Conceptual Framework AND Accounting Standard - Chapter 1-6 Reviewer PDF

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CONCEPTUAL FRAMEWORK AND ACCOUNTINGSTANDARDSCHAPTER 1: THE NEED FOR FINANCIALREPORTINGIntroductionInformation has to be acquired, processed, analyzed and communicated for formulation of better decisions.Accounting practices have to be continuously modified to cope with the changes in user’s informat...

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CONCEPTUAL*FRAMEWORK*AND*ACCOUNTING* STANDARDS* ® CHAPTER*1:*THE*NEED*FOR*FINANCIAL* REPORTING* ® Introduction* Information*has*to*be*acquired,*processed,* analyzed*and*communicated*for*formulation*of* better*decisions.** Accounting*practices*have*to*be*continuously* modified*to*cope*with*the*changes*in*user’s* information**

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Review*of*the*Nature*of*Accounting*and*the*users* of*the*Accounting*information*

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à*The*accounting*process*has*the*ultimate*purpose* of*generating*general*purpose*financial*statements* –*for*formulation*of*economic*decisions.*

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External*Users*and*Internal*Users*

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Internal*Users*–*users*who*have*ready*access*to* specific*types*of*accounting*information.* ® Active*owners*of*business*–*for*internal* decision-making*purposes.* ® To*evaluate*the*entity’s*performance* ® Make*financial*and*operational*plans*and* implement*business*decisions.* ® To*continue*or*to*liquidate,*to*infuse*additional* investments,*to*borrow*from*creditors*and*to* change*business*methods*and*strategies.* Financial'reporting'(New'Conceptual'Framework' issued'March'2018),'focuses'not'on'the'needs'of'the' internal'users'but'on'the'information'needs'of'those' who'do'not'have'ready'access'to'readily'available' information'about'an'entity.' External*Users*–*users*other*than*the*management* of*the*entity*do*not*have*ready*access*to*financial* reports*and*rely*heavily*on*negotiations*and* regulations*to*obtain*information*about*a*business* enterprise.** ® Inactive*owners*–*delegate*the*stewardship*of* the*enterprise’s*resources*to*the*management;* use*f/s*to*keep*track*of*the*enterprise*financial* condition*and*financial*performance*to*make*

decisions*whether'they'should'hold,'or'sell'their' equity'interests.' Creditors*and*lenders*–*assess*the*latter’s* ability*of*the*enterprise*to*pay*its*loans*and*the* interest.* Suppliers*–*determine*whether*the*cost*of* such*goods*and*services*will*be*pain*when*due;* dependent*upon*the*continuation*of*the* enterprise*as*a*major*customer.* Customers*–*interest*in*the*information*about* the*continuance*of*an*enterprise.* Potential*investor** Taxing*authorities*–*to*collect*the*correct* amount*of*taxes,*to*determine*taxing*policies* and*to*set*basis*for*national*income*and*similar* statistics.* Regulatory*bodies*(Government)*–*whether* the*enterprise*comply*with*prescribed*rules* and*regulations* Employees*and*employee*unions*–*to*assess* the*latter’s*ability*to*provide*remuneration,* retirement*benefits,*and*employee* opportunities.** Financial*analysts* Financial*advisers*and*consultants* General*public*-**trends*and*the*range*of* business*entities*economic*activities.*

Direct*Users*and*Indirect*Users** Direct*Users*–*Users*with*direct*interest*use* financial*information*as*a*tool*to*protect*their*own* interest*in*the*enterprise.** ® ® ® ® ® ® ®

Owners* Managers* Creditors* Suppliers* Customers* Employees* Taxing*Authority*

Indirect*Users*–*to*provide*or*protect*the*interest* of*a*direct*users.* ® Regulatory*agencies*-SEC*–*Protect*the* interest*of*the*investors*and*the*public.* ® Labor*union*–*protect*the*interest*of*the* employees.* ® Financial*and*legal*consultants*–*provide* advice*and*assistance*to*their*clients.**

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Accounting*primarily'provide'information'that'can' be'measure'and'expressed'in'terms'of'units'of' measure.'–'Monetary*unit'

®* Cost*Accounting** à*Concerned*with*the*measurement*and* recognition*of*cost*of*services*provided*or* products*manufactured.* à*Sometimes*considered*as*a*subset*of* management*accounting;*refers*to*the* recording,*presentation,*and*analysis*of* manufacturing*costs.** * ®** Tax*Accounting*-*helps*clients*follow*rules*set* by*tax*authorities;*includes*tax*planning,* computation*of*tax*and*preparation*of*tax* returns.**

Reporting*entity*(Accounting*entity)*may*be:* -

Business*enterprise* Government*unit* Non-profit*organization* Individual* A*unit*within*an*enterprise* A*group*of*entities,*and* Any'other'unit'that'is'considered'to'have'a' personality'different'from'the'personality'of'its' owners,'members'and'employees.'

