CFAS - Module 1 PDF

Module 1 Overview of Accounting, Accounting Standards and Conceptual Framework Overview of Accounting ILOs After this module, you will be able to: 1. Define Accounting and its purpose 2. Explain the basic concepts applied in accounting 3. State the branches of accounting and the sectors in the...

Module 1 Overview of Accounting, Accounting Standards and Conceptual Framework Overview of Accounting ILOs After this module, you will be able to: 1. Define Accounting and its purpose 2. Explain the basic concepts applied in accounting 3. State the branches of accounting and the sectors in the practice of accountancy 4. Explain the importance of a uniform set of financial reporting standards Accounting - Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decisions by users of the information - Accounting is the language of business - Accounting is an information system - Accounting is an art of recording, classifying, and summarizing in a significant manner, and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof Identifying - Identify which transactions are to be recognized. - Only accountable events are recognized in accounting - Accountable events- one that affects the assets, liabilities ,equity, income or expenses of an entity. - Non accountable events that are relevant in financial reporting are not journalized but disclosed only using a memorandum entry - Types of Events - External - Exchange (Reciprocal Transfer)- giving and receiving (sale, purchase, payment of liabilities) - Nonreciprocal Transfer- one way transaction, giving or receiving only (Donation) - External Events other than transfer- changes in economic resources or obligation without a transfer (Change in fair values) - Internal - Production - conversion of raw materials into finished goods - Casualty- unanticipated loss from disaster or similar events (Fire, Flood, and Theft) Measuring - Assigning numbers, normally in monetary terms to the economic transactions and events - Historical cost - Fair value - Present value - Realizable value - Current cost - Inflation-adjusted cost - Valuation by fact or opinion - Valued by opinion- measurement is affected by estimates - Uncollectible amounts of receivable - Depreciation (useful life and residual value) - Provisions (warranty, coupons) - Valued by fact- unaffected by estimates - Ordinary shares at par value - Land stated at acquisition cost - Cash measured at face value Communicating Communicating is the process of transforming data into useful information such as financial statements and disseminate it to users. It also involves interpreting the significance of the processed information 1. Recording 2. Classifying 3. Summarizing 4. Interpreting Basic Purpose of Accounting - To provide relevant/material information to user for them to make an economic decisions - Economic Entities use accounting to record economic activities, process data and disseminate information intended to be useful in making economic decisions - Economic Entities: - Not-for-profit Entity - Business Entity - Economic Activities - Production - Exchange - Consumption - Income Distribution - Savings - Investments Types of Information provided by accounting 1. Quantitative Information- numbers, quantity, or units 2. Qualitative Information- expressed in words or descriptive forms 3. Financial Information- expressed in money Types of Accounting Information as to user’s needs 1. General Purpose accounting information- designed to meet the common needs of most statement users. It is prepared in accordance with GAAP/PFRS 2. Special Purpose accounting information- designed to meet specific needs of a particular user. This information is provided by other types of accounting other than financial accounting Accounting Concepts - It refers to the principles upon which the process of accounting is based. - Double Entry System - Going Concern Assumption - Separate Entity - Stable Monetary unit - Time Period - Materiality Concept - Cost Benefit - Accrual Basis of Accounting - Historical Cost Concept - Concept of Articulation - Full Disclosure Principle - Consistency concept - Matching (Association of cause and effect) - Entity Theory - Proprietary Theory - Fund Theory - Realization - Prudence (Conservatism) - Matching (Direct Association of cost and revenues) - Systematic and rational allocation - Immediate Recognition Double Entry System - Each accountable event is recorded in two parts- Debit and Credit Going Concern Assumption - The entity is assumed to carry on its operations for an indefinite period of time. - The entity does not expect its operations in the foreseeable future - The measurement basis involving mixture of costs and values is appropriate only when the entity is a going concern. Separate Entity - Also known as Accounting entity, business entity or entity concept - The entity is viewed separately from its owners. - Personal transactions of the owners among themselves or with other entities are not recorded in the entity’s accounting records. Stable Monetary Unit - Purchasing power of peso is assumed to be stable or constant and any effect of inflation is disregarded Time Period - Also known as Periodicity or Accounting Period - The life of the entity is divided into series of reporting periods. - An accounting period is usually 12 months and may either be a calendar Period or Fiscal Period Materiality Concept - Information is material if its omission or misstatement could influence economic decisions. - Materiality is a matter of professional judgement and is based on the size and nature of the item being judged Cost-benefit - Also known as Constraint or Reasonable Assurance - The cost of processing and communicating information should not exceed the benefits to be derived from it Accrual Basis of Accounting - Income is recognized when earned - Expense is recognized when incurred Historical Cost Concept - Also known as