FAR HO2 Underlying Assumptions

CONCEPTUAL FRAMEWORK Accounting Postulates. These are the basic notions

or fundamental premises on which the accounting
Complete Title: Conceptual Framework for
process is based.
Financial Reporting
Recent Version: 2018
A. Going Concern – Continuity Assumption.
- the accounting entity is viewed as
continuing in operation indefinitely.
BASIC CONCEPTS: - Foundation of cost principle.
Conceptual Framework is a summary of the terms Example:
and concepts that underlie the preparation and
presentation of FS. 1. The current and non-current
classification of assets and liabilities.
It is concerned with the Gen. Purpose FS including 2. Accrual of income and expenses and
consolidated FS. prepayments and unearned income.
The underlying theme of the Framework is decision 3. Depreciation of PPE, amortization of
usefulness or Usefulness of information in making intangible assets, depletion and etc.
economic decision.
B. Accrual Principle
- Addresses the recognition of income
and expenses as against the cash basis
Basic Purpose
principle.
To serve as a guide in developing future PFRSs - Income is recognized when earned
and in resolving accounting issues not directly rather than when received.
addressed by existing PFRS. - Expense is recognized when incurred
rather than when paid.
Heirarchy:
1. Specific Standard C. Accounting Entity Concept
2. Relative Standard - Viewed separately from its owners.
3. Conceptual Framework - Personal transactions of the owners
4. Other GAAP among themselves or with other entities
5. Accounting Literature are not recorded in the entity’s
accounting records.

D. Time Period Principle

Specific Purpose
- Supports the Going concern
 To assist FRSC principle.
a. In developing future PFRSs and - The life of the entity is divided into series
reviewing existing PFRSs. of reporting periods.
b. In promoting harmonization of - Accounting period: 12 months
regulations, accounting standards and - Calendar or Fiscal year
procedures relating to the presentation
of FS in applying PFRSs. E. Monetary Unit Principle
 To assist FS Preparers – in applying - Accounting information should be
PFRSs stated in a common measurement
 To assist FS Users – in interpreting the basis to be useful, which is in the
information in the FS. Philippines it is Peso.
 To assist Auditors – in forming an opinion - this concept assumes that the
as to whether the FS conforms with PFRSs. purchasing power of the peso is
regarded as constant.

Authoritative Status
The CF is not a PFRS and hence does not define
standard for any particular measurement or
disclosure issue.
Conflict? PFRS shall prevail over the CF.
***Note!! CF is not PFRS. It is not a standard.
CHAPTER 1: Objective of Financial Reporting Limitations of Financial Reporting
a. Gen. Purpose financial reports do not and
cannot provide all of the information that
Users of Financial Information
existing and potential investors, lenders and
 Primary Users – FS were primarily other creditors need.
addressed to them. b. … are not designed to show the value of
an entity but they provide information to
Primary Users Concern help the primary users estimate the value of
Investors Risk and Return of the entity.
Investment c. To a large extent, gen. purpose financial
reports are based on estimate and
Ability of the company to
judgment rather than exact depiction.
return the investments.

Ability of the company to pay

dividends.
Lenders & Other Liquidity and Solvency
Creditors CHAPTER 2: Qualitative Characteristic
Ability of the company to pay Qualitative Characteristics are the qualities or
its obligations. attributes that make financial accounting
information useful to the users.
***NOTE!!
ASSETS = LIABILITIES + EQUITY Fundamental Characteristics:
Lenders and Other Investors
Creditors  make the information useful to the users
They are the users that provide resources to the in making economic decisions.
company.  address the content or substance of
information.
 Other Users
 are relevance and faithful representation.
Other Users Concerns
Employees Stability and Profitability A. Relevance – capacity of information to
make a difference in a decision made by
Stability: if the company is users. Relevant information has the ff
unstable, there is chance that ingredients:
the company will not pay their
compensation. Predictive Value – the information can help
users increase the likelihood of correctly
Profitability: request of salary
predicting or forecasting outcome of events.
increase.
Customers Continuity
Confirmatory Value (Feedback) – the
Long-term relation between information enables users confirm or correct
customer and supplier. earlier expectations.
Government Regulatory
***NOTE!!
If the company is following For the information to be relevant, it must
regulations. Tax compliance. contain both predictive and confirmatory value.
Public Various
Materiality – is the omission or
misstatement of information causing to
Objective of Financial Reporting
influence the decision of the users
To provide financial information about the reporting
entity that is useful to existing and potential In the exercise of the judgment in
investors, lenders and other creditors in making determining the materiality, the ff factors
decisions about providing resources to the entity. may be considered:

Specific Objectives: (PAR) a. Relative Size of the item in relation to

A. To provide information useful in making the total of the group to which the item
decisions about providing resources to the belongs.
entity. b. Nature of the item.
B. … useful in assessing the prospects of
the future net cash flows to the entity. ***NOTE!!!
C. … about entity resources, claims and Materiality is NOT an ingredient of Relevance
changes in resources and claims. but rather a specific aspect of relevance.

