Revised CF- chapter 1-8.docx

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS WEEK 1-3 - Established June 1973 - International Accounting Standards Committee (IASC) - Group of people task to doing specific standards - International Accounting Standards (IAS) - **Objective**: achieve uniformity of accounting principl...

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS WEEK 1-3 - Established June 1973 - International Accounting Standards Committee (IASC) - Group of people task to doing specific standards - International Accounting Standards (IAS) - **Objective**: achieve uniformity of accounting principles around the world (lumaki ang committee) - International Accounting Standards Council (IASC) - International Financial Reporting Standards (IFRS) **PHILIPPINES** - Professional Regulation Commission (PRC) - Board of Accountancy - Recommended and created FRSC - Financial Reporting Standards Council (FRSC) / Financial and Sustainability Reporting Standards Council (FSRSC) - To assist BOA in carrying out its powers and function 1. Establish and improve accounting standards that will be generally accepted in the PH. 2. Promulgate accounting standards - Philippine Accounting Standards (PAS) - Philippine Financial Reporting Standards (PFRS) - Foundation - Summary of terms and concepts that underlie the preparation and presentation of financial statement - Used as basis for development and revision of accounting standards - **Basic Purpose**: 1. Assist IASB to develop IFRS 2. Assist preparers of financial statements to develop a. consistent acting policy when no standard applies to a particular transaction b. accounting policy when a standard allows a choice 3. Assist all parties to understand and interpret IFRS 1. Primary Users A. Owners/Investors- the one who puts capital in a business B. Manager- responsible for running the business C. Lenders/Creditors- lends money to the business - assess paying ability D. Supplier- offers goods to the business 2. Other users A. Employees- assess the ability of the company to grant your demands B. Customers- asses the ability to continuously provide the goods they buy C. Government- assess the correct payment of taxes 1. Objective of Financial Reporting 2. Qualitative Characteristics of Useful Financial Information 3. Financial Statements & Reporting Entity 4. Elements of Financial Statements 5. Recognition & Derecognition 6. Measurement 7. Presentation & Disclosure 8. Concepts of Capital and Capital Maintenance - Why/purpose/goal of accounting - Provide financial information for decision-making - **Specific Objectives**: 1. Provide info about providing resources to the entity (statement of changes in equity) 2. Provide info in assessing cash flow prospects of the entity (statement of cash flows) 3. Provide info about resources, claims (statement of financial position), and their changes (income statement) **LIMITATIONS OF FINANCIAL REPORTING** 1. Do not and cannot provide all informations 2. Not designed to show the value of an entity but only helps to estimate its value 3. Intended to provide common information to users and cannot accommodate every requests of info 4. Based on estimate and judgment rather than exact depiction - Qualities/attitudes that make financial accounting information useful to users **CLASSIFICATIONS**: 1. Fundamental Qualitative Characteristics - Content/substance of information 2. Enhancing Qualitative Characteristics - Enhance the usefulness of information - Presentation/form 1. Relevance- capacity of info to influence the decision of users. - **Ingredients**: 1. Predictive Value- help users correctly forecast outcome of events 2. Confirmatory Value- enables users to confirm/correct earlier expectation - **Materiality (Doctrine of Convenience)** - If omission, misstatement, or obscuring of info could affect the decision of primary users (kailangan ipresent) 2\. Faithful Representation/Reliability \- actual effects of transactions are properly accounted for and reported - 1. Completeness- presented to facilitate understanding and avoid enormous implication - Standard of adequate disclosure - All significant and relevant info must be reported 2. Free from Error - No errors/omissions 3. Neutrality - Financial statements should not be prepared in favor of any party - Free from bias - **Substance over form**- we present transaction based on economic substance rather than their legal form - **Prudence**- exercise of care and caution when dealing with uncertainties such that assets/income are not overstated and liabilities/expenses are not understated - **Conservatism**- in case of doubt, choose the alternative that has the least effect on equity [BOTH FUNDAMENTAL QUALITATIVE CHARACTERISTICS MUST BE COMPLIED TO BECOME USEFUL] 1. Verifiability- different users could reach consensus - Using some evidences, you will arrive at the same conclusion (receipts) - Results and the duplication using the same method 2. Comparability - Users must identify and understand similarities & differences - Interacts with both relevance and reliability - Presents at least 2 years - **Types**: 