CONCEPTUAL FRAMEWORK AND not all business activities are accountable

ACCOUNTING STANDARDS
External and Internal Transactions
OUTLINE:
External Transactions - those economic events
● Accountancy Profession that involve one entity and another entity.
● CF: Objective of Financial Reporting
● CF: Qualitative Characteristics Internal Transactions - activities that take place
● CF: Financial Statements and entirely within the entity only. No parties are
Reporting Entity Underlying involved.
Assumptions Ex: Production and Casualty
● CF: Elements of Financial Statements
● CF: Recognition and Measurement Measuring
● CF: Presentation and Disclosure
● PFS: Statement of Financial Position - process of assigning peso amounts to
● PFS: Income Statement the accountable transactions.
● Statement of Cash Flows
Communicating
● Accounting Policies, Estimate and
Errors - the most important part of preparing and
● Events after the Reporting Period distributing accounting reports to potential
users.
- reason why accounting become so called
CHAPTER 1: “universal language of business”

ACCOUNTANCY PROFESSION Implicit in the communication process:

Definition of Accounting - Recording or Journalizing

- Classifying (Posting to the Ledger)
★ Accounting Standards Council - Summarizing (Financial Statements)

A service activity, process or science that Overall Objective of Accounting

provides quantitative information that is useful in
making economic decision. To provide quantitative financial
information about business that is useful to
★ Committee on Accounting Terminology statement users particularly owners and creditors
in making economic decisions.
An art of recording, classifying and
summarizing transactions which is likely to be An information system that measures
financial in nature. business activities, processes information into
financial reports and communicates the reports to
★ American Accounting Association decision makers.
A process of identifying, measuring and The Primary task of Accountants is to
communicating economic information to make an supply financial information so that the users
informed decision for the users. could make informed judgement and better
Identifying decisions.

- process of recognition or nonrecognition of Financial Reports tells us how well an

business activities as “accountable” entity is performing in terms of profit and loss and
events. where it stands in financial terms.
- An activity is accountable or quantifiable The Accountancy Profession
when it has an effect on assets, liabilities,
and equity.

1
 Republic Act No. 9298 - Philippine All Public Accountants and its parties are
Accountancy Act of 2004 required to register with BOA and PRC for the
practice of Public Accountancy.
A law regulating the practice of
accountancy in the Philippines. Certificate of Registration is valid for 3
years and renewable every 3 years upon
Attaining this status is equivalent to the payment of required fees.
law and medicine profession.
Three main areas of accountancy professional:
In order to qualify to practice this
profession, a person must: Finish a degree in a. Public Accounting
Bachelor of Science in Accountancy and pass b. Private Accounting
a very difficult government examination given c. Government Accounting
by The Board of Accountancy (BOA).
Public Accounting
Computer-based Examination is offered
twice a year, one in May and another one in - composed of individual practitioners, small
October, in authorized testing centers around the accounting firms and large multinational
country. organizations that render independent
and expert financial services to the
The Board of Accountancy public.
- Offer 3 kinds of Services: Auditing,
- body authorized by law to promulgate Taxation and Management Advisory
rules and regulations affecting the practice Services.
of the accountancy profession in the
Philippines. Auditing
- responsible for preparing and grading the
Philippine CPA Examination. - Attest function of independent CPAs
- has been the primary service offered by
Limitation of practice of the Public most public accounting practitioners.
Accountancy - examination of financial statements by
Independent CPA for the purpose of
Single practitioners and partnerships shall expressing an opinion as to the fairness
be registered Certified Public Accountants in with which the financial statements are
the Philippines prepared.
A Certificate of Accreditation will only be Taxation
issued to CPA in public practice only upon the
accordance with rules and regulations - Includes the preparation of annual income
promulgated by BOA and approved by tax returns and determination of tax
Professional Regulation Commission (PRC). consequences of certain proposed
Registrants should acquire a minimum of 3 business endeavors.
meaningful years of experience in any areas of - To offer this service effectively and
public practice including taxation. efficiently, public accountants must be
familiar with the tax laws and
The Securities and Exchange Commission regulations and updated changes in
(SEC) shall not register any corporation taxation law and court cases concerned
organized for the practice of public with interpreting taxation law.
accountancy.

Management Advisory Services

Accreditation to practice public accountancy
2
 - no precise coverage but is used generally technical skill and competence of the Certified
to refer to services to clients on the Public Accountant
following matters:
a. Advice on installation of computer CPD Credit Units
system All Certified Public Accountants shall be
b. Quality Control required to comply with 120 CPD Credit Units for
c. Installation and Modification of accreditation of CPA to practice the accountancy
Accounting System profession.
d. Budgeting
e. Forward planning and forecasting Then, Only 15 CPD Credit Units for
renewal of CPA License.
Private Accounting
Excess credit units earned shall not be
- Assist management in planning and carried over to the next 3 years, except for
controlling the entity’s operations. masteral and doctoral degrees.
- includes maintaining the records,
producing the financial reports, preparing Upon the age of 65 years old, CPA shall
the budgets and controlling and allocating be permanently exempted from CPD
the resources of the entity. Requirements. (only for the renewal of license,
- the highest accounting officer in an entity not for the accreditation to practice the
is called controller. profession).

Government Accounting Accounting versus Auditing

- focuses the custody and administration Accounting is essentially constructive in

of public funds. nature. On the other hand, Auditing is analytical
- process of examining all transactions
involving the receipt and disposition of Accountants will prepare the financial
government funds and property and statements while the Auditor will examine its
interpreting the results thereof. conformity with generally accepted accounting
principles.
Ex:
The work of an auditor begins when the work of
Bureau of Internal Revenue (BIR) the accountant ends.

Commission on Audit (CoA) Accounting versus Bookkeeping

Securities and Exchange Commission Accounting is conceptual and concerned

(SEC) with the “why”, reason or justification for any
action adopted while Bookkeeping is procedural
Bangko Sentral ng Pilipinas and concerned with development and
maintenance of accounting records. Also, the
“how” of accounting.
Continuing Professional Development (CPD)
Accounting versus Accountancy
Republic Act No. 10912
Accountancy refers to the profession of
Law mandating and strengthening the accounting practice while Accounting is used in
continuing professional development program for reference only to a particular field of accountancy
all regulated professions, including the such as public accounting, private accounting and
accountancy profession. government accounting.

