CFAS

20% Midterm, 20% Finals, 10% Project/Problem, Sets 50% Recit/Assignment/Quiz

Valix, 2022 edition

THE ACCOUNTING PROFESSION

CONCEPTUAL FRAMEWORK

 Financial Reporting and Assumptions

 Qualitative Characteristics
 Elements

Accounting (ASC) – is a service activity. Accounting function is to provide quantitative info. Intended to
be useful in making economic decision. Financial in nature.

o Committee on Accounting Terminology of the American Institute of Certified Public

Accountants
Accounting is the art or recording, classifying, and summarizing in a significant manner
and in terms of money, transactions and events which are in part at least of a financial
character and interpreting the results thereof

o American Accounting Association

Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgement and decision by users of the information.

IMPORTANT ACTIVITIES OF ACCOUNTING

1. Identifying as the analytical component
Recognition or nonrecognition of business activities as “accountable events”.
2. Measuring as the technical component
Assigning of peso amounts to the accountable economic transactions and events
3. Communicating as the formal components
Preparing and distributing accounting reports

OVERALL OBJECTIVE OF ACCOUNTING

To provide quantitative financial information about a business that is useful to statement user
particularly owners and creditors in making economic decisions

THE ACCOUNTANCY PROFESSION

Republic Act 9298 – law regulating practice of accountancy in the Philippines
CPAs may practice their profession in three main areas:
a. Public Accounting
b. Private Accounting
c. Government Accounting
THE PHILLIPINE ACT OF 2004 - provides that all certified public accountants (CPAs) shall
abide by the requirements, rules and regulations on continuing professional education to be
promulgated by the Board of Accountancy (BOA), subject to approval of the Professional
Regulation Commission (PRC).

TERMINOLOGIES AND ACCRONYMS

GAAP – Generally Accepted Accounting Principles

FRSC – Financial Reporting Standards Council

PRC – Professional Regulating Commission

PAS – Philippine Accounting Standards

IFRS – International Financial Reporting Standards

PFRS – Philippine Financial Reporting Standards

PIC – Philippine Interpretations Committee

IASC – International Accounting Standards Committee

IASB – International Accounting Standards Board

IASB (replaced IASC)
FRSC (replaced ASC)

created by PRC

initially develop GAAP

approved series of IFRS

PAS/PFRS pronouncements
statements

global phenomenon
intended to bring about
formed in august
2006
PIC greater transparency & a
higher degree of
comparability in
reporting

TOPICS
1. The Accountancy Profession IFRS
2. Conceptual Framework
a. Financial Reporting and Assumptions
b. Qualitative Characteristics
c. Elements of Financial Statements

CONCEPTUAL FRAMEWORK
underlying theory for the:

Development of Accounting Standards

Revision of Previously Issued Accounting Standards
provides foundation or standars that:

o contribute to transparency by enhancing comparability & quality of financial info

o strengthen accountability by reducing info gap between the providers of capital and the
people to whom they have entrusted their money
o contribute to economic efficiency by helping investors to identify opportunities and risks
across the world

authoritative status:

o CF is not an IFRS – in case where there is conflict, IFRS will prevail over CF
o If there is a standard or an interpretation that specifically applies to a transaction, the
standard or interpretation overrides CF
o In absence to any specific IFRS or interpretation that specifically applies to transaction,
management shall consider applicability of CF in developing & applying accounting
policy that results in information that is relevant & reliable

Purpose of the Revised (2018) Conceptual Framework (the old one was issued in 1989 & partly
revised in 2010)

o To assist the IASB to develop IFRS based on consistent concepts

o To assist prepares of FS to develop consistent accounting policy when no standard
applies to a particular transaction or other event or where an issue is not yet addressed
by an IFRS
o To assist prepares of FS to develop accounting policy when a standard allows a choice
of an accounting policy
o To assist all parties, understand and interpret IFRS

Users of financial information:

Primary Users
General purpose FS are primarily directed

o Existing & potential investors

o Lenders & other creditors

Other Users
FS useful but not primarily directed to them
o Employees
o Customers
o Government & other agencies
o Public

Scope of Conceptual Framework:

o Objective of Financial Reporting

o Qualitative Characteristics of Useful Financial Information
o Definition, Recognition & Measurement of the elements from which financial statements
are constructed
o Concepts of capital & capital maintenance

OBJECTIVE OF FINANCIAL REPORTING

 Foundation of Conceptual Framework
 To provide financial information about the reporting entity that is useful to existing &
potential investors, lenders and other creditors in making decisions about providing
resources to the entity
 “Why” purpose or goal of accounting

UNDERLYING ASSUMPTIONS
 Going Concern – the accounting entity is viewed as continuing in operation.
(Liquidating Concern)
 Accounting entity – transactions of entity shall not be merged with the transactions of
owners
 Time period – life of a business is divided into series of reporting periods
 Monetary Unit – stability of peso