All material items are relevant, but not all

relevant items are material.
 B. Faithful Representation (Reliability) – the  The benefit derived from the information
information provides a true, correct and should exceed the cost incurred in obtaining
complete depiction of the economic the information.
phenomena that it purports to represent.
The ff are the ingredients:

a. Completeness
b. Neutrality (free from bias) CHAPTER 3: The Financial Statements and the
c. Free from Error Reporting Entity

***NOTE!!! The Financial Statements

Substance over form and conservatism (choose The objective of the Gen. purpose FS is to provide
the option that has least impact on the business) financial information about the reporting entity’s
are NOT ingredients of faithful representation assets, liabilities, equity, income and expenses
and are specific aspects only. contained in the ff:
1. SF Position
2. SF Performance
Enhancing Characteristics (VCUT): 3. Other Statements and Notes to FS (SCF,
 Qualities that enhances its usefulness. SCE, Notes to FS)
 Address the form or presentation of FS are prepared for specific period of time or the
information. reporting period. FS also provide comparative
information for at least one preceding reporting
period.
A. Verifiability – different knowledge and
independent observers could reach
consensus, although not necessarily The Reporting Entity
complete agreement, that a particular
depiction is a faithful representation. Reporting Entity is an entity who must or chooses
to prepare the FS and is NOT necessarily a legal
B. Comparability – an information is entity.
comparable if it helps users identify Few types of FS:
similarities and differences between sets of
information that are provided by: a. Consolidated – parent and subsidiary are
single reporting entity.
a. A single entity but different periods b. Unconsolidated/Individual – parent alone
(Intra-comparability) – provides the report.
b. Different entities in a single period (Inter- c. Combined – reporting entity comprises of 2
comparability) or more entities not linked by parent-
subsidiary relationship.
***NOTE!!

The focus of the CF is intra-comparability.

Although related, consistency and
comparability are not the same. Comparability CHAPTER 4: Elements of Financial Statements
is the goal and consistency are the means of
These are the quantitative information that are
achieving the goal.
shown in the SFP and Statement of
Comprehensive income.

C. Understandability – requires that financial

information must be comprehensible or
Statement of Financial Position (As of/as at)
intelligible if it is to be useful.
ASSETS
***NOTE!!!
Complex matters cannot be eliminated. A present economic resource controlled by the
entity as a result of a past event. An economic
D. Timeliness – having information available resource is a right that has a potential to produce
to decision makers ion time to influence economic benefits.
their decisions. Characteristics:
a. The asset is controlled by the entity.
Cost/Constraint Control – the power to govern economic benefits
 Cost is a pervasive constraint on the and restricting others to enjoy the benefit.
information that can be provided by financial b. The asset is the result of a past transaction
reporting. or event.
c. The asset provides future economic
benefits.
***NOTE!!! Tangibility and ownership are not ***NOTE!!! There’s no such thing as actuarial gain
essential characteristics of assets. Also, the or loss on defined contribution plan.
presence and absence of expenditure is not
necessary in determining the existence of
assets. EXPENSES (decrease in asset or increase in
liability)
The decrease in economic benefit during the acctg
LIABILITIES
period in the form of outflow or decrease in asset
A present obligation of an entity arising from past and increase in liability that results in decrease in
transaction or event, the settlement of which Is equity other than distribution to equity participants.
expected to result in an outflow from the entity of
resources embodying economic benefits.
Characteristics:
CHAPTER 5: Recognition and Derecognition
a. The liability is the present obligation of a
particular entity. Recognition: the process of reporting an asset,
b. Arises from past transactions or event. liability, income or expense on the face of the FS of
c. The settlement of the liability requires an the entity.
outflow of economic resources embodying
economic benefits. Recognition Criteria:

***NOTE!!! Identification of payee and certainty a. It meets the definition of assets, liability,
of timing of settlement and amount of liability equity, income or expense
are not essential characteristics of liabilities. b. Recognizing it would provide useful
information
The recognition of an item may not provide useful
EQUITY (directly related to Assets; inversely information if:
related to Liability)
a. It is uncertain whether an asset or liability
The residual interest in the asset (net asset) of the exists
entity after deducting all of its liabilities. b. An asset or liability exists but the probability
of an inflow or outflow of economic benefit is
INCOME
low.
The increase in economic benefit during the acctg
REMINDERS!!
period in the form of an inflow or increase of assets
or decrease in liability that results in increase in  Recognition criteria only applies to assets,
equity, other than contribution from equity liabilities, income and expense. There is no
participants. Equity Recognition Principle/Criteria
***NOTE!!! Increase in equity other than owner because it is a residual interest.
transactions.  Application of the matching principle
(matching the cost to its related revenue).
Income encompasses both revenue (arises from  Expenses are incurred in conformity with
ordinary course of business and presented in the the 3 applications of the matching principle,
FS at a gross amount) and gains (incidental or namely:
peripheral operations and presented at net of direct a. Cause and effect association/ Strict
costs). matching – examples: warranty
expense, cost of goods sold, sales
commission
Statement of Comprehensive income: classified b. Systematic and Rational Allocation –
into 2; profit or loss and other comprehensive based on cost allocation over the
income (OCI). number of years benefitting from that
cost. Example: Depreciation and
GR: income is part of P/L unless it will be classified amortization
as OCI, which are as follows; c. Immediate Recognition – recognize
a. Unrealized G/L on financial asset measured the expense because you have already
at FVTOCI (Available for Sale Invstmt) earned it. Example: Casualty Losses
b. G/L from translating the FS of a foreign
operation. (ForEx translation gain or loss)
Derecognition is the OPPOSITE of recognition. It
***NOTE!!! ForEx Transaction gain or loss is is the removal of a previously recognized asset or
presented in P/L) liability from the entity’s statement of financial
c. Revaluation Surplus during the year. position.
d. Unrealized G/L from derivative contracts Derecognition occurs when the item no longer
designated as cash flow hedge. meets the definition of an asset or liability.
e. Remeasurements of defined benefit plan
incldg. actuarial G/L on defined benefit On derecognition, the entity:
obligation.
 a. Derecognizes the assets or liabilities that CHAPTER 7: Presentation and Disclosure
have expired or have been consumed,
collected, fulfilled or transferred and Information about assets, liabilities, equity, income
and expenses is communicated through
recognized any resulting income and
presentation and disclosure in the FS.
expenses.
b. Continues to recognize any assets or Effective communication makes information more
liabilities retained after the derecognition. useful. Effective communication requires:
***NOTE!!! Not all transfers require derecognition 1. Focusing on presentation and disclosure
(ex. Consignment of goods). You will only objectives and principles rather than on
derecognize if you transfer control. rules.
2. Classifying information by grouping similar
items and separating dissimilar items.
3. Aggregating information in a manner that it
is not obscured either by excessive detail or
CHAPTER 6: Measurement
by excessive summarization.
Measurement is the process of determining the
***NOTE!!!
monetary amounts at which the elements of the
financial statements are to be recognized and Classification – sorting of assets, liabilities, equity,
carried in the SFP and I/S. income or expense with similar nature, function and
measurement basis for presentation and disclosure
The framework acknowledges that a variety of purposes.
measurement bases are used today to different
degrees and in varying combinations in FS - Classes.
including:
Aggregation – adding together of assets, liabilities,
 Historical Cost – based on the transaction equity, income or expenses that have shared
price of the element at the time of characteristics and are included in the same
recognition. classification.
HC of Asset= Consideration Paid +
Transaction Cost - Classes that are combined together.
HC of Liability= Consideration Received - Classification and aggregation are key concepts to
Transaction Cost effectively communicate the information contained
on FS so that it will not be excessively
 Current Value – measures the element detailed/summarized.
updated to reflect the conditions at the
measurement date.
a. Fair Value – price that would be
received to sell an asset or paid to
transfer a liability in an orderly CHAPTER 8: Concepts of Capital and Capital
transaction bet. market participants. FV Maintenance
is not an entity specific measurement.
Concepts of Capital
b. Value in use –PV of the cash flows or
other economic benefits, that an entity Financial Cap Physical Cap
expects to derive from the use of an Concepts Invested Productive
asset and from its ultimate disposal. money or capacity of the
Fulfillment Value is the PV of the cash purchasing entity.
flows or other economic resources that power (most
an entity expects to be obliged to known type of
transfer as it fulfills a liability. cap.)
Adopted by Yes No
***NOTE!!! Value in use (Assets) and Fulfillment most entities?
Value (Liability) are both an entity-based Measurement Historical Cost Current Cost
measurement.
***NOTE!!! HC has transaction costs, while VIU Capital Maintenance Approach: means that net
and Ful-V has no transactions costs. income occurs only after the capital used from the
beginning of the period is maintained.
c. Current Cost – cost of an equivalent
asset/liability at the measurement date, ***NOTE!!! The net income is derived from the
comprising the consideration that would movement of net assets. If the equity increases, net
be paid/received at the measurement income also increases or there is net income.
date plus transaction costs incurred on
Net changes in Equity XX
that date.
Less: Addtn’l Invsmt by owners (XX)
Add: Withdrawals and distribution XX
to owners
Comprehensive Income XX
Less: OCI (XX)
Add: Other Comprehensive Loss XX
P/L or Net income XX