Cost Principle - The value of an asset is determined on the basis of acquisition cost - This concept is not always maintained. There are assets that are not recorded at cost such as inventory Concept of Articulation - All of the components of a complete set of financial statements are interrelated. - When users use the financial statements in making decisions, they need to use each financial statement in conjunction with the other financial statements Full Disclosure Principle - The nature and amount of information included in the financial statements reflects a series of judgment trade-offs - The trade-offs strive for: - Sufficient detail to disclose matters that make a difference to users - Sufficient condensation to make the information understandable, keeping in mind the costs of preparing and using it Consistency Concept - Financial statements are prepared on the basis of accounting principles that are applied consistently from one period to the next. - Changes in accounting policies are made only when required or permitted by the PFRS or when the change results to more relevant and reliable information. Changes in accounting policies are disclosed in the notes. Matching (Association of cause and effect) - Costs are recognized as expenses when the related revenues is recognized Entity Theory - The accounting objective is geared towards proper income determination - Proper matching of costs against revenues is the ultimate end. - This theory emphasizes the income statement and is exemplified by the equation Asset= Liabilities + Equity Proprietary Theory - The accounting objective is geared towards the proper valuation of assets. Residual Equity Theory - This is applicable when there are two classes of shares issued - PS and OS - The equation is Assets- Liabilities- Preferred Shareholders Equity= Ordinary Share Equity - This theory is applied in the computation of book value per share and return on equity Fund Theory - The accounting objective is directed towards cash flows, exemplified by the formula cash inflows - cash outflows = fund Realization - The process of converting non cash assets into cash or claims for cash. - It is also the concept that deals with revenue recognition - When non cash asset like inventory are sold, it will be converted into cash Prudence - Also known as conservatism - It is the use of caution when making estimated under conditions of uncertainty - Assets and income should not be overstated while liabilities and expenses should not be understated - When exercising prudence, the one which has the least effect on equity is chosen Matching Concept ( Direct Association of costs and revenues) - Cost that are directly related to the earning of revenue are recognized as expenses in the same period the related revenue is recognized - Cost of Sales are recognized as the Sales are recognized Systematic and Rational Allocation - Cost that are not directly related to the earning of revenue are initially recognized as assets and recognized as expenses over the periods their economic benefits are consumed, using some method of allocation - Cost of equipment is initially recognized as asset and subsequently recognized as depreciation expense Immediate Recognition - Costs that do not meet the definition of asset or ceases to meet the definition of an asset, are expensed immediately. Common Branches of Accounting 1. Financial Accounting 2. Management ACcounting 3. Cost Accounting 4. Auditing 5. Tax Accounting 6. Government Accounting 7. Fiduciary Accounting 8. Estate Accounting 9. Social Accounting 10. Institutional Accounting 11. Accounting System 12. Accounting Research Financial Accounting - It focuses on preparation of general purpose financial statements - Primary Purpose: to provide information about an entity’s economic resources, claims to those resources and changes in those resources - Secondary Purpose: To provide information useful in assessing the entity’s management stewardship Management Accounting - It refers to the accumulation and communication of information for use by internal users of management - An offshoot of management accounting is management advisory services which includes services to clients on matters of accounting, finance, business policies, organization procedures, product costs, distribution and many other phases of business conduct and operations Cost Accounting - Systematic recording and analysis of the costs of materials, labor and overhead incident to production Auditing - The process of evaluating the correspondence of certain assertions with established criteria and expressing an opinion thereon Tax Accounting - Preparation of tax returns and rendering of tax advice such as the determination of the tax consequences of certain proposed business endeavros Government Accounting - The accounting for the government and its instrumentalities, placing emphasis on the custody of public funds, the purposes for which those funds are committed and the responsibility and accountability of the individuals entrusted with those funds Fiduciary Accounting - The handling of accounts managed by a person entrusted with the custody and management of property for the benefit of another Estate Accounting - The handling of accounts for fiduciaries who wind up the affairs of a deceased person Social Accounting - The process of communicating the social and environmental effects of an entity’s economic actions to the society Institutional Accounting - The accounting for non-profit entities other than the government Accounting systems - The installation of accounting procedures for the accumulation of financial data and designing of accounting forms to be used in data gathering Accounting Research - Careful analysis of economic events and other variables to understand their impact on decisions. Bookkeeping and Accounting - Bookkeeping refers to the process of recording the accounts or transactions of an