CONCEPTUAL FRAMEWORK
Foundation in the Preparation of Financial
Statements
Philippine Financial
Reporting
Conceptual
Standards/International
Framework
Financial Reporting
Standards
Conceptual Framework overview
Conceptual framework is a body of concepts, terms,
and assumptions that set out the concepts that
underlie the preparation and presentation of financial
statements for external users.
Conceptual Framework is not PFRS.
It serves as a general guideline in the preparation and
presentation of financial statements in the absence of
specific PFRS.
In case of conflict between Conceptual Framework
and PFRS, the conditions and requirements for
measurement and disclosure set by the latter will
prevail over former.
Aduana, N.(2019)
Purpose of Conceptual Framework
• To assist the Board in the development of future IFRSs and its review of
existing IFRS;
• To assist the Board in promoting harmonization of regulations, accounting
standards and procedures relating to the presentation of financial statement
by providing a basis for reducing the number of alternative accounting
treatments permitted by IFRS;
• To assist national standard-setting bodies in developing national standard;
• To assist preparers of financial statements in applying IFRS and in dealing with
topics that have yet to form the subject of IFRS;
• To assist auditors in forming an opinion on whether financial statements
comply with IFRS;
• To assist users of FS in interpreting the information contained in financial
statements prepared in compliance with IFRS and
• To provide those who are interested in the work of IASB with information
about its approach to the formulation of IFRS.
Conceptual Framework
Overview of the Conceptual Framework
Three levels:
First Level = Basic objective
Second Level = Qualitative characteristics and
elements of financial statements
Third Level = Recognition, measurement, and
disclosure concepts
ASSUMPTIONS PRINCIPLES CONSTRAINTS
Going concern 1. Measurement 1. Cost-Benefit Balancing
2. Balance bet. Qualitative
2. Revenue recognition
Characteristics Third level
3. Expense recognition 3. True and Fair Value
Presentation The “how”
4. Full disclosure
implementatio
QUALITATIVE CHARACTERISTICS
ELEMENTS
1. Relevance
(Predictive and Confirmatory Value)
1. Assets
2. Liabilities Second level
2. Faithful Representation 3. Equity
(Completeness, neutrality/Prudence, Free 4. Income The bridge
from error
5. Expenses between level 1
and 3
OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
Framework equity investors,
The “why” –
for Financial lenders, and other
creditors in their purpose of
Reporting capacity as capital accounting
Providers.
Scope of Conceptual Framework
The Conceptual Framework deals with
a. The objective of general purpose financial reporting
b. The qualitative characteristics of useful financial information
c. The definition, recognition and measurement of the elements
from which financial statements are constructed; and
d. Concepts of capital and capital maintenance
First Level: Basic Objective
OBJECTIVE
“To provide financial information about the reporting entity
that is useful to present and potential equity investors, lenders,
and other creditors in making decisions in their capacity as
capital providers.”
Second Level: Fundamental Concepts
Qualitative Characteristics of Accounting
Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more
useful) information from inferior (less useful)
information for decision-making purposes.
SECOND LEVEL – QUALITATIVE CHARACTERISTICS
ENHANCING
FUNDAMENTAL INGREDIENTS
QUALITIES
QUALITIES
CONFIRMATORY
VALUE COMPARABILITY
RELEVANCE
PREDICTIVE
VALUE
VERIFIABILITY
COMPLETENESS TIMELINESS
FAITHFUL NEUTRALITY
REPRESENTATION
FREE FROM
ERROR
Second Level: Fundamental Concepts
Fundamental Quality - Relevance
Relevance is one of the two fundamental qualities that
make accounting information useful for decision-
making.
Second Level: Fundamental Concepts
Fundamental Quality – Faithful Representation
Faithful representation means that the numbers and
descriptions match what really existed or happened.
Second Level: Fundamental Concepts
Enhancing Qualities
Distinguish more-useful information from less-useful
information.
ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Going concern 1. Measurement 1. Cost
2. Revenue recognition
Third
1. Periodicity
2. Accrual
Basic Elements
3. Expense recognition
4. Full disclosure
level
QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity
qualities 4. Income
5. Expenses
Framework
for Financial OBJECTIVE
Provide information
Reporting about the reporting
entity that is useful
to present and potential First level
equity investors,
lenders, and other
creditors in their
capacity as capital
Providers.
