The Conceptual Framework of Financial Reporting - Part 1 PDF

## The Conceptual Framework of Financial Reporting - Part 1 ### Purpose * Assist the Philippine Accounting Standards Board (Board) to develop PFRS standards (standards) that are based on consistent concepts. * Assist preparers to develop consistent accounting policies when no standard applies to...

## The Conceptual Framework of Financial Reporting - Part 1 ### Purpose * Assist the Philippine Accounting Standards Board (Board) to develop PFRS standards (standards) that are based on consistent concepts. * Assist preparers to develop consistent accounting policies when no standard applies to a particular transaction or other event, or when standard allows a choice of accounting policy. * Assist all parties to understand and interpret the standards. *** This is a summary of the terms and concepts that underlie the preparation and presentation of general purpose financial statements. * It provides an overall theoretical foundation for accounting which will guide standard-setters, preparers and users of financial information in the preparation and presentation of statements. * A foundation on which financial statements are developed and revised, and provides a platform from which accounting standards are revised. *** It is not a standard In the absence of specific standards or interpretation, management shall consider the applicability of the Conceptual Framework. In cases of conflict, the requirements of the relevant PFRS prevail over the conceptual framework. ## Status of the Conceptual Framework * The Conceptual Framework is not a PFRS. When there is a conflict between the Conceptual Framework and a PFRS, the PFRS will prevail. * In the absence of a standard, management shall consider the Conceptual Framework in making its judgement in developing and applying an accounting policy that results in useful information. ## Hierarchy of Reporting Standards * PFRS * Judgement * Other PFRS dealing with similar transactions * Conceptual Framework * Management may consider the following: * Pronouncements issued by other standard setting bodies. * Other accounting literature and industry practices. ## Scope ### 1. Objective of Financial Reporting The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to primary users in making decisions about providing resources to the entity. #### General Purpose * Common needs * It does not and cannot provide all the information needed by the primary users - must consider other factors. The objective of general-purpose financial reporting forms the foundation of the Conceptual Framework. * Financial Information - information expressed in monetary value. * Reporting Entity - economic entities (business and not-for-profit) - the one who is required or chooses to prepare financial statements. ##### Classification of users 1. Primary Users - existing and potential investors, lenders and other creditors (PROVIDES RESOURCES TO ENTITY) 2. Other Users - employees, customers, governments and their agencies and the public. ## Financial Information 1. Profitability 2. Liquidity 3. Solvency 4. Need for additional financing * Profitability - results of operations / level of income earned through effective and efficient use of its resources. * Liquidity - availability of cash for current obligations. * Solvency - availability of cash for financial commitments when they fall due. ## Primary Users 1. Primary users - are those who cannot demand information directly from reporting entities. The primary users are: * Existing and potential investors. * Lenders and other creditors. Only the common needs of primary users are met by the financial statements. ## 2. Qualitative Characteristics of Useful Financial Information ### Fundamental Qualitative Characteristics * Relevance - it has the capacity to influence a decision". * Materiality * Predictive Value * Confirmatory Value * Faithful Representation * Completeness * Neutrality * Free from Error ### Enhancing Attributes * Comparability and Consistency * Understandability * Verifiability * Timeliness ## 3. Financial Statements and the Reporting Entity A reporting entity is one that is required, or chooses, to prepare financial statements, and is not necessarily a legal entity. It can be a single entity or a group or combination of two or more entities. * Consolidated- FS - Parent (controlling) - Subsidiary (controlled) 50%-100% ownership. ## 4. Elements of Financial Statements * Assets * Liabilities * Equity * Income * Expenses ### Financial Position * Assets * Liabilities * Equity ### Financial Performance * Income * Expenses ## Asset * Asset is "a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits." (Conceptual Framework 4.3 & 4.4) ### Three Aspects in the Definition of an Asset 1. Right - asset refers to a right, and not necessarily to a physical object. 2. Potential to produce economic benefits - the right has a potential to produce economic benefits for the entity that are beyond the benefits available to all others. Such potential need not be certain or even likely - what is important is that the right already exists and that, in at least one circumstance, it would produce economic benefits for the entity. 3. Control - means the entity has the exclusive right over the benefits of an asset and the ability to prevent others from accessing those benefits. ## Liability * Liability is "a present obligation of the entity to transfer an economic resource as a result of past events." (Conceptual Framework 4.26) ### Three Aspects in the Definition of a Liability 1. Obligation - An obligation is "a duty or responsibility that an entity has no practical ability to avoid." (CF 4.29) An obligation can be either legal obligation or constructive obligation. 2. Transfer of an economic resource - the obligation has the potential to require the transfer of an economic resource to another party. Such potential need not be certain or even likely - what is important is that the obligation already exists and that, in at least one circumstance, it would require the transfer of an economic resource. ## Equity * "Equity is the residual interest in the assets of the entity after deducting all its liabilities." (Conceptual Framework 4.63) * Equity equals Assets minus Liabilities ## Income and Expenses ### Income * Income is "increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims." (Conceptual Framework 4.68) ### Expenses * Expenses are "decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims." (Conceptual Framework 4.69)