entity. It normally ends with the preparation of Trial Balance - Accounting requires the interpretation of the significance of the processed information unlike bookkeeping - Accountancy refers to the profession or practice of accounting. Four Sectors in the Practice of Accountancy 1. Public Practice - involves the rendering of audit or accounting related services to more than one client on a fee basis 2. Practice in Commerce and Industry - refers to employment in the private sector in a position which involves decision making 3. Practice in Academe/Education- Employment in an educational institution which involves teaching of accounting related subjects 4. Practice in the government- employment or appointment to a position in an accounting profession group in the government or in a GOCC Accounting Standards - Philippine Financial Reporting Standards (PFRS) represent the GAAP in the Philippines - The PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise: - PFRSs - Philippine Accounting Standards (PASs) - Interpretations - PFRSs are accompanied by guidance to assist entities in applying their requirements. A guidance states whether it is an integral part of the PFRS. If it is, then it is mandatory. The Need for Reporting Standards - Entities should follow a uniform set of reporting standards when preparing and presenting financial statements. Without Standards: - Financial Statements would not be comparable - The risk of fraudulent reporting is heightened - Incorrect economic decisions - The term “Generally Accepted” means that either: - The Standard has been established by an authoritative accounting rule-making body like PFRS - The principle has gained general acceptance due to practice over time and has been to be most useful (double entry rule) - The process of establishing financial accounting standards is a democratic process in that a majority of practicing accountants must agree with a standard before it becomes implemented. Hierarchy of Reporting Standards When selecting its accounting policies, an entity considers the following in descending order: 1. PFRSs 2. Management- it shall use its judgment in developing and applying an accounting policy that results in a relevant and reliable information - In making the judgment: - Management shall refer to and consider the applicability of the ff (in descending order): - The requirements in PFRSs dealing with similar and related issued - The Conceptual Framework - Management may also consider the ff: - Pronouncement of other standard-setting bodies - Accounting literature and accepted industry practices Accounting Standard Setting Bodies and Other Relevant Organizations 1. Financial Reporting Standards Council (FRSC)- official accounting standard setting body in the Philippines created under the Philippine Accountancy Act of 2004 (RA no. 9298) - Composed of 15 individuals, 1 Chairperson and 14 members 1. Philippine Interpretations Committee (PIC)- is a committee formed by the Accounting Standards Council (ASC), the predecessor of FRSC, with the role of reviewing the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) for approval and adoption by the FRSC 2. Board of Accountancy (BOA)- professional regulatory board created under RA no. 9298 to supervise the registration, licensure and practice of accountancy in the Philippines. Accounting Standard Setting Bodies and Other Relevant Organizations 4. Securities and Exchange Commission (SEC)- government agency tasked in regulating corporations and partnerships, capital and investment markets, and the investing public. Some SEC rulings affect the accounting requirements of entities and the adoption and application of accounting policies 5. Bureau of Internal Revenue (BIR)- administer the provisions of the National Internal Revenue Code. 6. Bangko Sentral ng Pilipinas (BSP)- influences the selection and application of accounting policies by banks and other entities performing banking functions 7. Cooperative Development Authority (CDA)- influences the selection and application of accounting policies by cooperatives International Accounting Standards - International Accounting Standards Board (IASB) is the standard setting body of the IFRS Foundation with the main objectives of developing and promoting global accounting standards - It was established in April 1, 2001 as part of the International Accounting Standards Committee (IASC) Foundation - IASC Foundation is a non-profit organization based in Delaware, USA and is the parent of IASB, wish is based in London. - On July 1, 2010, the IASC Foundation was renamed to Interntionall Financial Reporting Standards Foundation (IFRS Foundation) - International Financial Reporting Standards (IFRSs) are the standards issued by the IASB which is composed of the ff: - IFRSs- standards issued by the IASB - International Accounting Standards- standards issued by IASC which are adopted by IASB - Interpretations Due Process - IFRSs are developed through international due process that involves accountants and other various interested individuals and organization from around the world. It involves: 1. The staff identifies and reviews issued associated with a topic and considers the application of the Conceptual Framework to the issues 2. Study of national accounting requirements and practice, including consultation with national standard-setters 3. Consulting the Trustees and the Advisory Council about the advisability of adding the topic to the IASB’s agenda 4. Formation of an advisory group to give advice to the IASB on the project 5. Publishing a discussion document for public comment 6. Publishing an exposure draft for a public document 7. Publishing with an exposure draft a basis for conclusions and the alternative views of an IASB member who opposes publication 8. Consideration of all comments received 9. Holding a public hearing and conducting field tests, if necessary 10. Publishing a standard including the basis for conclusions, explaining, among other things, the steps in the IASB’s due process and how the IASB dealt with public comments on the exposure draft and the dissenting opinion of any IASB member Other Relevant International Organizations 1. International Financial Reporting Interpretations Committee (IFRIC)- a committee that prepares interpretation of how specific issues should be accounted for under the application of IFRS where: a. The standards do not include specific authoritative guidance b. There is a risk of divergent and unacceptable accounting practices 2. IFRS Advisory Council- a group of organizations and individuals with an interest in international financial reporting. Its role includes advising on priorities within the IASB’s work program. 