Acquisition of advanced knowledge, skill Financial Accounting versus Managerial

and proficiency. Also, raises and enhances the Accounting

3
 Financial Accounting is the area of Role is to prepare interpretations of
accounting that emphasizes reporting to creditors PFRS for approval by the FRSC and to provide
and investors. It also focuses on general purpose timely guidance on financial reporting issues
reports known as financial statements intended not specifically addressed in current PFRS.
for internal and external users.
International Accounting Standards
Managerial Accounting is the Committee
accumulation and preparation of financial reports
for internal users only. Moreover, an area of An independent private sector body with
accounting that emphasizes developing the objective of achieving uniformity in the
accounting information for use within an entity. accounting principles which are used by
business and other organizations for financial
reporting around the world.

Generally Accepted Accounting Principles Headquartered in London, United Kingdom.

Rules, Procedures and Practices in Accounting Objectives:

The principles have developed on the a. To formulate and publish in the public
basis of experience, reason, custom, usage and interest accounting standards to be
practical necessity. observed in the presentation of financial
statements and to promote their worldwide
It is followed in the preparation and acceptance and observance.
presentation of financial statements. Like laws b. To work generally for the improvement
or political process that must be followed in and harmonization of regulations,
financial reporting. accounting standards and procedures
relating to the presentation of FS.
Purpose of Accounting Standards
International Accounting Standards Board
❖ Identify proper accounting practices for the
preparation and presentation of financial Formerly known as IASC
statements.
❖ To create a common understanding Publishes standards in a series of
between preparers and users of pronouncements called International Financial
information. Reporting Standards.
❖ To have a set of high-quality accounting
standards to ensure comparability and The standard setting process includes in
uniformity in financial statements. the correct order research, discussion paper,
exposure draft and accounting standard.
Financial Reporting Standards Council Merits of proposed standards are assessed from
a position of neutrality.
Formerly known as the Accounting
Standards Council.

Main function is to establish and improve The move toward IFRS is essential to achieve the
accounting standards that will be generally goal of one uniform and globally accepted
accepted in the Philippines. financial reporting standards. Moreover, this
standards are based on American Accounting
Approved statements are known as Standards.
Philippine Accounting Standards or PAS and
Philippine Financial Reporting Standards or
PFRS.

Philippine Interpretations Committee

Philippines Financial Reporting Standards

4
Collectively include all: - However, ang conceptual framework ay
hindI IFRS (mas mataas ang IFRS).
a. PFRS → IFRS - Nothing in the conceptual framework
b. PAS → IAS overrides any specific IFRS.
c. PIC → IFRIC - If there is any conflict, IFRS shall
prevail over CF.

CHAPTER 2:
Users of Financial Information:
CONCEPTUAL FRAMEWORK: OBJECTIVE OF
FINANCIAL REPORTING a. Primary Users - are the parties to whom
general purpose financial reports are
- Is a complete, comprehensive and single
primarily directed.
document promulgated by IFRS.
➢ Investors - concerned with the risk
- Describes the concepts for general
inherent in and return provided by
purpose financial reporting.
their investment.
- Concepts underlie the presentation and
➢ Lenders and Creditors - enables
preparation of financial statements.
them to determine whether their
- Serves as a theoretical foundation.
loans, interest and other amounts
ay kaya bang mabayaran ng may
Provides the foundation for Standards that:
utang sa kanila.

a. Contribute to transparency by
b. Other users - parties that may find the
enhancing international comparability.
general purpose financial reports useful
b. Strengthen accountability by reducing
but reports are not directed to the
information gap.
primary.
c. Contribute to economic efficiency by
➢ Employees - Interested in
helping investors.
information about stability (if worth
it ba magtrabaho) and profitability
Purposes of Revised Conceptual Framework:
of the entity (right to demand ng
salary increase).
a. To assist IASB to develop IFRS Standards
➢ Customers - continuance of an
based on consistent concepts.
entity when they have long-term
b. To assist preparers of financial statements
involvement. Para malaman nila if
na mag develop ng consistent accounting
capable ba si seller na mag
policy when no standards apply.
produce ng products or goods.
c. To assist preparers of financial statements
➢ Government and their agencies -
to develop accounting policy when
regulatory These users regulate
standard allows a choice of an acc. policy.
the activities of the entity,
d. To understand and interpret the IFRS
determine taxation policies and as
Standard ng mga prepares and users.
a basis for national income.
➢ Public - potential customers
Financial statements may assist
Authoritative Status of Conceptual Framework
the public by providing info about
trend and range of its activities.
- In the absence of a standard that applies
Ex: entities make substantial
to a transaction, kailangan i-consider ng
contributions to the local economy
management na magkaroon ng
including the number of people
conceptual framework in applying
they employ and local suppliers.
accounting policy.

5
Objective of Financial Reporting ➢ Financial performance comprises revenue,
- to provide financial information about expenses and net income or loss.
the reporting entity that is useful to primary ➢ Financial performance is the level of
users in making decisions. income earned by an entity.
- is the “why” purpose or goal of accounting. ➢ Financial performance is known as results
- Also include nonfinancial info such as of operations.
description.
Usefulness of Financial Performance:
Specific Objectives of Financial Reporting: - helps users to understand the return that
the entity has produced on economic
a. To provide info useful in making decisions resources.
about providing resources to the entity. - Past financial performance is usually
b. To provide info useful in assessing cash helpful; in predicting future returns.
flow.
c. About entity resources, claims and Accrual Accounting
changes in resources and claims. - must be measured using an accrual basis.
- Effects of transactions and other events
Economic Decisions are recognized when they occur and
➢ Investors need reports in order to help not as cash is received or paid.
them in making decisions whether to buy,
sell or hold investments. Limitations of Financial Reporting:
➢ Creditors and lenders need financial
reports to enable them in making a. Financial reports do not and cannot
decisions whether to provide or settle provide all info. (hindi need isa-isahin
loans. ang need ng external users).
b. Financial reports are not designed to
Assessing Cash Flow Prospects show the value of an entity. (Based on
➢ Decisions of investors about buying or estimate not on exact depiction).
selling depends sa returns na ineexpect c. Intended to provide common info to users
nila from their investments like dividends. and cannot accommodate every
➢ Sa lenders and Creditors naman, request.
nakadepende ‘yong decisions nila sa d. Based in estimate and judgement rather
principal and interest or payments na ine- than exact depiction.
expect nila.
Management Stewardship
Economic Resources and Claims ➢ Pinagkatiwala ng entity o company ang
➢ Economic Resources - Assets resources sa management, then
➢ Claims - Liabilities and equity of an entity. management has a responsibility to
➢ Liquidity - availability of cash in the near provide an info about the entity's
future to cover currently maturing resources.
obligations. Ex: Cash or cash
equivalent.
➢ Solvency - availability of cash over a
long-term to meet financial commitments
when they fall due.

