CFAS Reviewer - Conceptual Framework 2020 PDF

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDSChapter 1: THE ACCOUNTANCY PROFESSION Definition of Accounting  Accounting Standards Council: o Accounting function is to provide quantitative information, primarily financial in nature, about economic entities, intended to be useful in making economic d...

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS Chapter 1: THE ACCOUNTANCY PROFESSION Definition of Accounting  Accounting Standards Council: o Accounting function is to provide quantitative information, primarily financial in nature, about economic entities, intended to be useful in making economic decision o Art of recoding, classifying and summarizing in significant manner and in terms of money, transactions and events which are part at least of financial character and interpreting results o Process of identifying, measuring and communicating economic informatiion to permit informed judgment and decision by users Important Points 1. Accounting is about quantitative information 2. Information is likely to be financial in nature 3. Should be useful in decision making  Definition given by American Accounting Association  Very purpose of accounting is to provide quantitative information to be useful in making economic decision o Identify analytical component  Accounting process is recognition or nonrecognition of business activities  Not all business activities are accountable  Hiring of employees, death of enity president and entering into a contract are all business activities but such events are not accountable because they cannot be quantified or expressed in terms of unit of measure  Accountable of quantifiable when it has effect on assets, liabilities and equity  Subject matter of accounting is economic activity or measurement of economic resources and obligations  Emphasized and reccognized in accounting  Sociological and psychological matters beyond province of accounting  External and Internal Trnsaction  Economics activities of entity are referred to transactions which may be classified as external and internal  External transactions or exchange transaction – economic events involving one entity and another entity o Purchase of goods from supplier o Borrowing money from bank o Sales of goods to customer o Payment of salaries to employees o Payment of taxes to government  Internal transactions - events involving the entity only o Economic activities that take place entirely within entity  Production – process by which resources are transformed into products  Casualty – any suddend and unanticipated loss from fire, flood, earthquake and other event

o Measuring technical component  Assigning of peso amounts to accountable economic transactions and events  Information is to be useful, must be expressed in terms of common financial denominator  FS without monetary amounts would be largely unintelligible or incomprehensible  Philippine Peso unit of measuring accountable economic  Measurement bases are historical cost and current value  Historical cost - most common measure of financial transactions  Current value – fair value, value in use, fulfillment value and current cost o Communicating formal component  Process of preparing and distributing accounting reports to potential users  Identify and measure are pointless if information contained in accounting records cannot be communicated in some form to potential users  Universal Language of Business  Process of recording, classifying and summarizing aspects of accounting  Recoding or Journalizing – process of systematically maintaining a record of all business transactions after have been identified and measured  Classifying – storing or grouping of similar and interrelated transactions (posting to ledger)  Ledger – group of accounts which are systematically categorized into asset, liability, equity, revenue and expense  Summarizing – preparation of financial statements  Statement of Financial Position  Income Statement or Statement of Comprehensive Income  Statement of Changes in Equity  Statement of Cash Flows Accounting as an Information System  Measures business activities, processes information into reports and communicates reports to decision maker  Key product of informatiion system is set of financial statements – documents that report financial information about entity to decision makers  Financial reports tell us how well an entity is performing in terms of profit and loss where it stands in financial terms The Accountancy Profession  Republic Atc. No. 9298 – regulates practice of accountancy in Philippines  Philippine Accountancy Act of 2004  Order to qualify practice accountancy profession, person must finish a degree in Bachelor of Science in Accountancy and pass Board Examination  Board of Accountancy – body of authorized by law to promulgate rules and regulations affecting practice of accountancy profession o Responsible for preparing and grading Philippine CPA Exam  Computer-based examination if offered twice a year