3. International Federation of Accountants (IFAC)- a non-profit, non-governmental, non- political organization of accountancy bodies that represents the worldwide accountancy profession. Its mission is to develop and enhance the profession to provide services of consistently high quality in the public interest. 4. International Organization of Securities Commissions (IOSCO)- an international body of security commissions. SEC is a member of IOSCO Future of IFRS - In October 2022, FASB and IASB entered into a memorandum of understanding calles “Norwalk Agreement” which is a significant milestone towards achieving the goal of having uniform accounting standards. - They agree to : - Make their existing financial reporting standards fully compatible by minimizing differences - Coordinate their future work programs to ensure that once achieved, compatibility is maintained Changes in Reporting Standards - Standards are continually reviews, revised or superseded. - Changes to reporting standards are primarily made in response to users’ needs. - Legal, Political, Business and social environments also influence changes in reporting standards Conceptual Framework for Financial Reporting ILOs After this topic, you will be able to: 1. State the purpose, status and scope of the Conceptual Framework 2. State the objective of Financial reporting 3. Identify the primary users of financial statements 4. Explain briefly the qualitative characteristics of useful information and how they are applied in financial reporting 5. Define the elements of financial statements and state their recognition criteria and their derecognition 6. State the measurement bases used in financial reporting Purpose of Conceptual Framework The Conceptual Framework prescribes the concepts for general purpose financial reporting. Its purpose is to: a. Assist the IASB in developing Standards that are based on consistent concepts b. Assist preparers in developing consistent accounting policies when no Standard applied to a particular transaction or when a Standard allows a choice of accounting policy c. Assist all parties in understanding and interpreting the Standards The Conceptual Framework provides the foundation for the development of Standards that: d. Promote transparency by enhancing the international comparability and quality of financial information e. Strengthen accountability by reducing the information gap between providers of capital and entity’s management f. Contribute to economic efficiency by helping investors to identified opportunities and risks around the world, thus improving capital allocation. The use of a single, trusted accounting language lowers the cost of capital and reduces international reporting costs Status of the Conceptual Framework - The CF is NOT a Standard. - Thus, if there is a conflict between a Standard and CF, the requirement of the Standard will prevail - Hierarchy of Reporting Standards 1. PFRSs 2. Judgment - When Making judgment: - Management shall consider the ff: - Requirements in other PFRSs dealing with similar transactions - Conceptual Framework - Management may consider the ff: - Pronouncement issued by other standard-setting bodies - Other accounting literature and industry practices Scope of the Conceptual Framework The CF is concerned with the general purpose financial reporting which involves general purpose financial statements. It provides the concepts that underlie general purpose financial reporting with regard to the ff: 1. The objective of financial reporting 2. Qualitative Characteristics of useful financial information 3. Financial Statements and the reporting entity 4. The elements of financial statements 5. Recognition and Derecognition 6. Measurement 7. Presentation and Disclosure 8. Concepts of capital and Capital maintenance 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 existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity - It is the foundation of Conceptual Framework and all other aspects of the Conceptual framework revolve around this objective. Primary Users 1. Existing and potential investors; and 2. Lenders and other creditors - These users cannot demand information directly from reporting entities and rely on financial reports for their financial information needs for decision making. Decisions about providing resources to the entity involves: - Buying, selling or holding investments - Providing or setting loans and other forms of credit - Exercising voting or similar rights that could influence management’s actions relating to the use of the entity’s economic resources - These decisions depend on the expected return which is based on the 1. Prospects for future net cash inflows and 2. Management Stewardship - General Purpose Financial Reporting deals with providing information that caters to the common needs of the primary users. Thus, these reports cannot provide all the information needs of the primary users. - There are other sources of information such as news, articles, economic conditions, and etc - These reports do not directly show the value of the reporting entity but it helps users in estimating its