Accounting*entity*concept* à'Concept*that*separates*the*personality*of*the* enterprise*to*its*owners*and*other*stakeholders* à*Capable*of*controlling*its*own*economic* resources*and*incurring*economic*obligations.* * BRANCHES*OF*ACCOUNTING* * ® Financial*Accounting** à*Broadest*branch*of*accounting* à*Focusing*on*the*need*of*external*users* à*Primarily*concerned*with*the*recognition,* measurement*and*communication*of* economic*resources,*economic*obligations*and* changes*in*economic*resources*and*economic* obligations.** à*Complete*set*of*an*enterprise’s*Financial* Statements** à*Should*conform*to*accounting*standards*as* developed*by*standard*setting*bodies.* * The'main'purpose*of*the*accounting*standards'is' to'ensure'the'relevance'and'reliability'provided'to' the'external'users.' * ®** Management/Managerial*Accounting** à'Serves*the*information*needs*of*the*internal* users.** à*Making*and*implementing*short-term*and* long-range*plans* à*The*information*provided*is*not'structured' and'is'not'necessarily'conforming'to'the' accounting'standards.'' àInvolves*financial*analysis,*budgeting*and* forecasting,*cost*analysis,*evaluation*of* business*decisions,*and*similar*areas.** *

* ®** Government*Accounting*–Deals*with*how*the* funds*of*the*government*are*recorded*and* reported.*(receipts*and*dispositions*of*gov’t* funds.)* * Bookkeeping*–*refers*only*to*one*phase*of* accounting,*the'recording'phase.* * Auditing** à *An*independent*examination*of*the*financial* statements*conducted*by*a*certified*public* accountant*for*the*purpose*of*rendering*an*opinion* as'to'the'fairness'of'the'presentation*of*the*f/s.** * o ** External*Auditing*-*refers*to*the*examination* of*financial*statements*by*an*independent*CPA* (Certified*Public*Accountant)*with*the*purpose* of*expressing*an*opinion*as*to*fairness*of* presentation*and*compliance*with*the* generally*accepted*accounting*principles* (GAAP).** o ** Internal*Auditing*-*deals*with*determining*the* operational*efficiency*of*the*company* regarding*the*protection*of*the*company’s* assets,*accuracy*and*reliability*of*the* accounting*data,*and*adherence*to*certain* management*policies.** * Other*Branches*of*Accounting* ®* Accounting*Education*-*deals*with*developing* future*accountants*by*creating*relevant* accounting*curriculum.** ®** Accounting*Research*-*focuses*on*the*search* for*new*knowledge*on*the*effects*of*economic* events*on*the*process*of*summarizing,* analyzing,*verifying,*and*reporting* standardized*financial*information,*and*on*the* effects*of*reported*information*on*economic* events.**

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FINANCIAL*REPORTING*AND*THE*STANDARDSETTING*PROCESS* à*Each*country*communicates*financial*reports* based*on*the*accounting*principles*in*a*particular* country*–*business*transactions*became* complicated.* Led*to*the*creation*of*the*International* Accounting*Standards*Committee*(IASC)*in*1973.** From*the*date*of*its*organization*up*to*2001,*the* IAS*Committee*developed'a'set'of'uniform'global' accounting'standards,*called*International* Accounting*Standards*(IAS).* The*IAS*Committee*was*RECONSTITUTED*in*2001* as*the*International*Accounting*Standards*Board* (IASB),*under*the*umbrella*of*the*International* Financial*Reporting*Standards*(IFRS)*Foundation.**

c. International*Accounting*Standards;*and* d. Interpretations*made*by*the*Standing* Interpretations*Committee*(SIC*–*the*body*that* interprets*the*works*of*IASC)* The'overall'objective'is'the'very'objective'of'financial' reporting,'based'on'the'mission'statement'of'the'IFRS' Foundation;*that*is*to*communicate*financial* information*that*achieves*transparency,* accountability,*and*efficiency*to*financial* markets*around*the*world.* IFRS*Standards*bring'transparency'by'enhancing' the'international'comparability'and'quality'of' financial'information,'enabling'investors'and'market' participants.' Financial'reporting'practices'are'dynamic'–' therefore'accounting'standards'shall'continuously'be' reviewed,'amended,'and'revised.''