Second Level: Basic Elements
Second Level: Basic Elements
Exercise 1: Identify the qualitative characteristic(s) to be used
given the information provided. Characteristics
(a) Qualitative characteristic being Relevance
employed when companies in the Faithful representation
same industry are using the same Predictive value
accounting principles.
Confirmatory value
(b) Quality of information that confirms Neutrality
users’ earlier expectations.
Completeness
(c) Imperative for providing comparisons Timeliness
of a company from period to period.
Verifiability
(d) Ignores the economic consequences Understandability
of a standard or rule. Comparability
Second Level: Basic Elements
Exercise 2: Identify the qualitative characteristic(s) to be used
given the information provided. Characteristics
(e) Requires a high degree of consensus Relevance
among individuals on a given Faithful representation
measurement. Predictive value
(f) Predictive value is an ingredient of this Confirmatory value
fundamental quality of information. Neutrality
(g) Qualitative characteristics that Completeness
enhance both relevance and faithful Timeliness
representation.
Verifiability
Understandability
Comparability
Second Level: Basic Elements
Exercise 3: Identify the qualitative characteristic(s) to be used
given the information provided. Characteristics
(h) Neutrality and completeness are Relevance
ingredients of this fundamental quality Faithful representation
of accounting information. Predictive value
(i) Two fundamental qualities that make Confirmatory value
accounting information useful for Neutrality
decision-making purposes.
Completeness
(j) Issuance of interim reports is an Timeliness
example of what enhancing
Verifiability
ingredient?
Understandability
Comparability
Third Level: Recognition, Measurement, and
Disclosure Concepts
These concepts explain how companies should recognize,
measure, and report financial elements and events.
Recognition, Measurement, and Disclosure Concepts
ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Measurement 1. Cost
1. Going concern 2. Revenue recognition
3. Expense recognition
4. Full disclosure
Framework for
Financial Reporting
Third Level: Assumptions
Assumption
Going Concern - company to last long enough to fulfill
objectives and commitments.
Third Level: Principles
Principles
Measurement
Cost is generally thought to be a faithful representation of the
amount paid for a given item.
Fair value is “the amount for which an asset could be exchanged,
a liability settled, or an equity instrument granted could be
exchanged, between knowledgeable, willing parties in an arm’s
length transaction.”
IASB has taken the step of giving companies the option to use fair
value as the basis for measurement of financial assets and
financial liabilities.
Third Level: Principles
Revenue Recognition - revenue is to be recognized when it
is probable that future economic benefits will flow to the company
and reliable measurement of the amount of revenue is possible.
Timing of Revenue Recognition
Third Level: Principles
Expense Recognition - outflows or “using up” of assets
or incurring of liabilities (or a combination of both) during a
period as a result of delivering or producing goods and/or
rendering services.
Expense Recognition
“Let the expense follow the revenues.”
Third Level: Principles
Full Disclosure – providing information that is of sufficient
importance to influence the judgment and decisions of an
informed user.
Provided through:
Financial Statements
Notes to the Financial Statements
Supplementary information
Third Level: Assumptions
Exercise 4: Identify which basic assumption of accounting is
best described in each item below.
(a) The economic activities of FedEx Corporation
(USA) are divided into 12-month periods for the Periodicity
purpose of issuing annual reports.
(b) Total S.A. (FRA) does not adjust amounts in its Monetary
financial statements for the effects of inflation. Unit
(c) Barclays (GBR) reports current and non-current
classifications in its statement of financial Going Concern
position.
(d) The economic activities of Tokai Rubber
Industries (JPN) and its subsidiaries are merged Economic
for accounting and reporting purposes. Entity
Third Level: Principles
Exercise 5: Identify which basic principle of accounting is
best described in each item below.
(a) Parmalat (ITA) reports revenue in its income Revenue
statement when it is earned instead of when the Recognition
cash is collected.
(b) Google (USA) recognizes depreciation expense for Expense
a machine over the 2-year period during which that Recognition
machine helps the company earn revenue.