Changes in Economic Resources and Claims:

➢ Effects of transactions and other events
that change the economic resources and
claims such as issuing debt or equity
instruments.
6
 CHAPTER 3: b. Obscuring information - presentation of
financial information not readily
CONCEPTUAL FRAMEWORK: QUALITATIVE understood or not clearly expressed.
CHARACTERISTICS c. Primary users
- Qualities or attributes that make financial
info useful.
- To ensure that information is useful to Faithful Representation
users in making decisions.
- The description and figures must match
Fundamental Qualitative Characteristics what really existed or happened.
- Effects of transaction shall be properly
- Substance of Financial Information accounted for.
➢ Relevance and Faithful representation
(2 fundamental) Ingredients of Faithful Representation
➢ Both relevant and faithful to be useful.
a. Completeness
Relevance - information that is necessary for a
user to understand the
- Capacity of the info to influence a phenomenon or transaction.
decision. - Facilitates understanding and
- Information should be related and avoids erroneous implication.
relevant. - To be complete, FS shall be
accompanied by notes to FS.
Ingredients of Relevance:
➢ Standard of Adequate Disclosure - all
➢ Predictive Value - Increase likelihood of relevant info in preparation of FS shall be
correctly or accurately predicting or clearly reported.
forecasting future events. (Based on b. Neutrality
factors) - To be fair, should not favor one
➢ Confirmatory Value - It provides party.
feedback about previous evaluations and - Without bias, not slanted,
corrects earlier expectations. (Based on emphasized or manipulated to
Financial Statements) increase profit.
➢ Prudence
Materiality - Neutrality is supported by
prudence.
- Information is material if it omitting,
- exercise of care and caution when
misstating or obscuring it could be
dealing with uncertainties.
expected to influence the economic
➢ Conservatism
decisions.
- When an alternative exists, the
- Magiging material ang isang item kung
alternative that has the least effect
nakakaapekto sa decision making ng
on equity should be chosen.
primary users.
- “In case of any doubt, record any
- IASB is the one who provided the new
loss, and do not record any gain”
definition of materiality.
Ex: If there is a choice between two
Materiality highlights important aspects:
acceptable assets, the lower figure should be
a. Could reasonably be expected to selected.
influence - ensures that info is capable of
➢ Contingent loss - provision if a loss is
influencing economic decisions of primary
probable and the amount can be reliably
users rather than to all users which is too
measured.
broad.

7
 ➢ Contingent gain - not recognized and - Is a consideration of the cost
disclosed only. incurred in generating financial info
c. Free from error against the benefit to be obtained.
- No errors or omissions in the
description of the transaction.
➢ Measurement Uncertainty
CHAPTER 4:
- arises when the monetary amount
in a financial report cannot be CONCEPTUAL FRAMEWORK: FINANCIAL
observed directly. STATEMENTS AND REPORTING ENTITY
➢ Substance over form UNDERLYING ASSUMPTIONS
- Para maging faithfully represented
ang info, dapat ang transactions or - Provide financial information about an
events are accounted in entity’s asset. liabilities, equity, income
SUBSTANCE and NOT merely in and expenses.
legal form. a. Entity’s prospects for future net
cash inflows
Enhancing Qualitative Characteristics: b. Management;s stewardship over
economic resources.
- Intended to increase the usefulness of
financial information. Information is provided in the:
➢ Comparability
- To identify and understand 1. Statement of financial position (ALE)
similarities and differences among 2. Income statement (income and expenses)
items. 3. Statement of cash flows (operating,
➢ Consistency investing and financing activities)
- Use of the same method for the 4. Statement of changes in equity
same item. 5. Notes to financial statements
- Comparability is a goal, and
consistency helps to achieve the
goal. Types of Financial Statements:
- Is the uniform application of
accounting methods 1. Consolidated - a parent and subsidiaries
➢ Understandability report as a single entity.
- Clearly and concisely makes it ❖ Parent + Subsidiaries = 1 FS
understandable. 2. Unconsolidated - a parent alone provides
- Must be comprehensible or a report.
intelligible if it is to be useful. ❖ 1 parent = 1 FS
- useless ang fundamental 3. Combined - reporting entity comprises
characteristics kung hindi two or more entities not linked by parent-
maintindihan ng mga users. . subsidiary.
➢ Verifiability ❖ 2 Parents = 1 FS
- Verifiable in the sense that it is ❖ 2 Subsidiaries = 1 FS
supported by evidence.
Reporting Entity
➢ Timeliness
- Having information available to - who must choose to prepare the FS and is
decision makers. not necessarily a legal entity.
- The older the info, the less useful.
➢ Cost Constraint Considered as reporting entity:
- cost is a persuasive constraint on
the information. a. corp, partnership,
b. parent alone
c. Unconsolidated
8
 d. Combined
e. a reportable business segment of
an entity. CHAPTER 5:

Reporting Period CONCEPTUAL FRAMEWORK: ELEMENTS OF

FINANCIAL STATEMENTS
- period when FS are prepared for general
purpose financial reporting. FINANCIAL STATEMENTS
- Must be prepared on an annual basis
- portrays the financial effects of
(12 months)
transactions and other events by grouping
- may be an interim basis (3 months, six or
them into broad classes according to their
nine months)
economic characteristics.
- Interim are not required but optional.
a. ALE at the end of the reporting period Elements of Financial Statements
b. Income and expenses during the reporting
period. - refers to the quantitative information
reported in the statement of financial
Underlying Assumptions position and income statement.
- are the building blocks from which
- Serves as the foundation or bedrock of
financial statements are constructed.
accounting in order to avoid
misunderstanding. (refer to pg. 94 for more info)
a. Going Concern (continuity assumption)
- The accounting entity is viewed as Elements related to the measurement of
continuing in operation indefinitely FINANCIAL POSITION (3) :
in the absence of evidence.
● Asset
b. Accrual Principle
● Liability
- Income is recognized when earned
● Equity
rather than when received.
- Expenses are recognized when Elements related to the measurement of
incurred rather than when paid. FINANCIAL PERFORMANCE (2) :
- As against the cash basis principle.
c. Accounting Entity ● Income
- an entity is separate from its ● Revenue
owners. ●
- Ang personal transaction ng owner
NOTES:
ay hindi dapat naka report sa FS
ng entity. ● The Conceptual Framework identifies no
d. Time Period elements that are unique to the statement
- The life of an entity is divided into a of changes in equity because such
series of reporting periods. statement comprises items that appear in
- Usually 12 months and may be a the statement of financial position and the
calendar or fiscal year. income statement.
e. Monetary Unit ● Equity - is the residual interest in the
- Should be stated in a common assets of the entity after deducting all the
measurement basis to be useful. liabilities.
Peso if in the Philippines.
- Assumes that purchasing power of Equity = Assets - Liabilities
peso is regarded as constant kahit
may mga fluctuations o inflations.

9
Assets Ex. :

- under the Revised Conceptual - Right over physical objects, such as PPE,
Framework, an asset is defined as a and Equipment or Inventory
present economic resource controlled by - Right to intellectual property
the entity as a result of past events.

Economic Resource
3. Rights established by contract or
- is a right that has the potential to produce legislation
economic benefits. - such as owning a debt instrument or an
equity instrument or owning a registered
NOTE: patent.
● The new definition clarifies that an asset is
an economic resource and that the
potential economic benefits no longer Potential to produce economic benefits
need to be expected to flow to the entity.
● An economic resource is a right that has
Essential Characteristics of Assets (3) : the potential to produce economic benefits
- (2nd charac. of asset)
● The asset is a present economic resource. ● for the potential to exist, it does not need
- ( nasa definition ng asset to ) to be certain or even likely that the right
● The economic resource is a right that has will produce economic benefits.
the potential to produce economic
benefits. Economic Resource
- (defined na to above ‘ECONOMIC
RESOURCE’) ● is the present right that contains the
● The economic recourse is controlled by potential and not the future economic
the entity as a result of past events. benefits that the right may produce.
- ( nasa definition ng asset to ) An Economic Resources could
Right produce economic benefits if an entity is
entitled (5):
● right that have the potential to produce
economic benefits may take the following 1. To receive contractual cash flow
forms (3) : 2. To exchange economic resources with
1. Rights that correspond to an obligation of another party on favorable terms
another entity 3. To produce cash inflows or avoid cash
outflows
Ex. : 4. To receive cash by selling the economic
resource
- right to receive cash 5. To extinguish a liability by transferring an
- right to receive goods / services economic resource
- right to exchange economic resources
with another party on favorable terms. Control of an Economic Resource
- right to benefit from an obligation of
another part if a specified uncertain future ● An entity controls an asset if it has the
event occurs. present ability to direct the use of the
asset and obtain the economic benefits
that flow from it.

2. Rights that do not correspond to an

obligation of another entity

10
Control ● The obligation is to transfer an economic
resource.
● also includes the ability to prevent others ● The obligation is a present obligation that
from using such assets and therefore exists as a result of past events.
preventing others from obtaining the
economic benefits from the asset. Obligation
● may arise if an entity enforces legal
rights. ● is a duty or responsibility that an entity has
no practical liability to avoid.
NOTES: ● can either be legal or constructive.

● If there are no legal rights, control can still Legal Obligation

exist if an entity has other means of
ensuring that no other party can benefit - enforceable as a consequence of a
from an asset. binding contract or statutory requirement

Ex. : Ex.: Account Payable

an entity has access to technical know- Constructive Obligation

how and has the ability to keep this know-how - Arise from normal business practice,
secret. custom and desire to maintain good
(siguro para tong sa situation ng sa apple) business relations or act in an equitable
manner.
Liabilities
Transfer of an economic resource:
- under the Revised Conceptual
Framework, a liability is defined as the ● Obligations to transfer an economic
present obligation of an entity to transfer resource include (5) :
economic resources as a result of past 1. Obligation to pay
events. 2. Obligation to deliver goods or noncash
resources
NOTE: 3. Obligation to provide services at some
future time
● The new definition clarifies that a liability is 4. Obligation to exchange economic
the obligation to transfer an economic resources if a specific party on
resource and not the ultimate outflow of unfavorable terms.
economic benefits. 5. Obligation to transfer an economic
● The outflow of economic benefits no resource if a specified uncertain future
longer needs to be expected similar to the event occurs.
definition of an asset
● The new definition of liability to some Past Event
extent is inconsistent with the definition of
liability under IAS 37 ● an obligation exists as a result of past
● In case of conflict, the IASB stated that the event if both of the following conditions are
requirements of a Standard shall always satisfied (2):
prevail over the Conceptual Framework. 1. An entity has already obtained economic
benefits
Essential Characteristics of Liabilities (3) : 2. An entity must transfer an economic
resource.
● The entity has an obligation.
- the entity liable must be identified.
However, it is not necessary that the
payee or the entity to whom the obligation
is owed be identified.
11
Definition of Income represented information about financial
performance.
● It is defined as an increase in assets or
decrease in liabilities that result in Expense
increase in equity, other than those
relating to contributions from equity ● is defined as decrease in assets or
holders. increases in liabilities that result in
● Income encompasses both revenue and decrease in equity, other than those
gains. relating to distributions to equity holders.