IFRS*Foundation*–*a*non-profit,*public*interest* organization*established*to*develop*a*single*set*of* high-quality,*understandable,*enforceable*and* globally'accepted'accounting'standards*–*IFRS* Standards.**

The*Standard*Setting**Process*Adopted*by*the* IASB1*

Immediately*after*its*reconstitution,*the*IASB*took* the*initiative*to*undertake'an'improvements'project' in'the'light'of'queries'and'criticisms'raised'in' relation'to'the'IAS'by'securities'regulators,' professional'accountants,'and'other'interested' parties.'The*objective*of*the*improvements*project* were*to*reduce*or*eliminate*alternatives,* redundancies,*and*conflict*within*the*IAS,*to*deal* with*some*convergence*issues,*and*to*make*other* improvements.**

à*Primary*functions*of*the*IFRS*Foundation*is*to* govern'and'oversee'the'activities'of'its'standardsetting'body,'which'is'IASB.'*

Accounting*standards*that*originated*from*the* works*of*IASC,*even*improved*or*revised*by*the* IASB,*are*known*as*International*Accounting* Standards.* The*standards*that*originated*from*the*works*of* IASB*are*called*International*Financial*Reporting* Standards*(IFRSs);*IFRS*includes:* a. Specific*International*Financial*Reporting* Standards;* b. Interpretations*made*by*the*International* Financial*Reporting*Interpretations*Committee* (IFRIC,*the*body*that*interprets*the*works*of* IASB)*

à*The*IFRS*standard*are*required*in*more*than* 140*jurisdictions*(countries)*

IASB*follows*a*due*process*in*the*development*of* financial*reporting*standards.*Stages:** 1. Setting*the*agenda* 2. Planning*the*project* 3. Developing*and*publishing*the*discussion* paper*–*discussion*of*the*working*group,* includes*a*comprehensive*overview*of*the* issue,*possible*approaches*in*addressing*the* issue;*the*preliminary*views*of*its*authors*or* the*IASB*and*an*invitation*to*comment.** 4. Developing*and*publishing*the*exposure* draft*–*the*main*vehicle*to*consult*the* interested*public.*Comment*period*for*major* projects*is*120*days,*IFRIC*Interpretations*is* usually*60*days.* - Make'revisions'and'publish'second'exposure' draft.* 5. Developing*and*publishing*the*standard;* and* 6. Afterwards,*the*standard*is*issued.*

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The*IFRS*are*principle*based*rather*than*procedure* based.**

Commission*on*Audit,*and*the*accredited* professional*organizations*of*CAs*in*the*Phil.**

The*Standard*Setting*Process*in*the*Philippines*

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Before*1981,*the*Philippines*did*not*have*a*formal* process*for*the*development*of*accounting* practices.*

FRSC*formed*the*Philippine*Interpretations* Committee*(PIC)*in*November*2006*to*provide* council*assistance*in*establishing*and*improving* financial*reporting*standards*in*Ph.**

The*accounting*principles*of*the*PH*is*mostly*based* on*the*accounting*practices*and*principles* developed*by*the*United*States*of*America.* In*late*1981,*the*Philippine*Institute*of*Certified* Public*Accountants*(PICPA),*the*accredited* professional*organization*of*CPAs*in*the*PH,* organized*the*Accounting*Standards*Council*(ASC)* that*formalized*the*standard*setting*process*in*the* country.* The*ASC*was*formed*on*November*18,*1981*to* study*the*standard*accounting*standard-setting* process*in*the*PH.** The*accounting*standards*developed*by*the*ASC* were*known*as*the*Statement*of*Financial* Accounting*Standards*(SFAS)*–*standards*based*on* existing*practices*–*statements*by*International* Accounting*Standards*Committee*(IASC)*and*the* Financial*Accounting*Standards*Board*(FASB)*of* USA.** ASC*composed*of*8*members:*PICPA,*SEC,*BSP,*BoA,* and*Financial*Executives*of*the*Phil.** 1997*–*ASC*made*a*decision*to*move*fully*to*the* IAS.*(1997-200*transition)* 2001*–*it*adopted*most*of*the*standards*that*had* been*developed*by*the*IASC.** 2005*–*full*adoption*of*IAS*in*the*Phil.** The*Board*of*Accountancy*–*body*that*regulates*the* practice*of*accountancy*in*the*Phil.*Established*in* 2006*the*Financial*Reporting*Standard*Council* (FRSC)*to*replace*and*take*over*the*ASC.** Philippine*Accountancy*Act*(RA*9298)*–*the*FRSC* shall*be*composed*of*a*chairman*and*14*members:* BoA,*SEC,*Bangko*Sentral*ng*Pilipinas,*Bureau*of* Internal*Revenue,*Financial*Executives*of*the*Phil.,*