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Content of Conceptual Framework for Financial Reporting
1. The Objective of General Purpose Financial Reporting
o to provide financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
2. Qualitative Characcteristics of Useful Financial Information
3. Financial Statements and the Reporting Entity
4. The Elements of Fianacial Statements
5. Recognition and Derecognition Measurement
6. Presentation and Disclosure
Qualitative Characteristics of Useful Financial Information
1. Fundamental Qualitative Characteristics
a. Relevance: capable of making difference in the user’s decision. The financial
information is relevant when it has predictive value, confirmatory value, or both.
Materiality is closely related to relevance
Predictive Value – when it can help users to increase the likelihood of correctly or accurately
predicting or forecasting outcome of events.
Confirmatory Value – it provides feedback about previous evaluations and enables users to
confirm or correct earlier expectations
Materiality – not required when the item is not significant enough to affect the evaluation,
decision, and fairness of financial statement.
b. Faithful Representation: The information is faithfully represented when it is
complete, neutral, and free from error. Descriptions and figures must match what
really existed or happened.
Completeness – relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication.
Neutral – without bias in the preparation or presentation of financial information
Conservatism – incase of doubt, record any loss not record any gain.
Free from error – there are no errors or omissions in the description of the phenomenon or
transaction.
2. Enhancing Qualitative Characteristics
a. Comparability: Information should be comparable between different entities or time
periods; the uniform application of accounting method between and across entities in
the same industry
b. Verifiability: Independent and knowledgeable observers are able to verify the
information; supported by evidence so that accountants would look into the same
economic decision or conclusion
c. Timeliness: Information is available in time to influence the decision of users; the
older the information, the less useful
d. Understandability: Information shall be classified, presented clearly and concisely;
financial information must be comprehensive or intelligible if it is to be most useful
e. (additional) Consistency: uniform application of accounting method from period to
period within an entity.
Financial Statements and the Reporting Entity
Financial Statements
Financial Statement should provide the useful information about the reporting:
a. In the statement of financial position, by recognizing
 Assets
 Liability
 Equity
b. In the statements of financial performance, by recognizing
 Income
 Expenses
c. In other statements, by presenting and disclosing information about
 Recognized and unrecognized assets, liabilities, equity, income and
 Expenses, their nature and associated risks;
 Cash flows;
 Contributions from and distributions to equity holders, and
 Methods, assumptions, judgements used, and their changes.
Reporting Entity – is an entity who must or chooses to prepare the financial statements. It can
be:
a. A single Entity – for example, one company
b. A portion of an entity – for example, a division of one company
c. More than one entity – for example, a parent and its subsidiaries reporting as a group
Types of Financial Statements:
a. Consolidated: (parent and subsidiary) a parent and subsidiaries reporting as a single
reporting entity;
b. Unconsolidated: (parent) e.g., a parent alone provides reports, or
c. Combined: (not linked) e.g., reporting entity comprises two or more entities not linked by
parent – subsidiary relationship.
The Elements of Financial Statement
a. Asset
A present economic resource controlled by the entity as a result past event
Right
o Rights that correspond to an obligation of another entity
o Rights that do not correspond to an obligation of another entity
o Rights established by contract or legislation

Potential to produce economic benefits, entitled to:

o To receive contractual cash flows
o To exchange economic resources with another party in favorable terms
o To produce cash inflows or avoid cash outflows
o To receive cash by selling the economic resource
o To extinguish a liability by transferring an economic resource

Control of an economic resource

o An entity controls an asset if it has present ability to direct the use of the asset and
obtain the economic benefits that flow from it
o Ability to prevent others from using such asset
o May arise if an entity enforces legal rights

b. Liability
A present obligation of the entity to transfer an economic resource as a result of past
events
Obligation
o A duty or responsibility that an entity has no practical ability to avoid.
o Can either be legal or constructive
Transfer of economic resource
o Obligation to pay cash
o Obligation to deliver goods or non-cash resources
o Obligation to provide services at some future time
o Obligation to exchange economic resources with another party on unfavorable terms
o Obligation to transfer an economic resource if specified uncertain future event occurs

Past event
o An entity has already obtained economic benefits
o An entity must transfer an economic resource

c. Equity
The residual interest in the assets of the entity after deducting all its liabilities
State of Financial Performance
Refers to income statement and statement presenting other comprehensive income
d. Income
o Increases in asset or decreases in liabilities resulting in increases in equity, other
than contributions from equity holders
o Encompasses both revenue and gains
e. Expenses
o Decreases in assets or increases in liabilities resulting in decreases in equity,
other than distributions to equity holders
o Encompasses loss & expenses that arises in ordinary regular activities

