ACCOUNTING STANDARDS

 Objectives of Financial Reporting

IASC (June 29 1973)

International Accounting Standards Committee

IAS
International Accounting Standards

Objective:
> Uniformity of accounting principles all around the world

IASB (April 1,2001)

International Accounting Standards Board

IFRS
International Financial Reporting Standards

PRC
Professional Regulation Commission

BOA
Board of Accountancy
> gumagawa ng board exam
> incharge sa education ng accountancy

Recommended to make

FRSC (created by PRC)

Financial Reporting Standards Councils
> To assist BOA in carrying out its powers and functions

Main Function:
Establish and improve accounting standards that will be generally accepted in the Philippines

Promulgated accounting standards aka

Philippine Accounting Standards (PAS) (old)
Philippine Financial Reporting Standards (PFRS) (new) January 1,2005

Pinalitan lang yung Letter I (International) sa Letter P (Philippine)

CONCEPTUAL FRAMEWORK
> Summary of the terms and concepts that underlie the preparation and presentation of financial
statements
> definition, concepts, policy, foundation ng accounting
> used as basis for the development and revision of accounting standards

Basic Purpose:
> Assist IASB to develop IFRS
> Assist preparers of FS to develop consistent accounting policy when no standards applies to a
particular transaction

*Kapag walang standards pumunta ka sa conceptual framework

Ex. crypto currency
= intangible assets

> Assist preparers of FS to develop accounting policy when a standard allows a choice of an
accounting policy.
 Tinuturuan kang mamili
> Assist all parties to understand and interpret IFRS.

IFRS = CONCEPTUAL FRAMEWORK

User of Financial Information

> Primary Users
 Crush mo yan haha

1. Owner / Investors
 the one who puts in capital in a business
2. Manager
 the one who is responsible for running the business
3. Lenders and other creditors
 Assesses the paying ability of the business (borrower)
4. Supplier
 offers goods for the sale of the business

> Other Users

 Nagbebenefit din sila

1. Employees
 Assesses the ability of the company to grant their demands
2. Customers
 Assesses the ability of the company to continuously supply the goods they buy
3. Government
 Assesses the correct payment of taxes and filing of all required documents
SCOPE OF THE REVISED CONCEPTUAL FRAMEWORK
Chapter
1. Objective of Financial Reporting
2. Qualitative Characteristics of Useful Financial Information
3. Financial Statements and Reporting Entity
4. Elements of Financial Statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of Capital and Capital Maintenance

OBJECTIVE OF FINANCIAL REPORTING

> Why | Purpose | Goal of accounting
> Provide financial information for decision making
- Financial Statements
 > Specific Objectives
- Provide information useful in making decisions about providing resources to the entity
Statement of Changes in Equity

- Provide information useful in assessing the cash flow prospects of the entity
Statement of Changes in Cash Flow
- Provide information about entity resources, claims and changes in resources and claims
Statement of Changes Financial Position Income Statement

LIMITATIONS OF FINANCIAL REPORTING

> Do not and cannot provide all information that existing and potential investors, lenders and other
creditors need.

> Not designed to show the value of an entity but these reports provide information to help the
primary users estimate the value of the entity.

> Intended to provide common information to users and cannot accommodate every request for
information.

> Based on estimate and judgment rather than exact depiction.

CHAPTER 2

Qualitative Characteristics
 Qualities or attributes that makes information useful to users

Classifications:
(a.) Fundamental QC
 Hindi pwedeng mawala
 Content / substance

(b.)Enhancing QC
 Increases the usefulness of the information
 Presentation / form

FUNDAMENTAL
1. Relevance- capacity of information to influence a decision
Ingredients:
1. Predictive Value- help users correctly forecast outcome of events
2. Confirmatory Value- enables users to confirm or correct earlier expectations
Example:
1st quarter= 2M (confirmatory value)
4
Whole Year = 8M (predictive value)

 Materiality / Doctrine of Convenience - if omission, misstatement, obscuring of info

could reasonably affect decision users
 (2) Faithful Representation- actual effects of transactions are properly accounted for and
reported.

Ingredients:
1. Completeness- presented to facilitate understanding and avoid implication.
Standard of adequate disclosure
 All significant and relevant information shall be report

2. Neutrality- FS should not be prepared to favor any party.

 Free from bias and fair

3. Free from Error- walang error walang omissions

Substance over form- present transactions based on economic substance and not their legal forms

Prudence- exercise care and caution when dealing with uncertainties in the overstatement of FS
items. MAG-INGAT KA!!! (opo mag iingat po)
Asset / Income - X overstated
Liability / Expenses - X understated

Conservatism - in case of doubt choose alternative that has the best effect on equity

ENHANCING QC (VCUT)
1. Verifiable- different observers could reach consensus
 Using same evidences, same conclusion
 Results can be duplicated by using the same method

2. Comparability- users must identify and understand similarities and differences

Within the entity- Horizontal Comparability / Intracomparabilty

Across entities- Dimensional Comparability / Intercomparability

Consistency- same method from period to period

3. Understandability- readily understandable by users

- users are expected to have a reasonable understanding of economic activities

4. Timeliness- having information available

Cost- constraint- benefit derived from the information should exceed the cost incurred in obtaining
information.