Implementations*guidelines:* a. Specific*Philippine*Financial*Reporting* Standards*(PFRS),*which*are*adopted*from* the*IFRSs;* b. Philippine*Accounting*Standards*(PAS),* which*are*adopted*from*the*IASs;*and* c. Philippine*Interpretations,*which*are* adopted*from*the*interpretations*of*the* IFRIC*and*the*SIC*and*the*interpretations*of* the*PIC.* PFRS*developed*through*a*due*process*that* involves*members*of*PICPA,*financial*executives,* regulatory*authorities,*members*of*the*academe,* etc.*Involves*the*following*steps:* 1. Consideration*of*the*pronouncement*of* IASB;** 2. Formation*of*a*task*force,*when*deemed* necessary,*to*give*advice*to*the*FRSC;* 3. Issuing*for*comment*and*exposure*draft* approved*but*a*majority*of*the*FRSC* members;*comment*period*will*be*at*least* 60*days,*but*not*less*than*30*days*is* considered*appropriate*by*the*FRSC;* 4. Consideration*of*all*comments*received* within*the*comment*period,*when* appropriate,*preparing*a*comment*letter*to* the*IASB;*and* 5. Approval*of*a*standard*or*an*interpretation* by*a*majority*of*the*FRSC*members.** * * * * * * * * * *

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CHAPTER*2:*THE*CONCEPTUAL*FRAMEWORK* FOR*FINANCIAL*REPORTING* Purpose*and*Status*of*the*Conceptual* Framework* Conceptual*Framework*–*describes*the*objectives* of,*and*the*concepts*for,*general*purpose*financial* reporting.*

à*To*evaluate*the*enterprise’s*liquidity,*solvency,* profitability*and*operating*and*financial*flexibility.* Liquidity*–*availability*of*cash*in*the*near*future** Solvency*–*availability*of*cash*over*the*longer*term* to*meet*financial*commitments*as*they*fall*due.* Profitability*–*ability*of*the*enterprise*to*generate* cash*flows*from*its*existing*resource*base.**

The*purpose*of*Conceptual*Framework*is*to:* a. Assist*the*IASB*to*develop*International* Financial*Reporting*Standards*(IFRS)*that* are*based*on*consistent*concepts.* b. Assist*prepares*to*develop*consistent* accounting*policies*when*no*standard* applies*to*a*particular*transaction*or*other* event,*or*when*a*standard*allows*a*choice*of* accounting*policy;*and* c. Assist*all*parties*to*understand*and* interpret*the*Standards.**

Operating*and*financial*flexibility*–*ability*to* adjust*to*unexpected*downturns*in*the*economic* environment.* Users*are*also*interested*on*the*information*about* general*economic*conditions,*political*events,*etc.** Information'about'and'entity’s'economic'resources' and'claims.' Information'on'changes'in'economic'resources'and' claims'

The'Conceptual'framework'is'NOT'PRFS'nor'IFRS.'' Scope*of*the*Conceptual*Framework* -

8*chapters* Based*on*the*most*recent*revise*Conceptual* Framework*for*Financial*Reporting*effective* January*1,*2020.*

CF*Chapter*2:*The*Qualitative*Characteristics*of* Useful*Financial*Information* ®*Qualitative*characteristics*are*classified*in*two:* à*Fundamental** à *Enhancing* Fundament*Qualitative*Characteristics*

CF*Chapter*1:*The*objective*of*General*Purpose* Financial*Reporting* à*Financial*reports*are*directed*toward*the* common*information*need*of*the*existing*and* potential*investors,*lenders*and*other*creditors.* The*following*also*uses*the*financial*reports:* ® Employees*–*information*about*the* stability*and*profitability*of*their* employers.* ® Government*and*its*Agencies*–*to* regulate*the*activities*of*the*enterprise*and* determine*the*appropriate*allocation*of* resources*through*taxation.* ® Public*–*Trends*and*recent*development.* The*users*of*general*purpose*financial*reports*have* common*information*needs:*

