going concern assumption.
• However, implicit in accounting are the basic assumptions of
Accounting entity, time period and monetary unit.
CONCEPTUAL FRAMEWORK
Conceptual Framework for Financial Reporting
• The conceptual framework aims to provide a platform for the
standard- setters, preparers and users of the financial information
in the preparation and presentation of financial statements and
development and revision of accounting standards

• The conceptual framework is concerned with general-purpose and

consolidated financial statements.

• Special purpose financial statements are outside the scope of the

conceptual framework
CONCEPTUAL FRAMEWORK
Purpose of the Conceptual Framework
a. To assist the FRSC in developing accounting standards that will
become Philippine GAAP
b. To assist preparers of financial statements in applying
accounting standards and in dealing with issues not yet covered
by GAAP
c. To assist the FRSC in its review and adoption of IFRS
d. To assist users of financial statements in interpreting the
information contained in the financial statements
e. To assist auditors in forming an opinion as to whether financial
statements conform with Philippine GAAP
f. To provide information to those interest in the work of the FRSC
in the formulation of PFRS.
CONCEPTUAL FRAMEWORK
Underlying Assumptions
Accrual Basis
Under this basis, the effects of transactions and other events
are recognized when they occur (and not as cash or its
equivalent is received, or paid) and they are recorded in the
accounting records and reported in the financial statements of
the period to which they relate
Going Concern
It is assumed that the entity has neither the intention not the
need to liquidate or curtail materially the scale of its operations
If such an intention or need exists, the financial statements may
have to be prepared on a different basis and, if so, the basis is
disclosed
CONCEPTUAL FRAMEWORK
Qualitative Characteristics of Financial Statements
Qualitative characteristics are the attributes that makes the informa-
tion provided in the financial statements useful to users
QUALITATIVE CHARACTERISTICS

FUNDAMENTAL (Content) ENHANCING (Form)

Relevance Faithful Comparability

(Materiality) Representation (Consistency)

Predictive Neutrality Timeliness

Value
Confirmatory Completeness Verifiability
Value
Freedom Understandability
from error
CONCEPTUAL FRAMEWORK
Constraints on Relevant and Reliable Information

• A constraint is a practical exception to the application of

sound accounting theory

• Cost is a pervasive constraint on the information on the

information that can be provided by financial reporting

• The presentation of relevant information is constrained

by the cost of obtaining the information

• General rule: “the benefits derived from the information

should not exceed the cost incurred in obtaining the
information.”
CONCEPTUAL FRAMEWORK
The Elements of Financial Statements
FINANCIAL POSITION
Asset – is a resource controlled by the entity as a
result of past events and from which future economic
benefits are expected to flow to the entity
Liability – is a present obligation of the entity arising
from past events, the settlement of which is expected
to result in an outflow from the entity of resources
embodying economic benefits
Equity – is the residual interest in the assets of the
entity after deducting all its liabilities
CONCEPTUAL FRAMEWORK
The Elements of Financial Statements
Assets
The future economic benefits embodied in an asset
may flow to the entity in a number of ways as follows:
a. Used singly or in combination with other assets in
the production of goods or services to be sold by
the entity;
b. Exchanged for other assets;
c. Used to settle a liability;
d. Distributed to the owners of the entity
CONCEPTUAL FRAMEWORK
The Elements of Financial Statements
Liabilities
The settlement of a present obligation usually involves the
entity giving up resources embodying economic benefits in
order to satisfy the claim of the other party. Settlement of a
present obligation may occur in a number of ways as
follows:
a. Payment of cash;
b. Transfer of other assets;
c. Provision of services;
d. Replacement of that obligation with another obligation;
e. Conversion of the obligation to equity.
CONCEPTUAL FRAMEWORK
The Elements of Financial Statements
PERFORMANCE
The elements of income and expenses are defined as
follows:
Income – is increases in economic benefits during the
accounting period in the form of inflows or enhancement of
assets or decreases of liabilities that result in increase in
equity, other than those relating to contributions from
equity participants
Expenses – are decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrence of liabilities that result in decreases in
equity, other than those relating to distributions to equity
participants
Paragraph 62
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements

• Recognition is the process of incorporating in the balance

sheet or income statements an item that meets the
definition of an element and satisfies the criteria for
recognition set out in the framework.
• It involves the depiction of the item in words and by a
monetary amount and the inclusion of that amount in the
balance sheet or income statement totals.
• Items that satisfy the recognition should be recognized in
the balance sheet or income statement
• Failure to recognize such items is not rectified by
disclosure of the accounting policies used nor by notes or
explanatory material
Paragraph 82
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements

An item that meets the definition of an element should

be recognized if:
a. It is probable that any future economic benefit
associated with the item will flow to or from the
entity; and
b. The item has a cost or value that can be measured
reliability.

Paragraph 83
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements
Recognition of Assets

• An asset is not recognized in the balance sheet

when expenditure has been incurred for which it is
considered improbable that economic benefits will
flow to the entity beyond the current accounting
period.
• Instead, such a transaction results in the
recognition of an expense in the income statement.