CHAPTER 3: FINANCIAL STATEMENTS AND REPORTING ENTITY

Objectives
  Provide information about economic resources of the reporting entity, claims against the entity
and changes in the economic resources and claims
Economic resources- Assets
Claims against the entity- Liabilities
Changes in the economic resources and claims- Equity (Income/ Expenses)

Reporting Entity
 Entity that prepares financial statements

Reporting Period
 Period of financial statements
 Annual basis (Jan 1- Dec 31)

ACCOUNTING ASSUMPTION
 Going concern / Continuity Assumptions
 Accounting entity is viewed as continuing in operation indefinitely in the absence of
evidence in the country
 Explicit assumption
“You are my forever” ayiiee haha

 Accounting Entity Assumption / Business Entity Assumption

 Pera mo hiwalay sa business
 Entity is separate from the owners, managers, and employees who constitutes the entity
 Implicit assumption (hindi sinabi silent)

 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 on financial positions, financial
performance, and cash flows.
 Implicit assumption
 Hatiin mo huwag mong pahirapan ang sarili mo (monthsary raw ba eh haha)
 Calendar year - ending on December 31
 Fiscal year- ending any on any month except December 31

 Monetary Unit Assumption

 Elements of FS should be stated in terms of a measure (Philippine Peso)
 Implicit assumption

CHAPTER 4: ELEMENTS OF FINANCIAL STATEMENTS

 Financial Position or Balance Sheet

 Assets
 Liability
 Equity
 Financial Performance or Income Statement
 Income
 Expense
Assets
 Present economic resource controlled by the entity as a result of past events
(right) ability to direct the use
Ability to prevent others from using

Liability
 Present obligation of an entity to transfer an economic resource as a result of past
events (duty/ responsibility) pay cash, deliver goods, render services,
Exchange economic resources on unfavorable terms

Equity
 Residual interest in the assets after deducting liabilities
 Yan nalang natitira
 Assets - Liabilities = Equity

Income
 Increases in assets or decreases in liabilities that results in increase in equity, other than those
relation to contributions from equity holders
 Revenue + Gains = Income

Revenue
 Arises in the course of ordinary activities

Gains
 Other items that meets the definition of income but not aries in the course of ordinary
activities
 Gain on sale
Expenses
 Decrease in asset or increase in liabilities that result in decreases in equity, other than those
relating to distributions to equity holders.
 Expense + Loss = Expense

Expense
 Arises in the course of ordinary activities.

Losses
 Do not arise in the course of ordinary regular activities
 Loss on Sale

Chapter 5 RECOGNITION AND DERECOGNITION

Recognition
 process of capturing for inclusion in the Financial Statement

Accrual Basis
 Recognize income when earned regardless of collection
 Recognize expense when incurred regardless of payment.

Expense
 Matching Principle
 cost incurred in order to generate revenue must be recognize in the same period.

* Cost & Effect Association

 expense recognize when the revenue is recognized
 strictly matching concept
 Inventory

Cash AR. COGS

Sales. Inventory

*Systematic & Rational Allocation.

 cost are expense by allocating over the period benefited
 X direct relationship w/ revenue
 Depreciation (8 years or more)

* Immediate Recognition,
 Expensed outright because of difficult associating w/ revenue.
 wala na talaga
 Salary Expense

Derecognition
 removal of all or part from the Financial Statement


Chapter 6 MEASUREMENTS

Measurements
 quantifying in monetary terms the element of FS

Categories:
1. Historical Cost

 Cost incurred in acquiring or creating the asset

 Entry price / Entry value

Asset = consideration paid + transaction Cost

Liability= Consideration received + TC.