Limitation of Practice of Public Accountancy  Single practitioners and partenrships for practice of public accountancy shall be registered CPA in Philippine  Certificate of accreditation shall be issued to CPA in public practice  Board of Accountancy and approved by Professional Regulation Commission such registrant has acquired minimum of 3 years  SEC shall not register any corporation organized for practice of public accountancy Accredition to Practice Public Accountancy  CPA, firms and partnerships or CPA, including pertners and staff members, required to register with BOA and PRC for practice of public accountancy  PRC upon favorable recommendation of BOA shall issue Certificate of Registration to practice public accountancy which shall be valid for 3 years and renewable every 3 years upon payment o Public accounting  Composed of individual practitioners, small accounting firms and large multinational organizations that render independent and expert financial services to public  Services offered:  Auditing  Traditionally been primary services offered by most public accountant  Audting or External auditing is examination of financial statements by independent CPA for purpose of expressing opinion as to fairness with FS prepared  External auditing – attest function of independent CPA  BIR requires audited FS to accompany filing annual income tax returns  Banks require audit by independent CPA before granting loan  Taxation  Preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavors  CPA not frequently represents client in tax investigations  Managament Advisory Services  Services increasingly important in recent years  Audit and tax services are undoubtedly mainstay of public accounts  Has no precise coverage, used generally to refer services to clients on matters of accounting, finance, business policies, organization procedures, production costs, distribution and phases of business conduct and operations a. Advice on installation of computer system b. Quality control c. Installation and modification of accounting system d. Budgeting e. Forward planning and forecasting f. Design and modification of retirement plans

g. Advice on mergers and consolidations o Private accounting  CPAs are employed in business entities (accounting staff, chief accountant, internal auditor and controller)  Controller – highest accounting officer  Main objective – assist management in planning and controlling entity’s operations  Maintaining records, produce FS, prepare budgets, and control and allocate resources  Has responsibility for determination of various taxes entity obliged to pay o Government accounting  Encompasses process of analyzing, classifying, summarizing and communicating all transactions involve receipt and disposition of government funds and property and interpreting results  Custody and administration of public funds  Employed in many branches of government:  Bureau of Internal Revenue  Commission on Audit  Department of Budget and Management  Securities and Exchange Commission  Bangko Sentral ng Pilipinas Continuing Professioal Development (CPD)  Republic Act. No. 10912  Law mandating and strengthening CPD program for all regulated prefoessions, include accountancy preofession  All CPAs shall abided requirements, rules and regulations on CPD to promulgated by BOA, subject to approval of PRC, in coordination with accredited national professional organization of CPA or duly accredited educational institutions  Refers to inculcation and acquisition of advance knowledge, skill, proficiency, and ethical and moral values after initial register of CPA  Raises and enhances technical skills and competence of CPA  Credit Units: o Refer to CPD credit hours required for renewal of CPA license and accredition of CPA to practice accountancy profession every 3 years o New BOA resolution, all CPA regardless of area or sector of prectice shall require comply with 120 CPD credit units in compliance period of 3 years  2017 80 credit units  2018 100 credit units  2019 120 credit units o Excess credit units earned shall not be carries over next 3 year period, except credit units earned for masteral and doctoral degres o Emphasized CPD has become mandatory for CPA o CPD is required for renewal of CPA license and accreditation of CPA to practice accountancy profession  Exemption from CPD:

o CPA shall permanently exempted from CPD requirements upong 65 years o Exemption applied only to renewal of CPA license and not for purpose of accreditation to practice accountancy profession Accounting vs Auditing  Broad sense, accounting enbrace auditing  Auditing – one of the area accounting specialize  Limited sense, essentially constructive in nature. Accounting cease FS are already prepared  FS are prepared, auditor will begin perform task of auditing  Auditor examines FS to ascertain whether they are conformity with general accepted accounting principles Accounting vs Bookkeeping  Bookkeeping – procedural and largely concerned with develop and maintain accounting records (how of accounting)  Accounting – conceptual and concerned with why, reason or justification for action adopted  Bookkeeping – procedural element of accounting as arithmetic procedural element of math Accounting vs Accountancy  Accountancy – profession of accounting practice  Accounting – reference only to particular field of accountancy such public, private, and government accounting Financial Accounting vs Managerial Accounting  Financial Accounting – primary ocncern with recording of business transactions and eventual preparation of FS, focuse on general purpose reports known as FS intended for internal and external users, area of accounting emphasize report to creditor and investor  Managerial Accounting – accumulation and preparation of financial reports for internal users, area of accounting emphasize developing accounting information for use of entire entity Generally Accepted Accounting Principles (GAAP)  Known or represents to be the accounting rules, procedures and practices in preparation and presentation of FS  Principles developed from experience, reason, custom, usage and practical necessity  Laws that must be followed in financial reporting  Political process which incorporates political actions of various interested user group as well as professional judgment, logic and research Purpose of Accounting Standards  Identify proper accounting process for preparation and presentation of FS  Creates common understanding between preparers and users of FS particularly measurement of assets and liabilities  Set of high quality accounting standards  Necessity to ensure comparability and uniformity in FS based on same information

Financial Reporting Standards Council (FRSC)  Development of GAAP is formalized initially through creation of Accounting Standards Council (ASC)  Replaced ASC  Setting body created by PRC upon BOA to assist BOA in carrying out powers and functions provided under Republic Act. No. 9298  Main function: establish and improve accounting standards that will generally accepted in Phil  Accounting Standards promulgated by FRSC constitute highest hierchy of GAAP in Philippines  Approved statements are known as o Philippine Accounting Standards (PAS) o Philippine Financial Reporting Standards (PFRS)  Composition Board of Accountancy 1 Securities and Exchange Commission 1 Bangko Sentral ng Pilinas 1 Bureau of Internal Revenue 1 Commission on Audit 1 Major Organization of Preparers and Users of Financial Statements – Financial Executive Institute of the Philippines (FINEX) 1 Accredited National Professional Organization of CPAs: 2 Public Practice 2 Commerce and Industry 2 Academe or Education 2 Government Total 14  Chairman and members of FRSC shall have term of 3 years renewable for another term  Any member of ASC shall not be disqualified from being appointed to FRSC Philippine Interpretation Committee (PIC)  Was formed by FRSC in August 2006 and has replaced Interpretations Committee (IC) formed by ASC in May 2000  Role – prepare interpretations of PFRS for approval by FRSC and provide timely guidance on financial reporting issues ot specifically addressed in PFRS  Interpretations intend to give authoritative guidance on issues likely to receive divergent or unacceptable treatment because standards do not provide specific and clearcut rules and guidelines  Counterpart of PIC in UK is Internation Financial Reporting Interpretations Committee (IFRIC) which replaced Standing Interpretations Committee (SIC) International Accounting Standards Committee (IASC)  Independent private sector body, with objective of achieving uniformity in accounting principles used by business and other organization for financial reporting around the world  Formed in June 1973 through agreement made by professional accountancy (Astralia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom and Ireland, and USA)

 IASC headquartered in London, UK  Objectives: o Formulate and publish public interest accounting standards to be observed in presentation of FS and promote their worldwide acceptance and observance o Improvement and harmonization of regulations, accounting standards and procedures relating to presentation of FS International Accounting Standard Board (IASB)  Replaces International Accounting Standard Committee (IASC)  Publishes standards in series of pronouncements called Internation Financial Reporting Standards (IFRS)  Adopted body of standards issued by IASC  Standard-setting process includes in correct order research, discussion paper, exposure draft and accounting standard Moving toward IFRS  Develop accounting standards will generally aceepted in Philippine  Issued by other standard setting bodies such as USA Financial Accounting Standard Board (FASB) and IASB are considered  Past years, most of the Philippine Standards issued based on American Accounting Standards  FRSC adopted their entirely all IAS and IFRS  Essential to achieve goal of one unifrom and globally accepted Financial Reporting Standards (FRS)  Fully complaint with IFRS effective January 2005  Process which started back in 1997 in moving from USA GAAP to IFRS  Following factors are considered in deciding move totally to IAS: o Support of IAS by Philippine Organization, Philippine SEC, BOA and PICPA o Increase internalization of business which has heightened interest in common language for financial reporting o Improvement of international accounting standards or removal of free choice of accounting treatments o Increase recognition of international accounting standars by World Bank, Asian Development Bank and World Trade Organization Philippine Financial Reporting Standards (PFRS)  FRSC issues standards in series of pronouncements called “PFRS”  Collectively included all: o PFRS corresponds to IFRS o PFRS are numbered the same as their counterpart in IFRS o Philippine Accounting Standards corresponds to IAS o Philippine Accounting Standards are numbered the same as their counterpart in IFRS o Philippine Interpretations corresponds to Interpretations of IFRIC and SIC, and Interpretations developed by PIC