value Information on Economic Resources, Claims and Changes - Expected Returns are based on Prospects for future net cash inflows and Management Stewardship which can be assessed through the use of the ff info: - The economic resources of the entity, Claims against the entity and changes in those resources and claims; and - Financial Position- shows the resources (assets) and claims against those resources (liabilities and equity) - Assessed the entity’s liquidity, solvency, needs for additional financing, and management’s stewardship on the use of economic resources - Changes in economic resources and claims-shows in financial performance (income and expenses) and other transactions that may lead to changes in financial position - How efficiently and effectively the entity’s management has utilized the entity’s economic resources 2. Qualitative Characteristics The Cost Constraint (Cost-Benefit) - Cost is a pervasive constraint on the entity’s ability to provide useful financial information - Cost of providing information can only be justified by its BENEFITS - COST SHOULD NOT OUTWEIGH THE BENEFITS Materiality - Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the the primary users make. - Materiality is an “entity-specific” aspect of relevance - Materiality depends on the facts and circumstances surrounding the entity - There is NO quantitative threshold for materiality but rather it is a MATTER OF JUDGMENT - Steps in Making Materiality Judgments (Materiality Process) 1. Identify information that has the potential to be material 2. Assess whether the information identified in Step 1 is, in fact, material 3. Organize the information within the draft financial statements in a way that communicates the information clearly and concisely to primary users 4. Review the draft financial statements to determine whether all material information has been identified and materiality considered from a wide perspective and in aggregate on the basis of complete set of financial statements 3. Financial Statements and Reporting Entity Complete set of Financial Statements: 1. Statement of Financial Position 2. Statement of Financial Performance 3. Statement of Changes in Equity 4. Statement of Cash Flows 5. Notes to Financial Statements 6. Statement of Financial Position as at the beginning of the earliest comparative period (at least one preceding reporting period)- only required when there are changes in accounting policies Note: FSs are normally prepared on the assumption that the reporting entity is a going concern, that is why they record their transactions at historical costs, OTHERWISE, the measurement should be at realizable value Reporting Entity - 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. - If a reporting entity comprises both parent and subsidiary, the reporting entity’s FSs are referred to as Consolidated Financial Statements - If a reporting entity is the parent alone, FSs are referred to as Unconsolidated Financial Statements - If a reporting entity comprises two or more entities that do no have parent-subsidiary relationship, the FSs are referred to as Combined Financial Statements 4. Elements of Financial Statements 1. Assets 2. Liabilities 3. Equity 4. Income 5. 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. Right ○ Rights that correspond to an obligation of another party Rights to receive cash Rights to receive goods or services Rights to exchange economic resources with another party on favorable terms Rights to benefit from obligation of another party to transfer an economic resource if a specified uncertain future event occurs ○ Rights that do not correspond to an obligation of another party Right over physical objects Rights to use intellectual property Asset Potential economic Benefits ○ Receive contractual cash flows or another economic resource ○ Exchange economic resources with another party on favorable terms ○ Produce Cash inflows or avoid cash outflows by Using the economic resource either individually or in combination with other economic resources to produce goods or provide services Using the economic resource to enhance the value of other economic resources Leasing the economic resource to another party ○ Receive cash or other economic resources by selling the economic resource ○ Extinguish liabilities by transferring the economic resource Control- an entity controls an economic resource if it has present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing the use of the economic resource and from obtaining the economic benefits that may flow from it. It follows that, if one party controls an economic resource, no other party controls that resource Liability A liability is a present obligation of the entity to transfer an economic resource as a result of past events. For a liability to exist, three criteria must all be satisfied: ○ The entity has an obligation; ○ The obligation is to transfer an economic resource; and ○ The obligation is a present obligation that exist as a result of past events. An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation is always owed to another party (or parties). The other party could be a person or another entity, a group of people or other entities, of society at large. It is not necessary to know the identity of the party to whom the obligation is owed. If one party has an obligation to transfer an economic resource, it follows that another party has a right (asset) to receive that economic resource Liability Transfer an economic resource ○ Obligations to pay cash ○ Obligations to deliver goods or provide services ○ Obligations to exchange economic resources with another party on unfavorable terms. ○ Obligations to transfer an economic resource if a specified uncertain future event occur ○ Obligations to issue a financial instrument if that financial instrument will oblige the entity to transfer an economic resource Result of past events ○ The