Paragraphs 89 and 90
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements

Recognition of Liabilities

• In practice, obligations under contracts that are equally

proportionately unperformed are generally not
recognized as liabilities in the financial statements.
However, such obligations may meet the definition of
liabilities and, provided the recognition criteria are met
in the particular circumstances, may qualify for
recognition. In such circumstances, recognition of
liabilities entails recognition of related assets or
expense.
Paragraph 91
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements

Recognition of Income
• The recognition of income occurs simultaneously
with the recognition of increases in assets or
decrease in liabilities.
• Encompasses both revenue and gains

Paragraph 92
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements
Revenue from Sales of Goods
• Conditions for the recognition of revenue from sale of
goods:
a. The entity has transferred to the buyer the significant
risks and rewards of ownership of the goods;
b. The entity retains neither continuing managerial
involvement nor effective control over the goods sold;
c. The amount of revenue can be measured reliably;
d. It is probable that economic benefits associated with the
transaction will flow to the entity;
e. The cost incurred or to be incurred in respect of the
transaction can be measured reliably
PAS 18 – Revenues par 14
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements
Revenue from Rendering of Services
• Conditions for the recognition of revenue from
rendering of services:
a. The amount of revenue can be measured reliably;
b. The stage of completion of the transaction at the end of
reporting period can me measured reliably;
c. It is probable that economic benefits associated with
the transaction will flow to the entity;
d. The cost incurred for the transaction and the costs to
complete can be measured reliably
PAS 18 – Revenues par 19
CONCEPTUAL FRAMEWORK
Recognition of the Elements of Financial Statements

Recognition of Expenses

• The recognition of expenses occurs simultaneously with the

recognition of an increases in liabilities or a decrease in
assets.
• Expenses are recognized in the income statement on the
basis of a direct association between the costs incurred and
the earning of specific items of income – commonly referred
to as the matching of costs with revenues

Paragraphs 94 and 95
CONCEPTUAL FRAMEWORK
Measurement of the Elements of Financial Statements

• Measurement is the process of determining the

monetary amounts at which the elements of the
financial statements are to be recognized and
carried in the balance sheet and income statement.
This involves the selection of the particular basis of
measurement.

Paragraphs 99
CONCEPTUAL FRAMEWORK
Measurement of the Elements of Financial Statements
• A number of different measurement bases are
employed to different degrees and in varying
combinations in financial statements. They include
the following:
a) Historical Cost
b) Current Cost
c) Realizable (Settlement) Cost
d) Present Value
Paragraphs 100
CONCEPTUAL FRAMEWORK
Measurement of the Elements of Financial Statements
Historical Cost
• Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition
• Liabilities are recorded at the amount of proceeds
received in exchange for the obligation, or in some
circumstances, at the amount of cash or cash
equivalents expected to be paid to satisfy the liability
in the normal course of business
Paragraphs 100
CONCEPTUAL FRAMEWORK
Measurement of the Elements of Financial Statements
Current Cost
• Assets are carried at the amount of cash or cash
equivalents that would have to be paid if the same or
an equivalent asset was acquired currently.
• Liabilities are carried at the undiscounted amount of
cash or cash equivalents that would be required to
settle the obligation currently.

Paragraphs 100
CONCEPTUAL FRAMEWORK
Measurement of the Elements of Financial Statements
Realizable (Settlement) Cost
• Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by
selling the asset in an orderly disposal.
• Liabilities are carried at their settlement values; that
is, the undiscounted amounts of cash or cash
equivalents expected to be paid to satisfy the
liabilities in the normal course of business

Paragraphs 100
CONCEPTUAL FRAMEWORK
Measurement of the Elements of Financial Statements
Present Value
• Assets are carried at the present discounted value of
the future net cash inflows that the firm is expected to
generate in the normal course of business
• Liabilities are carried at the present discounted value
of the future net cash outflows that are expected to
be required to settle the liabilities in the normal
course of business

Paragraphs 100
CONCEPTUAL FRAMEWORK
Measurement of the Elements of Financial Statements
• The measurement basis most commonly adopted in
preparing their financial statements is the historical
cost
• This is usually combined with other measurement
basis
• Some entities use the current cost basis as a
response to the inability of the historical cost
accounting model to deal with the effects of changing
prices of non-monetary assets
Paragraphs 101
CONCEPTUAL FRAMEWORK
Concepts of Capital and Capital Maintenance
• A financial concept of capital is adopted by most
entities in preparing their financial statements
• Under this concept, such as invested money or
invested purchasing power, capital is synonymous
with their net assets or equity of the entity
• Under the physical concept of capital, such as
operating capability, capital is regarded as the
productive capacity of the entity based on, for
example, units of output per day.
Paragraphs 102
CONCEPTUAL FRAMEWORK
Concepts of Capital and Capital Maintenance
Financial Capital Maintenance
• Under this concept, a profit is earned only if the
financial (or money) amount of the net assets at the
end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period,
after excluding any distributions to, and contributions
from, owners during the period
• Financial capital maintenance can be measured in
either nominal monetary units of constant purchasing
power
Paragraphs 104a
Capital Maintenance – Financial Capital Concept
January 1 December 31
Total Assets 1,500,000 2,500,000
Total Liabilities 1,000,000 1,200,000
Additional Investments 400,000
Dividend payments 300,000

Net Assets – December 31 1,300,000

Less: Net Assets – January 1 500,000
Increase in Net Assets during the year 800,000
Add: Dividend payments 300,000
Total 1,100,000
Less: Additional investments 400,000
Net Income 700,000
CONCEPTUAL FRAMEWORK
Concepts of Capital and Capital Maintenance
Physical Capital Maintenance
• Under this concept, a profit is earned only if the
physical productive capacity (or operating capability)
of the entity (or the resources or funds needed to
achieve that capability) at the end of the period
exceeds the physical productive capacity at the
beginning of the period, after excluding any
distributions to, and contributions from, owners
during the period
Paragraphs 104b
Capital Maintenance – Physical Capital Concept
January 1 December 31
Total Assets (at cost) 1,500,000 2,500,000
Total Liabilities 1,000,000 1,200,000
Additional Investments 400,000
Dividend payments 300,000
Assume that beginning net assets had a current cost of P 800,000 due to inflation

Net Assets – December 31 1,300,000

Less: Net Assets – January 1 800,000
Increase in Net Assets during the year 500,000
Add: Dividend payments 300,000
Total 800,000
Less: Additional investments 400,000
Net Income 400,000