Chapter 2: OBJECTIVE OF FINANCIAL REPORTING Conceptual Framework  For Financial Reporting is a complete, comprehensive and single doccument promulgated by IASB  Summary of terms and concepts that underlie preparation and presentation of FS for external users  Describes concepts of General Purpose Financial Reporting  Attempt to provide an overall theoretical foundation for accounting  Intend to guide standard setters, preparers and users of financial information in preparation and presentation of statements  Underlying theory for development of accounting standards and revision of previously issued accounting standards  Used in future standard setting decision but no changes will be made to current IFRS  Provides foundation for Standards: o Contribute to transparency by enhancing international comparability and quality of financial information o Strengthen accountability by reducing information between providers of capital and people whom they have trusted their money o Contribute to economic efficiency by helping investors to identify opportunities and risks across the world  Purposes of Revised Conceptual Framework: o Assist IASB to develop IFRS based on consistent concepts o Assist preparers of FS to develop consistent accounting policy when no standards applies to particular transaction or other event or when an issue is not yet addressed by IFRS o Assist preparers of FS to develop accounting policy when standards allowas a choice of accounting policy o Assist all parties to understand and interpret IFRS  Scope of Revised Conceptual Framework o Objective of financial reporting  Provides financial information about reporting entity that is useful to existing and potential investors, lenders and other creditors making decision  Why, purpose or goal of accounting  Financial reporting – provision of information about entity to external users that is useful to them in making decisiions and assessing effectiveness of managements  Encompass not only FS but also other informatiion such as highlights, summary of figures, analysis of FS and significant ratios  Also include nonfinancial information such as product description and list of corporate officers and directors  Principal way of providing information to external users is through annual FS  Target Users  Composed primary user group  Reason: most crtitical and immediate need for information in financial reports  Information that meets the needs of specified primary users likely to meet the needs of other users (employees, customers, governments and agencies)  Management of reporting entity, also interested in information about entity  Management need not rely on general purpose financial reports because is

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liable to obtain or access additional infornation internally Specific Objectives of Financial Reporting  Provide information that is useful for decision making  Place more emphasis on importance of providing information needed to assess management stewardship of entity economic resources  Specific objectives:  Information useful in making decisions about resource providing in entity  Information useful in assessing cash flow prospects of entity  Information about entity resources claims and changes in resources Economic Decisions  Existing and potential investors and general purpose financial reports in order to enable them decisions to buy, sell or hold  Lenders and other creditors need general purpose financial reports in order to enable them in decisions to provide loans and other forms of credit Assessing Cash Flow Prospects  Decision exist and potential investors about buy, sell or hold equity instruments depend on returns they expect from investments (devidends)  Provide or settle loans and other forms of credit depend on principal and interest payments or other returns they expect  Financial report should provide infos useful in assessing amount, timing and uncertainty of prospects for future net cash flows to entity Economic Resources and Claims  Provide information about financial posistion of reporting entity  Financial position is infos about entity’s economic resources and claims against reporting entity  Economic resources are assets and claims are liabilities and equity of entity  Financial position comprises assets, ...