Revenue arises in the course of ordinary NOTE:

regular activities and is referred to by a variety of ● Expenses encompass losses as well as
different names including sales, fees, interest, those expenses that arise in the course of
dividends, royalties and rent. ordinary regular activities.
Gains represent other items that meet the ● Expenses that arise in the course of
definition of income and do not arise in the course ordinary regular activities include cost of
of ordinary regular activities. goods sold, wages and depreciation.

NOTES: Losses

● The essence of Revenue is regularity. ● do not arise in the course of ordinary

● Gains include gain from disposal of regular activities and include losses
noncurrent assets, unrealized gain on resulting from disasters.
trading investment and gain from Ex.: losses from fire, flood, storm, storm surge,
expropriation. tsunami and hurricane, as well those arising from
disposal of noncurrent assets.

STATEMENT OF FINANCIAL PERFORMANCE

● refers to the income statement and a

statement presenting other
CHAPTER 6:
comprehensive income.
● AKA statement of profit or loss CONCEPTUAL FRAMEWORK: RECOGNITION
● The primary source of information about AND MEASUREMENT
an entity’s financial performance.
Recognition
NOTES:
- process of capturing for inclusion in the
● However, in developing accounting financial statements an item that meets
standards, there are some items of the definition of an asset, liability, equity,
income and expenses that are included in income or expense.
other comprehensive income and not in - amount at which asset, liability or equity is
profit or loss if such presentation would recognized in the statement of financial
provide more relevant and faithfully position as carrying amount.
represented information about financial
performance.
● There are instances that an amount in
Recognition links the elements to the statement
other comprehensive income in one
of financial position and statement of financial
reporting period may be recycled to profit
performance.
or loss in another reporting period.
● Such recycling is permitted as long as it
would result in relevant and faithfully

12
Recognition Criteria Three application of Matching Principles

❖ Only items that meet the definition of an 1. Cause and Effect Association
Asset, Liability or Equity are recognized in - expense is recognized when the revenue
the Statement of Financial Position. is already recognized.
❖ Only items that meet the definition of an - matching of cost with revenue.
Income or Expense are recognized in the
Statement of Financial Performance. Examples:
❖ Information that is both relevant and Cost of Merchandise Inventory
faithfully represented.
❖ An Asset or Liability and any Doubtful Accounts
corresponding Income or Expense can
exist even if the probability of inflow or Warranty Expense
outflow of the benefits is low.
Sales Commissions
Point of Sale Income Recognition
2. Systematic and Rational Allocation
- income shall be recognized when earned. - Some costs are expensed by simply
- legal title to the goods passes to the buyer allocating them over the periods benefited.
at the point of sale. - The reason for this is that some cost
- Under certain conditions, income may be incurred will benefit future periods and the
recognized at the point of production, absence of clear association of the
during production and at the point of expense with specific revenue will affect
collection. the record.

Steps on Recognizing Revenue: Examples:

➔ Identify the contract Depreciation of PPE

➔ Identify performance obligations in the
Amortization of Intangibles
contract
➔ Determine the transaction price Allocation of Prepaid Accounts
➔ Allocate the transaction price
➔ Recognize revenue when entity satisfies 3. Immediate Recognition
performance obligations - cost incurred is expensed outright
because of uncertainty of future economic
Additional Info: benefits or difficulty of reliably associating
certain costs with future revenue.
➢ Percentage of Completion Method
- recognize revenue and costs as project Examples:
processes.
➢ Completed Contract Method Officers’ Salaries
- recognize revenue and costs when the
Advertising and Selling Expense
project is completed.
Disposal of Building

Casualty Loss
Expense Recognition

- expenses are recognized when incurred.

- application of the matching principle takes Derecognition
place.
- There is no gain if there is no pain. - removal of all or part of a recognized
account that no longer meets the definition
of terms.

13
Measurement ● Presentation and Disclosure
- can be an effective communication about
- quantifying in monetary terms the the information in FS
elements in the financial statements. - A reporting entity communicates its
a. Historical Cost information about ALE, income and
- original acquisition of an asset plus expenses by presenting and disclosing
transaction cost information in the FS
- consideration received to incur the liability - Effective communication enhances
minus transaction cost understandability, relevancy, faithful
- entry price or entry value representation and comparability of the
b. Current Value information in the FS. This is further
❖ Fair Value - price that buyer and seller supported by not duplicating information
agreed on. in different parts of the FS.
❖ Value in Use - present value of cash flows - Duplication is unnecessary and can
that expects to derive from the use of an make THE FS less understandable.
asset and from the ultimate disposal.
❖ Fulfillment Value - present value of cash
that is expected to transfer in paying or
settling a liability. ● Classification
❖ Current Cost - cost of an equivalent price - Is the sorting of ALE, income and
at the measurement date that reflects expenses based on their similar or shared
market conditions. Based on entry price or characteristics.
value. - Classifying dissimilar ALE, income and
expenses can obscure relevant info,
Selecting a measurement basis reduce understandability, comparability
and faithful representation of the FS.
- it is necessary to consider the nature of
information that the measurement basis Ex. Classifying Assets and Liabilities into
will produce. current and noncurrent.
- The most common measurement basis
used in preparing financial statements is - It may be necessary to classify
Historical Cost as it is generally components of equity if the components
understood and verifiable. are subject to legal, regulatory and
other requirements.

Ex. ordinary share capital, share premium

The IASB did not mandate a single measurement and retained earnings should be disclosed
basis because the different measurement bases separately.
could produce useful information under different
circumstances.
● Classification of Income and Expenses
- Income and Expenses are classified as
CHAPTER 7: components of profit loss and
components of other comprehensive
CONCEPTUAL FRAMEWORK: income.
PRESENTATION AND DISCLOSURE - Statement of financial frameworks refer to
the income statement along with the
ALE - Assets , Liabilities, Equity
presentation of the statement of other
FS - Financial statement comprehensive income.
- Income and expenses should be
appropriately classified and included in the
income statement.