Recognition and Derecognition

Recognition
The Rev CF defines recognition as the process of capturing for inclusion in the FS an item that
meets the definition of an asset, liability, equity, income or expense.
The Framework requires recognizing the elements only when the recognition provides useful
information – relevant with faithful representation.
Carrying amount – amount of which A, L or E is recognized in the SFP.
Recognition criteria
a. Point of sale income recognition
b. Expense recognition – matching principle
i. Cause & effect association
ii. Systematic & rational allocation
iii. Immediate recognition
Derecognition
Removal of an asset or liability from the statement of financial position and normally it happens
when the item no longer meets the definition of an asset or a liability
Measurement
The Framework discusses two basic measurement basis:
Historical Cost – this measurement is based on the transaction price at the time of recognition
of the element
Current Value – it measures the element updated to reflect the conditions at the measurement
date. Here, several methods are included:
 Fair value
 Value in use
 Fulfillment value
 Current cost
The Framework the gives guidance on how to select the appropriate measurement basis and
what factors to consider (especially relevance and faithful representation).
Guidance of measurement of equity:
The total carrying amount of equity is not measured directly. Instead, it is measured exactly by
the formula:

 Total carrying amount of all assets, less

 Total carrying amount of all liabilities
Presentation and Disclosure
Effective communication of information in the financial dttement requires:

 Focus on objectives and principles f presentation and disclosure, not on the rules
 Group similar items and saparate dissimilar items
 Aggregate information, but do not provide unnecessary detail or the opposite – excesive
aggregation to obscure the information.
Concepts of Capital and Capital Maintenance
Two concepts of capital:
Financial Capital – synonymous with the net assets or equity of the entity.
Under the financial maintenance concept, the profit is earned only when the amount of the net
assets at the end of the period is greater than the amount of net assets in the beginning, after
excluding contributions from and distributions to equity holders.
The financial capital maintenance can be measured either in
a. Nominal monetary units, or
b. Units of constant purchasing power
Computation of Net Income under Financial Capital
Illustration

January 1 December 31
Total Assets 1,500,000 2,500,000
Total Liabilities 1,000,000 1,200,000
Additional investments during the year 400,000
Dividends paid during the year 300,000

PAS 1
A complete set of financial statements includes: [IAS 1.10]
1. A statement of financial position (balance sheet) at the end of the period
2. A statement of profit or loss and other comprehensive income for the period (presented
as a single statement of profit or loss, immediately followed by a statement presenting
comprehensive income beginning with profit or loss)
3. A statement of changes in equity for the period
4. A statement of cash flows for the period
5. Notes, comprising a summary of significant accounting policies and other explanatory
notes
6. Comparative information prescribed ny the standard.
An entity may use titles for the statements other than those stated above. All financial
statements are required to be presented with equal prominence.
ANSWERS (ASSIGNMENT)

1. A. – II.

2. B. – IV.

3. C. – VII.

4. D. – V.

5. E. – I.

6. F. – VI.

7. G. – III.

8. L

9. A

10. E

11. L

12. 75,000

13. 380,000

14. IS

15. BS

16. IS

17. IS

18. RE

19. BS

20. Increase Asset, Increase Equity

21. Increase Asset, Increase Equity

22. Increase Asset, Increase Equity

23. Increase Asset, Increase Liability

Lachica, Willyn Marie D.

BSMA 2102
PROBLEM 3-7 Identification (ACP)

1.    Relevance

2.    Comparability

3.    Understandability

4.    Neutrality

5.    Substance over form

6.     Materiality

7.    Conservatism

8.    Completeness

9.    Relevance

10. Faithful Representation

11. Completeness

12. Free from error

13. Comparability

14. Verifiability

15. Timeliness

PROBLEM 3-8 True or False (IAA)

1.    .True

2.    False

3.    False

4.    False

5.    False

6.    True

7.    False

8.    True

9.    False

10. False

11. False
12. False

13. False

14. True

15. False

PROBLEM 4-4 (IAA)

1.    Going Concern

2.    Monetary Unit

3.    Monetary Unit

4.    Time Period

5.     Accounting Entity

PROBLEM 4-5 Identification (IAA)

1.    Time Period

2.     Going Concern /Historical Cost

3.    Accounting Entity

4.     Monetary Unit

5.    Time Period

PROBLEM 4-6 Identification (IAA)

1.    Monetary Unit

2.     Time Period

3.     Monetary Unit

4.    Going Concern

5.    Accounting Entity

PROBLEM 5-2 Multiple choice (Conceptual Framework)

1.    D.

2.    D.

3.    D.

4.    D.

5.    B.
6.    A

7.    B

8.    D

9.    C

10. C

SEATWORK:

PROBLEM 6-8 Identification (IAA)

1.    Systematic and Rational Allocation

2.     Income Recognition Principle

3.     Materiality

4.     Standard Adequate Disclosure

5.     Prudence

6.     Materiality

7.     Income Recognition Principle

8.     Standard Adequate Disclosure

9.     Comparability

10.  Faithful Representation

PROBLEM 6-9 Identification (IAA)

1.    Historical Cost

2.    Materiality

3.    Expense Recognition Principle

4.     Substance over form

5.     Income Recognition Principle

6.     Consistency

7.     Conservatism

8.     Completeness

9.     Matching Principle

10.  Conservatism
PROBLEM 7-1 Multiple Choice (Conceptual Framework)

1. d

2. a

3. d

4. a

5. d

PROBLEM 7-2 Multiple Choice

6. a

7. b

8. a

9. d

10. c