1. Horizontal Comparability/Intra comparability- within the entity 2. Dimensional Comparability/Inter comparability- across entities - **Consistency**- same method for period to period 3. Understandability- readily understandable by users - Users are expected to have reasonable understanding of economic activities - Links decision makers and the decisions they make 4. Timeliness- having info available in time to influence decisions - **Cost Constraint**- benefit derived from the information should exceed the cost incurred in obtaining information - **Time Constraint**- timeliness - **Financial Statements**- provides information about economic resources of the reporting entity, claims against the said entity, and changes in the economic resources and claims. - **Reporting Entity**- entity that prepares financial statements - **Reporting Period**- period of financial statements - **Required: Annual** - Calendar Year- ending in December 31 - Fiscal Year/ Natural Business Year- ending in any period other than December 31 - **Optional: Interim** 1. GOING CONCERN/CONTINUITY ASSUMPTION - Accounting entity is viewed as continuing in operation indefinitely in the absence of evidence in the contrary. - Explicit assumption: expressed and shared 2. ACCOUNTING ENTITY ASSUMPTION - Accounting is separate from the owners, managers, and employees who constitutes the entity. 3. TIME PERIOD ASSUMPTION/PERIODICITY - The indefinite life of the entity is subdivided into accounting periods which are usually of equal length for the purpose of preparing reports. 4. MONETARY UNIT ASSUMPTION - Elements of financial statements should be stated in terms of measure (peso). I. Financial Position a. Assets b. Liabilities c. Equity II. Financial Performance d. Income e. Expenses A. **ASSETS** - Present economic resources controlled by the entity as a result of past events. B. **LIABILITY** - Present obligation of an entity to transfer economic resources as a result of past events. C. **EQUITY** - Residual interest in the assets after deducting liability. - Equity = Assets -- Liabilities D. **INCOME** - Increases in asset or decreases in liabilities that results on increases in equity other than those relating to contributions from owners. - Assets \^, Liabilities \^, Equity \^ 1. REVENUE - Arises in the ordinary course of business - Regular (palagi) 2. GAINS - Other items that do not match the definition of revenue. - Hindi palagi E. **EXPENSES** - Decreases in assets or increases in liabilities that results in decreases in equity other than those withdrawals by the owners. - Assets \^, Liabilities \^, Equity \^ 1. EXPENSES - Arises from the ordinary course of business 2. LOSS - Do not arise in the ordinary course of business - **RECOGNITION** - Accrual Basis - Recognize income when earned regardless of collection - Recognize expenses when incurred regardless of payments - **EXPENSE** - Matching Principle - Cost incurred in order to generate revenue must be recognized in the same period (para kumita ka may kaakibat na cost) a. **CAUSE AND EFFECT ASSOCIATION** - Expense is recognized when the revenue is already recognized - Strict matching concept - Inventory b. **SYSTEMATIC AND RATIONAL ALLOCATION** - Costs are expensed by allocating over the periods benefited - There is no direct association with revenue - Depreciation (ex. every 5 years) c. **IMMEDIATE RECOGNITION** - Expensed outright because of difficulty of associating with revenue - Salary expense - **DERECOGNITION** - Removal of all or part from the FS - Quantifying in monetary terms the elements of financial statements 1. **HISTORICAL COST** - Cost incurred in acquiring or creating the asset - Entry price/entry value - Asset = consideration paid + transaction cost - Liabilities = consideration received -- transaction cost 2. **CURRENT VALUE/CURRENT COST** - Magkano ngayon a. Fair Value - price that would be received/ paid between market participants - exit price/ exit value - **For Liabilities**- present value (babayaran mo ngayon, magkano?) b. Value in Use (asset) - Present value of cash flows that is expected to derive from continuing use of the asset - Includes transaction cost on the disposal of asset - Exit Price/Exit Value (gagamitin mo hanggang masira) c. Fulfillment Value (liability) - Present value of cash that is expected in paying or settling the liability (binabayaran ang obligation) - Includes transaction cost on settlement on liab - Exit Price/Exit Value d. Current Cost - Replacement cost (ex. may laptop ka for 3 years tapos gusto mo na palitan) - Price of cost of an equivalent asset/liabilities - sorting of assets, liabilities, equity, income, and expense - **AGGREGATION** - adding together assets, liabilities, equity, income, and expense - Approaches in determining net income 1. TRANSACTION APPROACH - Normal 2. CAPITAL MAINTENANCE APPROACH - Net income occurs in excess of beginning capital A. Financial Capital - Net assets is based on monetary amount invested (historical cost) B. Physical Capital - Net assets is based on physical productive capacity to produce goods or service (current cost)