14
 - Income statement or statement of profit or - Return on capital is the amount of money
loss is the primary source of received each year as the result of initial
information about an entity’s financial investment
performance for the reporting period. - Return of capital is the payments that the
- There are items of income and expenses investor receives which returns a portion
that are presented outside of profit or of the capital invested
loss but included in other
comprehensive income.
- Components of other comprehensive Two concepts of Capital Maintenance
income can be later classified or recycled
into statement of profit or loss ● Financial Capital
- It is the monetary amount of net assets
**‘Recycling’ is the process whereby items contributed by the shareholders and the
previously recognised in other comprehensive amount of the increase in net assets
income are subsequently reclassified to profit or resulting from earnings retained by the
loss.as an accounting adjustment but referred to entity.
in IAS 1 as reclassification adjustments.. In other - It is the traditional concept based on
words gains or losses are first recognised in the historical cost and adopted by most
OCI and then in a later accounting period also entities.
recognised in the SOPL. - Under this concept, net income occurs
when the nominal amount of net assets at
the end of the year exceeds the nominal
● Aggregation amount of net assets at the beginning of
- adding ALE, income and expenses that the period. after excluding distributions
have similar and shared characteristics and contributions by owners during the
and are included in the same classification period.
- makes information more useful by
summarizing large volumes of detail but in
turn, it may conceal some of the details. ● Physical Capital
- Normally, State of financial performance - This is the quantitative measure of the
and statement of financial position provide physical productive capacity to produce
summarized and condensed information goods and services.
- More detailed info is provided in notes to
- Physical productive capacity may be
financial statements. based on, for example, units of output per
day or physical capacity of productive
assets to produce goods and services.
● Capital Maintenance - This concept requires that productive
- Financial performance is determined using assets be measured at current cost, rather
either, transaction approach or, capital than historical cost.
maintenance approach with transaction - Productives assets include Inventories
approach being the traditional choice and PPE.
- Capital maintenance approach means that - Current cost for productive assets must
net income only occurs only after the be maintained sot that physical capital is
capital used from the beginning of the also maintained
period is used. - Physical capital are equal to the net
- An entity reaches capital maintenance assets of the entity, expressed in terms of
when the amount of its ending capital is current.
unchanged from the beginning period. The - Physical concept of capital should be
excess will turn into profit. applied if the main concern of users is the
operating capability of the company

15
 - Under this, net income occurs when the ● cash flows
physical productive capital of the entity at
the end of the year exceeds the physical Frequency of reporting
productive capital at the beginning of the
period, also after excluding distributions FS should be presented at least annually if
and contributions from owners during the it is shorter or longer than a year. shall provide:
period.
a. reason of using longer/ shorter period
b. ano ung period na covered ng FS
c. the amounts
CHAPTER 8:
Statement of Financial Position
PRESENTATION OF FINANCIAL
STATEMENTS: STATEMENT OF FINANCIAL - balance sheet
POSITION - formal statement showing the assets,
liability and equity
● Financial Statements - Primary users analyze this statement to
- the means by which the information evaluate the liquidity, solvency and the
accumulated and processed in financial needs of the entity
accounting is periodically communicated
to the users Operating Cycle
- end product or main output
- structured financial presentation of the - time between the acquisition of assets and
SFP and Income Statement realization of cash
- to meet the needs of users who are not in - nakadepende yung operating cycle sa
a position to require an entity to prepare company pero usually more than 12
reports tailored to the particular months raw ang gamit
information needs
- directed to all common users and not Current Assets Noncurrent Assets
specific users

COMPONENTS cash or cash a residual definition

equivalent unless it is
1. Statement of Financial Position an entity shall classify
restricted to settle a
2. Income Statement other assets not classified
liability for more than
3. Statement of Comprehensive Income as current as noncurrent
twelve months
4. Statement of Changes in Equity includes the following:
5. Statement of Cash Flows entity holds the assets
6. Notes for the purpose of
trading 1. Property, plant, and
Objective:
equipment
1. to provide information about the financial expects to realize the
asset within twelve - tangible assets
position, performance and cash flows of
months held by an entity
an entity that is useful to a wide range of
for use in
users in making economic decisions
expects to realize the production or
2. must provide information about the
assets or sell/ supply of goods
following:
consume it within the and services; are
● assets
normal operating cycle expected na
● liabilities
magamit for more
● equity
than one period
● income & expenses
● contributions and distributions to owners

16
 before the financial statements are
(PAS 16, par 6) authorized.

e.g. building, machinery,

etc.

2. Long-term
**Noncurrent liability, if the refinancing is long-
investments
term basis on or before the end of reporting
- assets held by an period
entity for the
accretion of wealth
through capital
distribution (IASC) Current Liabilities Non current Liabilities

e.g. interest, royalties expects to settle the a residual definition

liability within the
3. Intangible assets
entity’s normal an entity shall classify
operating cycle other liabilities not
- identifiable non
classified as current as
monetary asset
holds the liability for noncurrent includes the
without physical
the purpose of trading following:
substance
liability is due to be - Noncurrent
e.g. patent, trademark,
settled within twelve portion of long-
copyright
months term debt
goodwill (unidentifiable) - Finance lease
entity does not have a liability
4. Deferred tax assets right to defer - Deferred tax
settlement for at least liability
5. Other noncurrent twelve months - Long term
assets obligations to
company officers
- those do not fit - Long-term
into the definition deferred revenue
of the previously
mentioned

e.g. long-term advances

to officers, directors, etc.
Covenants

Liabilities - borrowing agreements which represent

undertakings by the borrower
Currently maturing long-term debt - restrictions on the borrower as to borrowings,
paying dividends, etc.
- Liability due to be settled within twelve - if breached, the liability is payable on
months is classified as current liability, demand
even if: - current, if lender agreed not to demand
1. period is longer than twelve months payment
2. agreement to refinance/ reschedule
payment after the reporting period and