2. Current Value
a) Fair Value
 price that would be received / paid between market participants.
 Exit Price / Exit value
 Liab = present Value
 Ibebenta mo

b.) Value in Use (Asset)

 Present value of cash flows that is expected to derive from continuing use of the asset.
 Includes TC on disposal of asset
 Exit Price / Exit Value

c.) Fulfillment Value (Liability)

 PV of cash flows that is expected in paying or settling the liability.
 Includes TC on settlement on liability
 Exit Price / Exit Value

d.) Current Cost

 Replacement cost

Chapter 7 ELEMENTS OF FINANCIAL

Classification
 sorting of assets, liab, equity, income, expenses

Aggregation
 Adding together A, L, E, I, E

Chapter 8 PRESENTATION AND DISCLOSURE

2 Approaches in determining Net Income

1. Transaction approach.
 Normal
2. Capital Maintenance Approach.
 net income occurs in excess of beg. capital.

(1) Financial Capital

 net assets are based on monitary amount investment.(Historical Cost)

January 1. December 31
Asset 1,500,000 2,500,000
Liab. 1,000,000. 1,200,000
Add. 400,000
Withdrawal. . 300,000

A= L + E
A-L=E

1,500,000. 2,500,000
(1,000,000). (1,200,000)
500,000. -. 1,380,000. = 800,000

Add. 400,000
NI. ? 700,000
With. (300,000)
Equity 800,000

(2) Physical Capital

 net asset is based on physical productive capacity to produce goods and/or services (cc)

Addt'l Info: Equity beg. has a current Cost of 800,000

1,300,000
(800,000)
500,000

400,000
? 400,000
(300,000)
500,000

FINANCIAL POSITION
Financial Statements
 Means by which the information accumulated and processed in financial accounting is
periodically communicated to the users
 End product/ main output of accounting process

General purpose
 Prepared for use by the general public

Objectives
 Provide information about the financial position, financial performance and cash flows of an
entity that is useful to a wide range of users in making economic decisions

Responsibility
 Management has the primary responsibility for the preparation and presentation of FS

COMPLETE SET OF FS
 Statement of financial position
 Income statement & statement comprehensive income
 Statement of changes in Equity
 Statement of Cash flows
 Notes

GENERAL FEATURES
Going Concern / Continuity
  Accounting entity is viewed as continuing in operation indefinitely in the absence of evidence in
the contrary

Accrual Basis
 Recognize income when earned regardless of collection
 Recognize expense when incurred regardless of payments

Materiality
 Depends on the relative size and nature of omission

Offsetting
 Gen Rule:
 Offsetting is not allowed
 Exception:
 If permitted by PFRS

Frequency
 Annual
Uniformity
 Consistency in presentation

Fair Presentation
 Achieved if financial statements are prepared in accordance with PFRS
 Inappropriate accounting policies
 Cannot be rectified by the disclosure in the notes

Comparative Information
 Present current period figures along with figures from the preceding period
 Third statement of financial position?
 Applied an accounting policy retrospectively
 Made retrospective restatement of items in the financial statement
 Reclassification should be disclosed

IDENTIFICATION OF FS
 Name of the Reporting Entity
 Date of the end of the reporting period or the period covered by the financial statements
 Presentation Currency

STATEMENT OF FINANCIAL POSITION

 Shows the 3 elements of financial position, namely assets. Liabilities and equity
 Historical Values are presented
 Used to evaluate liquidity and solvency
Liquidity
 Ability to meet currently maturing obligation
Solvency
 ability to meet long term maturing obligations

Current Assets
 Cash or Cash equivalents unless restricted or used to settle a liability for at least 12 months
after the reporting period
 Asset is for trading / in the course of business (inventory)
  Expects to realize assets within the after the reporting period (Accounts Receivable)
 Intends to use the assets within the normal operating cycle (supplies)

Commonly presented in the order of liquidity

 Unless there is an another way that provides information that is more reliable and relevant
Cash, Accounts receivable, Inventories

Non-Current Assets
 Not current assets

Current Assets
 Expected to be settled within the normal operating cycle
 Liability is for trading
 Due to be settled within twelve months after the reporting period
 Entity does not have an unconditional right to defer settlement of the liability for at least 12
months after the reporting period
 Ex: Accrued expense - interest payable

Current Assets
 Not current liabilities

Currently maturing long term debt

 Currently liability
 Except
 An agreement to refinance or reschedule the payment on a long term basis was made
on or before the reporting period
 The entity has a discretion to refinance the obligation on a long term basis for at least
12 months after the reporting period

Covenants
 Attached to borrowing arrangements which represent undertakings by the borrower

Breach of covenants
 Current liabilities
 Non-current if
 The lender has agreed on or before the end of the reporting period to provide grace
period for ending at least 12 months after the end of the reporting period

Equity
 Residual interest in the assets of the entity after deducting all of the liabilities
 Net assets

Terms
Owners’ Equity - Sole Proprietorship
Partner’s Equity - Partnership
Share’s Equity- Corporation

Statement of Comprehensive Income

Comprehensive Income
 Change in equity during a period resulting from transactions and other events, other than
changes resulting from transactions with owners in their capacity as owners
Components:
 Profit or Loss (Net Income)
 Other Comprehensive Income

OTHER COMPREHENSIVE INCOME

 Items of income and expense including reclassification adjustments that are not recognized in
profit or loss as required or permitted by PFRS