(c) KC Corp. (USA) reports information about pending Full
lawsuits in the notes to its financial statements. Disclosure
(d) Fuji Film (JPN) reports land on its balance sheet at
the amount paid to acquire it, even though the
estimated fair market value is greater. Measurement
Third Level: Constraints
Constraints
Cost – the cost of providing the information must be weighed
against the benefits that can be derived from using it.
Materiality - an item is material if its inclusion or omission
would influence or change the judgment of a reasonable
person.
Third Level: Constraints
Exercise 6: What accounting constraints are illustrated by
the items below?
(a) Willis Company does not disclose any
information in the notes to the financial Cost
statements unless the value of the information
to users exceeds the expense of gathering it.
(b) Beckham Corporation expenses the cost of
Materiality
wastebaskets in the year they are acquired.
Wiley, J.(2011)
Structure of Reporting Standards
Cover International
Setting
IAS
Philippine Standards
IFRS Principle-
PFRS Based
IAS
Interpretation
Accounting Cover
Standards PAS Philippine
Setting
Interpretation
Aduana, N.(2019)
Accounting Bodies & Issuances
Global Accounting Organization
Philippine Accounting Organization
Financial • Statement of
Accounting Financial Statement of Financial
Standards Accounting Accounting Standards (SFAS)
Board Standards (SFAS)
• Philippine
International • International Accounting Accounting
Accounting Accounting Standards Standards (PAS)
Standards Council
Committee Standards(IAS) 1- 41
(IASC) Financial • Philippine
International • International Reporting Financial
Accounting Financial Reporting Standards Reporting
Standards Standards (IFRS) Council Standards (PFRS)
Board (IASB) (FRSC) 1-17
Standard
Interpretation
Interpretation SIC & IFRIC Committee (IC) • IC & PIC
Committee (SIC)
and International Interpretations and Philippine Interpretations
Interpretations
Reporting
Interpretations
committee (PIC) • Various Numbers
Committee (IFRIC)
Aduana, N.(2019)
IFRS Affects US GAAP
• There is a clear trend toward adopting IFRS as the
single body of internationally accepted financial
reporting standards. In the next few years, thousands
of companies will move to IFRS as a primary basis of
financial reporting.
• The convergence efforts of FASB and the IASB already
have changed U.S. GAAP. As these efforts continue,
their effects on U.S. GAAP will multiply. Both boards
have issued exposure drafts relating to the near-term
convergence of their goals, and the IASB has
published several statements that narrow the
differences between U.S. GAAP and IFRS.
IFRS Affects US GAAP
The IFRS mandate will affect U.S. companies. Some
may be required to adopt IFRS to meet the reporting
requirements of an international parent or investor
company, while others may recognize the need to
voluntarily supplement their current financial reporting
with IFRS to allow for an accurate comparison with
foreign competitors.
A U.S. company will have to report under IFRS if (a) it
is the subsidiary of a foreign company that must use
IFRS; (b) has a foreign subsidiary that must report
according to IFRS; (c) has operations in a foreign
country where IFRS use is mandatory; or (d) has a
foreign investor that must report according to IFRS.
REVIEW QUESTIONS
1. IFRS is comprised of:
a. International Financial Reporting Standards and
FASB financial reporting standards.
b. International Financial Reporting Standards,
International Accounting Standards, and international
accounting interpretations.
c. International Accounting Standards and international
accounting interpretations.
d. FASB financial reporting standards and International
Accounting Standards.
REVIEW QUESTIONS
2. The objective of financial reporting places most emphasis
on:
a. reporting to capital providers.
b. reporting on stewardship.
c. providing specific guidance related to specific needs.
d. providing information to individuals who are experts in
the field.
REVIEW QUESTIONS
3. Which body from the U.S. side is similar to the IASB?
a. SEC.
b. FASB.
c. FASC.
d. FAF.
REVIEW QUESTIONS
4. General-purpose financial statements are prepared
primarily for:
a. internal users.
b. external users.
c. auditors.
d. government regulators.
PAS 1- Presentation of Financial Statements
It prescribes the basis for presentation of general purpose financial
statements to ensure comparability with the entity’s financial
statements of the previous period and financial statements of other
entities.
Requirements for presentation
Guidelines for their structure
Minimum requirements for their content
PAS 1 - Presentation of Financial Statements
• Requirements