17
 - non current, if lender agreed on or before 12. current tax liability
the end of RP to provide grace period 13. deferred tax asset and liability
ending at least 12 months 14. provisions
15. financial liabilities
Equity 16. liabilities included in disposal group
17. noncontrolling interest
- the residual interest in the assets of an 18. share capital and reserves
entity after deducting all the liabilities
- means “net assets” **Minimum na laman ng SFP
- terms used depend on the form of
business organization

a. Owner’s equity in a proprietorship

CHAPTER 9:
b. Partners’ equity in a partnership
PRESENTATION OF FINANCIAL
c. Stockholders equity or Shareholder’s equity in STATEMENTS: INCOME STATEMENT
a corporation
Income Statement
- residual interest of the owners in the net
assets of a corporation measured by the - a formal statement showing the financial
excess of assets over liabilities performance
- primarily measured in terms of
Notes to FS level of income
- also known as results of operations
- provide narrative description or - useful for predicting future
disaggregation of items performance and ability to
- used to report information that does not fit generate future cash flows
into the body of financial statements
Sources of Income
Forms of SFP
1. Sales of merchandise to customers
2. Rendering of services
Report Form Account Form
3. Use of entity resources
4. Disposal of resources other than products
three major sections assets are shown on
listed in a downward the left side; liabilities Components of Expense
sequence and equity on the right 1. Cost of Goods sold / Cost of sales
side 2. Distribution Costs/ Selling Expenses -
directly related to selling, advertising, and
Line Items delivery of goods
3. Administrative expenses
1. Cash and cash equivalent
- cost of administering the
2. financial assets
business
3. Trade and other receivables
4. Other expenses
4. Inventories
5.
5. PPE
- not directly related to
6. Investment in associates
selling and administrative
7. intangible assets
6. Income tax expense
8. investment property
9. biological assets *NO MORE EXTRAORDINARY ITEMS
10. total of assets classified as held for sale
11. trade and other payables
18
 Functional Presentation Natural Presentation

- classifies expense according to their function - also known as the nature of expense
- also known as the cost of goods sold method
method - expenses are no longer classified
- shall disclose adt’l information on the nature of - grouped or aggregated
expense

Comprehensive Income 5. gain or loss on the reclassification of

financial asset from amortized cost
- the change in equity during a period resulting 6. gain or loss on the reclassification of
from transactions and other events financial asset from fair value
- includes: 7. gain or loss from extinguishment of
a. components of profit or loss or income and financial liability
expenses affecting net income 8. income tax expense
b. components of other comprehensive 9. single amount comprising discontinued
income operation
10. profit or loss for the period
Profit or Loss 11. total OCI
12. Comprehensive income for the period
- the total income less expenses excl. OCI
being the total of profit or loss/ OCI
- the bottom line in the traditional income
statement

Other Comprehensive Income (OCI)

- comprises items of income and expenses

CHAPTER 10:
not recognized in profit or loss
- includes: STATEMENT OF CASH FLOWS
- unrealized gain or loss on equity and debt
investment; from derivative contracts STATEMENT OF CASH FLOWS
- revaluation surplus during the year &
● is a component of a financial statement
more.
summarizing the operating, investing and
Statement of Comprehensive Income financing activities of an entity.
● The primary purpose of a statement of
- starts with the net income or loss plus or cash flows is to provide relevant
minus the components of other information about cash receipts and cash
comprehensive payments of an entity during a period.
- to provide more comprehensive ● provides information about the cash
information on financial performance receipts (inflows) and cash payment
measured more broadly than the income (outflows).
traditionally computed.
NOTES:
Line items:
● The statement of cash flow is designed to
provide information about the change in
1. Revenue
an entity’s cash and cash equivalent.
2. Gain and loss from derecognition
3. finance cost CASH
4. share in income or loss of associate
● comprises cash on hand and demand
deposits.
19
CASH EQUIVALENTS Ex.:

● are short-term highly liquid investments ● Cash receipts from sale of goods.
that are readily convertible to known ● Cash receipts from royalties, rental fees,
amounts of cash and which are subject to commissions and other revenue.
an insignificant risk of change in value. ● Cash payments to suppliers for goods
purchased.
Ex.: ● Cash payments for selling, administrative
and other expenses
● Three-month BSP treasury bill
● Cash receipts and payments for securities
● Three-year BSP treasury bill purchased
help for trading.
three months before date of maturity
● Cash payment or refund of income taxes
● Three-month time deposit
unless can be identified specifically with
● Three-month money market instrument or
financing and investing activities.
commercial paper
INVESTING ACTIVITIES
NOTES: According to PAS 7, Paragraph 7
● are the cash flows derived from the
● investment normally qualifies as a cash
acquisition and disposal of long-term and
equivalent only when it has a short
other investing not included in cash
maturity of three (3) months or less
equivalent
from the date of acquisition.
● it includes cash flow from transactions
BANK OVERDRAFTS WHICH ARE involving non-operating assets
REPAYABLE ON DEMAND
Ex.:
● form an integral part of cash management.
● Cash payments to acquire property,
● In these circumstances, bank overdrafts
plant, and equipment.
are included as components of cash and
● Cash receipts from sale of PPE.
cash equivalents.
● Cash payments to acquire equity or
NOTE: debt instrument of other entities (current
and long-term investments)
● A characteristic of such banking ● Cash receipts from sale of equity or
arrangements is that the bank balance debt instruments of other entities.
often fluctuates from being positive to ● Cash advances and loans to other parties
overdrawn. other than advances and loans made by
● Cash flows are inflows and outflows of financial institution
cash and cash equivalents. ● Cash receipts from repayment of
advances and loans made to other
CLASSIFICATION OF CASH FLOWS (3):
parties.
● Operating Activities
FINANCING ACTIVITIES
● Investing Activities
● Financing Activities ● are the cash flow derived from the equity
capital and borrowing of the entity.
OPERATING ACTIVITIES
OTHERWISE STATED, FINANCING
● are the cash flows derived primarily from
ACTIVITIES ARE THE FLOWS THAT RESULT
the principal revenue producing activities
FROM TRANSACTIONS:
of the entity.
● generally result from transactions and A. Between the entity and the owners
other events that enter into the - equity financing
determination of net income or loss. B. Between the entity and the creditors
- debt financing
20
NOTES: INTEREST PAID AND INTEREST RECEIVED

As a simple guide, financing activities ● PAS 7, paragraph 33, provides that

include the cash flows from transactions involving interest paid and interest received shall
non-trade liabilities and equity of an entity. be classified as operating cash flows
because such items enter into the
Ex.: determination of net income or loss.
● Alternatively, interest paid may be
● Cash receipts from insurance of ordinary
classified as financing cash flow because
and preference shares.
it is the cost of obtaining financial
● Cash payments to acquire treasury
resources.
shares.
● Alternatively, interest received may be
● Cash receipts from issuing bonds, loans,
classified as investing cash flow because
notes, mortgages and other shorts or long
it is a return on investment.
term borrowings.
● Cash payments for amounts borrowed. NOTE:
● Cash payments by a lessee for the
reductions of the outstanding principal ● For a financial institution, interest paid
lease liability. and interest received are usually
classified as operating cash flows.