Components:
 Gain / Loss from translating financial statements of a foreign operation
 Unrealized gain / loss on derivative contracts designated as cash flow hedge
 Unrealized gain / loss on debt investment measured at FVOCI (bonds - utang)

 Unrealized gain / loss on equity investment measured at FVOCI (shares)

 Change in revaluation surplus (asset increases in value)
 Remeasurements of defined benefit plan (pension / retirement plan)
 Change in FV attributable to credit risk of financial liability designated at FVPL Posibilidad
na hindi ka bayaran
PL: Profit or Loss RE: Retained earnings
STATEMENT OF CHANGES IN EQUITY
 Residual interest in the assets of an entity after deducting all of the liabilities
Net assets
 Assets - Liabilities

Statement of changes in equity

 Shows movements in the elements or components of equity

 retained earnings

ACCOUNTING POLICY

 Specific principle, basis, convention, rule, and practice used by an entity in preparing and
presenting the financial statements

Change in Accounting Policy

 An entity adopts a GAAP which is different from the one they are using currently

 Change in the method of inventory pricing (FIFO, Weighted Average)

 Change in the method of accounting for long term construction contract
 The initial adoption of policy to carry assets at revalued amount
 Change from cost model to fair value model in measuring investment property
 Change to a new policy resulting from requirements of a new PFRS

WHY?
 Required by an accounting standard
 Change will result to a more relevant or reliable information
Treatment
 Retrospectively / Retroactively
 Applying the new accounting policy as if that policy had always been applied
  Any change is reported as adjustment to the opening balance of Retained Earnings in
the earliest period presented.
 Prospectively
 Applying the new accounting policy after the date of change
 Only used when retrospective application cannot be used (1st year - operation)

 No Specific accounting standard

 Select in the order of priority:
 Requirements of current standards dealing with similar matters
 Definition, recognition criteria and measurements concepts in the Conceptual
Framework
 Most recent pronouncements of other standards - setting bodies that use a similar
Conceptual Framework, other accounting literature and accepted industry practices

Change in Reporting entity

 Change in an entity’s nature and reports in such a way that the FS are in effect those of a
different reporting entity
- Changing the specific subsidiaries comprising a group of entities
- Change in accounting principles

FINANCIAL INSTRUMENT types of financial instruments

 Any contract that gives rise to both a financial asset of one entity and a financial liability or
equity instrument of another entity at least 2 parties

Financial Asset
 Cash
 Contractual right to receive cash or another financial asset from another entity
 Contractual right to exchange financial instruments with another entity under conditions that
are potentially favorable
 Equity instrument of another entity
Example:
 Cash
 Receivables
 Option to purchase shares at less than market price
 Investment in shares or equity instruments

Nonfinancial Asset

 Physical Assets
 Inventory
 Intangible assets
 Patent
 Prepaid Expense
 Future economic benefit not cash or another financial asset
 Right of use asset
 Does not give rise to present right to receive cash or another financial asset

Financial Liability
 Deliver cash or other financial assets to another entity
  To exchange financial instrument with another entity under conditions that are potentially
unfavorable
 Payables

Nonfinancial Liabilities
 Deferred Revenue
 Warranty Obligations
 outflow of economic benefits is delivery of goods and services, not cash or another
financial asset
 Income Tax Payable
Imposed by law, not by contract
 Constructive Obligations
 Not by contracts

Equity Instrument
 Any contract that evidences residual interest in the assets of an entity after deducting all of the
liabilities

Redeemable Preference share

 Mandatory redemption by the issuer for a fixed or determinable future date
 Gives holder the right to require the issuer to redeem the instrument at a particular date for a
fixed or determinable amount

Financial Liability
Dividends
 Interest expense

Contract that will be settled by the entity’s shares

 Equity or Financial Liability?

 Fixed shares + Fixed Price

 Equity
 Share Options
 Variable Shares + Fixed Price
 Financial Liability
 Contract for issuance of shares equal to 500,000
 Fixed shares + Variable Price
 Financial liability
 Contract for issuance of fixed amount shares equal to 100 ounces of gold

DERECOGNITION
 Financial Asset
 Contractual rights to the cash flows of the financial asset have expired, or
 Financial asset has been transferred and the transfer qualities for derecognition of risks
and rewards of ownership
 Financial Liability
 Extinguished (Paid)

FINANCIAL INSTRUMENTS RISKS

 Credit Risk
  Risk that one party will cause a financial loss by failing to discharge the obligation
 Allowance for doubtful accounts
 Liquidity Risk
 Risk that the entity will encounter difficulty in meeting obligations
 Market Risk
 Risk that the fair value will fluctuate
Types:
 Currency risk
 Interest Rate Risk
 Price risk