entity has already obtained economic benefits or taken an action ○ As a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer Equity Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. In other words, they are claims against the entity that do not meet the definition of liability (Asset- Liability=Equity) Equity may pertain to any of the following depending on the form of business organization: ○ In a sole proprietorship, there is only one owner’s equity account because there is only one owner ○ In a partnership, an owner’s equity account exists for each partner ○ In a corporation, owner’s equity or stockholders’ equity consists of share capital, retained earnings and reserves representing appropriations of retained earnings among others Income and Expense 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 (owners) 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 (owners) It follows from these definitions of income and expenses that contributions from holders of equity claims are not income, and distributions to holders of equity claims are not expenses. Income and expenses are the elements of financial statements that relate to an entity’s financial performance. Users of financial statements need information about both an entity’s financial position and its financial performance. Hence, although income and expenses are defined in terms of changes in assets and liabilities, information about income and expenses is just as information about assets and liabilities 5. Recognition and Derecognition Recognition- the process of including in the statement of financial position and the statement of financial performance an item that meets the definition of one of the financial statement elements. - Recognition/Derecognition of one element requires the recognition or derecognition of another element. - Sometimes, recognition of income results in the simultaneous recognition of related expense. (Example: Sales and Cost of Sales) - Recognition criteria: - An item is recognized if: a. It meets the definition of an asset, liability, equity, income or expenses AND b. Recognizing it would provide useful information (relevant and faithfully represented information) 5. Recognition and Derecognition Sales on account P20000 Recognition of Income (Sales) requires recognition of Asset (Accounts Receivable) Recognition of Expense (Cost of Sales) requires derecognition of Asset (Inventory) Payment of Accounts Payable P10000 Derecognition of Liability (AP) requires derecognition of Asset (Cash) Paid Rent Expense P3000 Recognition of Expense(Rent Expense) requires Derecognition of Asset (Cash) Derecognition Derecognition- it is the opposite of recognition which is the removal of a previously recognized asset or liability from the entity’s statement of financial position. - Derecognition occurs when the item no longer meet the definition of an asset or liability. - Derecognition of Asset or liabilities that have expired, or have been consumed, collected, fulfilled or transferred and recognized any resulting income and expenses (Asset- no future benefit) (Liability- no present obligation) - Not all transfers will result to derecognition. If the entity retains any substantial control over the asset, then there will be no derecognition 6. Measurement - Recognition requires quantifying an item in monetary terms. - Historical Cost= consideration paid + transaction costs - Not subject to changes but subject to: - Asset- impairment, depreciation or amortization, collection, discount or premium (when measured at Amortized Cost) - Liability- payment, discount or premium - Current Value - Fair value - price that would received to sell an asset or paid to transfer a liability, in orderly transaction between market participants at measurement date (Arm’s length Transaction) - Value in use and Fulfillment Value - present value of cash flows, or other economic benefits that an entity expects to derive from the use of an asset and from its ultimate disposal - Current Cost - Consideration is not cash - the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction cost that would be incurred at that date Notes: Entry Values= Current cost and Historical Costs Exit Values= Fair Value or Value in Use Considerations when selecting a measurement basis a. Nature of information provided by a particular measurement basis i. Historical Cost- subject to impairment/ depreciation ii. Fair value- subject to unrealized gain or loss from changes in FV iii. Current Cost- subject to holding gains or losses b. Qualitative Characteristics, the cost constraint and other factors 1. Relevance- asset and liabilities that are sensitive to price changes should be measured at Fair Value not Historical Value. ASsets that are used in combination should be measured at historical cost while assets that are independently used can be measured at FV 2. Faithfully Represented- level of measurement uncertainty. - Outcome Uncertainty- uncertain about the amount or timing of any inflow or outflow of economic benefits that will result from asset or liability - Existence Uncertainty- uncertain whether an asset or liability exists 7. Presentation and Disclosure Objectives: 1. To provide relevant and faithfully represented information 2. Intra comparability and Inter comparability Principles: 3. Entity-specific information is more useful than standardized description 4. Duplication of information is usually unnecessary as it can make financial statements less understandable Presentation - Classification - Classification of assets and liabilities - Offsetting - Classification of Equity - Classification of income and expense - Profit or Loss - Other comprehensive income - Aggregation Capital and Capital Maintenance - Two concepts of capital - Financial Concept of Capital - Physical concept of capital - Concept of Capital Maintenance - Financial Capital Maintenance - Physical Capital Maintenance End :)