NON-CASH TRANSACTIONS
DIVIDENDS RECEIVED
● Non-cash investing and financing
transactions shall be disclosed only either ● PAS 7, paragraph 33, provides that
in the notes to financial statements or in a dividend received shall be classified as
separate schedule or in a way that operating cash flow because it enters into
provides all relevant information about the determination of net income.
these transactions. ● Alternatively, dividend received may be
classified as investing cash flow because
NOTES: it is a return on investment.
● The statement of cash flow is strictly a DIVIDENDS PAID
cash concept.
● PAS 7, paragraph 34, provides that
dividend paid shall be classified as
financing cash flow because it is a cost of
ACCORDINGLY, THE FOLLOWING NON-CASH
obtaining financial resources.
TRANSACTIONS ARE DISCLOSED
● Alternatively, dividends paid may be
SEPARATELY:
classified as operating cash flow in order
● Acquisition of assets by issuing share to assist users to determine the ability of
capital. the entity to pay dividends out of operating
● Acquisition of assets by issuing bonds cash flows.
payable.
● Conversion of bonds payable into share CASH FLOW PAS ALTERNATIVE
capital. Interest Received Operating Investing
● Conversion of preference shares into
ordinary shares. Interest Paid Operating Financing

Dividends Received Operating Investing

Dividends Paid Financing Operating

21
 Applying Retrospective will turn the graph to:

CHAPTER 11:

ACCOUNTING POLICIES, ESTIMATE AND

ERRORS

Accounting Policies

- are the specific principles, bases

conventions, rules and practices applied
by an entity in preparing financial
statements.
Let us now apply sa journal entry:
- Dapat rin natin i apply yung mga
accounting policies para magkaroon ng We will base on the example of CFAS na libro.
comparability sa mga financial statements

Example: if the company accounting

policies stated that the company will use FIFO
method in measuring inventory

Change in accounting policy

Changes in accounting policy will apply if:

- required ng IFRS (International Financial 1. Identify first the amount of the new
Reporting Standards) method, dito sa example is the WA
- will result in FS (Financial Statements) (Weighted mean) method
providing more relevant information

Example: Company policies will change

from FIFO to weighted average method in
measuring inventory prices
2. Kunin ang difference between the old and
new method. Sa case ng example this is
How to report a change in accounting policy the FIFO and Weighted average method:

To further understand how to report

changes in accounting policy, kailangan natin ma
understand kung ano yung retrospective
application.
3. Journalize on the current accounting
period.To re state the value of the
inventory
Retrospective application

- Basically we will treat yung new

accounting policy na as if it has always Accounting Estimate
been applied.
- is a normal recurring correction or
adjustment of an asset or liability which is
the natural result of the use of an
estimate.

22
Example: Depreciation, doubtful accounts 300k ang natitirang value ng asset

How to report change in accounting estimate then 300k / 6 (natitirang valuable life ng asset) =
50k
- The effect of a change in an accounting
estimate shall be recognized in Profit or So ang dapat ng i entry starting ng 3rd year is
loss statement
- in the period of change kapag na affect
yung period nayun
- yung period of change at yung mga
susunod pang accounting periods
Prior period errors
To simplify:
- omissions or misstatements sa FS galing
sa isa or nakaraan pang periods
Change in accounting estimates - it arises from failure to use or misuse of
Prospective
the accounting policies
- Other examples is fraud

Additional info:

● Retained Earnings - natirang earnings ng How to treat prior period errors

company after deducting yung mga
dividend ng mga stock holders. - Error shall be corrected retrospectively by
● If there is no specific transition provision adjusting the open balances of the
the change in accounting policies should retained earnings and affected assets and
always be retrospective liability
- Kung paano i apply sa journal entries ay
hindi na na state ng libro sa Intermediate
Accounting Volume 3 na daw.
Prospective application

- Forget the past lang concept yan,

basically hayaan monang ganun yung
method nung last period basta palitan mo
within this period.

Let us provide an example also gathered CHAPTER 12:

from CFAS book:
EVENTS AFTER THE REPORTING PERIOD

- Events after the reporting period are the

events either favorable or unfavorable that
occur between the end of the reporting
period and the date that the financial
statements are authorized for issue.
Initially, 500k / 5 yrs = 100k per year

But nung beginning ng 3rd year biglang nag bago

estimate from 5 years to 8 years.but na consume
na yung 200k na initial estimate. Wala na tayong
pake sa 200k na consumed, instead lets focus sa
natitirang 6 years. So:

500k-200k(yung na depreciatie na)=300k

23
To simply:(Zoom nyo nalang)

Two types of Events after the Reporting

Period

Adjusting events

- after the reporting period are those that

provide evidence of conditions that exist at
the end of the reporting period

Example:

Bankruptcy of a customer which occurs

after the reporting period. I think this affects AR,
especially yung doubtful accounts. Pag hindi kasi
naten na adjust to overstated AR naten which
invalidates faithful representation of the FS.

Non adjusting events

- after reporting period are those that are

indicative of conditions that arise after the
end of reporting period
- Basically mga events na significant
enough to mention sa FS but not
significant enough to adjusting something
from the past FS

Example:

May sunog dun sa ilang production plant

after ng reporting period. Non adjusting siya since
it did not affect yung financial numbers sa FS but
kailangan malaman so we should mention it on
the FS

Financial statements authorized for issue

- when the board of directors reviews the

financial statements and authorizes them.
- There are some cases that na kailangan
mag submit ni entity ng FS sa mga
shareholders for their approval after the
financial statements have been issued
- There are some cases na yung Board of
Directors ang mag authorize ng FS at
hindi sa date na pag approve ng mga
stockholder.

24