® Relevance*–*the*ability*of*the*information* to*influence*a*decision.* ® Financial*information*has*predictive* value*if*it*can*be*used*as*an*input*to* processes*employed*by*users*to*predict* outcomes.* ® Financial*information,*on*the*other*hand,* has*confirmatory*value*if*it*provides* feedback*(confirms*or*changes)*about* previous*evaluations.* * ® Faithful*Representation* ® Financial*information*,must*not*only* present*relevant*phenomena,*but*it*must* also*faithfully*represent*the* phenomena*that*it*purports*to*represent.* ® Complete*depiction*includes*all* information*necessary*to*understand*the* phenomenon.*

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® Neutral*depiction*is*without*a*bias*in* the*selection*or*presentation*of*financial* information* ® Free*form*error*means*there*are*no* errors*or*omissions*in*the*description*of* the*phenomenon.*

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Classifying,*characterizing,*and*presenting* information*clearly*and*concisely.** Revenues*separate*from*gains*&*Expenses* separated*from*losses.* Information*about*complex*matters*should* not*be*excluded*from*the*f/s*simply*because* they*may*not*be*understood*by*the*users.**

Enhancing*Qualitative*Characteristics* ® Comparability*–*the*qualitative* characteristic*that*enables*the*users*to* identify*and*understand*similarities*in,*and* differences*between*at*least*two*set*of* economic*circumstances.* - Comparability*within*the*reporting*entity* for*at*least*two*reporting*periods* (Intracomparability)** - Consistency*–*application*of*the*same* period*from*perod*to*period.* - Comparability*between*and*among* enterprise’s*(Intercomparability)*is*more* difficult*to*achieve.* * ® Verifiability*–*means*that*different* knowledge*and*independent*observers* could*reach*consensus,*although*not* necessarily*complete*agreement*that*a* particular*depiction*is*a*faithful* representation.* - Information*can*be*replicated*using*the* same*measurement*methods*and*applying* the*same*process.* - Information*need*not*be*a*single*point* estimate,*as*estimates*may*be*within*a* range*of*possible*amounts.* Direct*Verification*–*Applying*techniques*and* methods*(counting*cash,*bank*statement)* Indirect*Verification*–*recalculation*using*verified* information.(FIFO)* * ® Timeliness*–*having*information*available* to*decision-makers*in*time*to*be*capable*of* influencing*their*decisions.* * ® Understandability*–*the*linkage*between* the*information*and*the*economic*decision* to*be*made*by*the*user.** * - Two*factors:*quality*of*the*information*&* quality*of*the*users.*

The*Cost*Constraint*on*Useful*Financial* Reporting* Constraint*–*A*practical*exception*to*the* application*of*sound*accounting*theory.** Financial*information*provides*certain*benefits*to* its*users*and*at*the*same*time,*involves'cost'to' provide'and'use.' The'benefits'derived'from'the'information'should' exceed'the'cost'of'providing'it.'' CF*Chapter*3:*Financial*Statements*and*the* Reporting*Entity* Objectives*and*Scope*of*Financial*Statements* The*information*presented*in*the*financial* statements*pertains*to:* a. The*entity’s*financial*position*with* recognized*assets,*liabilities,*and*equity.* b. The*entity’s*financial*performance*with* recognized*income*and*expense.** c. Information*about* - Recognized*assets,*liabilities,*income*and* expenses*including*nature*and*risks*arising* from*those*recog.*Assets*and*liabilities.* - Assets*and*liabilities*that*have*not*been* recognized* - Cash*flows* - Contributions*from*and*distributions*to* enterprise*owners;*and* - The*methods,*assumptions*and*judgements* in*estimating*amounts*presented*or* disclosed,*and*changes*in*those*methods,* assumptions*and*judgements.** Going*concern*assumption* à*An*enterprise*I*a*going*concern*and*will*continue* in*operation*for*the*foreseeable*future.** * The*Reporting*Entity* à*An*entity*that*is*required,*or*chooses,*to*prepare* financial*statements.**

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à*It*is*not*necessarily*a*legal*entity,*it*can*be:* ~*A*single*entity;* ~*A*portion*of*an*entity;*or* ~*more*than*one*entity.* * Financial'statements'of'a'reporting'entity' comprising'both'the'parent'and'its'subsidiaries'...