Welcome to ACT14:

Conceptual Framework and

Accounting Standards (CFAS)
Recap of previous discussion
a. Define accounting as provided by ASC, AICPA, and AAA.
b. Three important activities in the accounting process
c. Identify the basic purpose of accounting
d. Types of information provided by accounting
e. Types of reporting based on the uses of financial information
f. Explain accounting as a science, art, information system and language of business.
g. Basic Accounting Concepts
h. Common Branches of Accounting
i. Old and Current Laws Governing Accountancy Profession
j. Republic Act 9298
k. Four Scope of Practice in the Profession
 REPUBLIC ACT NO. 9298
PROFESSIONAL REGULATORY BOARD OF ACCOUNTANCY
Composition
• Chairman and Six (6) Members
• Four sectors in the practice of accountancy shall as much as possible be equally represented.
Qualifications of Members
• Must be a natural born citizen and a resident of the Philippines
• A duly registered CPA with at least ten (10) years of work experience in any scope of practice of
accountancy.
• Good moral character and must not have convicted of crimes involving moral turpitude
• Must not have any pecuniary interest, directly or indirectly, in any school conferring an academic
degree necessary for admission to the practice of accountancy or where review classes in
preparation for licensure examination are being offered or conducted, nor he/she be a member of
faculty or administration at the time of appointment to the Board.
• Must not be a Director or Officer of the APO at the time of his appointment.
Term of Office
• Three (3) years. No person who has served two successive complete terms as chairman or member
shall be eligible for reappointment until lapse of one year.
• No person shall serve as Board for more than 12 years.
 REPUBLIC ACT NO. 9298

ACCOUNTING AND AUDITING STANDARD SETTING COUNCIL

1. FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)
2. AUDITING AND ASSURANCE STANDARDS COUNCIL (AASC)
AUDITING AND ASSURANCE STANDARDS COUNCIL (AASC)
This will be discuss in detailed in your Auditing Subject.

FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)

• The official accounting standard setting body replacing the ASC.
• New Issued standards are called Philippine Financial Reporting Standards (PFRS) and while
all previously issued standards are called Philippine Accounting Standards (PAS)
• Standards are based on International Financial Reporting Standards (IFRS) and
International Accounting Standards (IAS) issued by International Accounting Standards
Board (IASB)
Philippine Interpretations Committee
• Created by FRSC to prepare interpretations of PFRS and to provide guidance on financial
reporting not specifically addressed in current PFRS.
• To give authoritative guidance on issues that the standards do not provide specific guidelines.
 REPUBLIC ACT NO. 9298

FASB IASB
• Standards issued referred to as Accounting • Standards issued referred to as IFRS or old
Standards Codification or old term is SFAS term is IAS
(US GAAP)
• United States of America (USA) application • International (UK Based) application
• Rule-based • Principle-based

Convergence Project
Designed to eliminate a variety of differences between IFRS and US GAAP.
 REPUBLIC ACT NO. 9298
FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)
Composition: 15 members
1 Chairman – Senior Accounting Practitioner in any scope of accounting practice
14 Representatives
Board of Accountancy (BOA) 1
Securities and Exchange Commission (SEC) 1
Bangko Sentral ng Pilipinas (BSP) 1
Bureau of Internal Revenue (BIR) 1
Financial Executive Institute of the Philippines (FINEX) 1
Commission on Audit (COA) 1
Accredited National Professional Organization of CPAs
Public Practice 2
Commerce and Industry 2
Academe/Education 2
Government 2
Total 14
 REPUBLIC ACT NO. 9298
PRACTICE OF ACCOUNTANCY
• PROHIBITIONS IN THE PRACTICE OF ACCOUNTANCY
No person shall practice accountancy or use the title Certified Public Accountant or use the
abbreviation title “CPA” or display or use any title, sign, card, advertisement, or other device
to indicate such person practices or offers to practice accountancy, or is a certified public
accountant unless such person shall have received from the BOA a Certificate of Registration
and be issued a professional ID card issued by the BOA and PRC.

• LIMITATIONS IN THE PRACTICE OF PUBLIC ACCOUNTANCY

a. It must be duly accredited by the BOA to practice public accountancy with Certificate
of Accreditation renewable every three (3) years.
b. Has acquired three (3) years meaningful experience in any areas of public practice
including taxation.
c. It could be registered as Single Practitioners, General Partnerships, Limited Liability
Partnership (LLP).
d. The SEC shall not register any corporation organized for the practice of public
accountancy.
 REPUBLIC ACT NO. 9298
CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
Republic Act No. 10912
The law mandating and strengthening the continuing professional development program for
all regulated professionals, including the accountancy profession.

• ACCOUNTANCY
The CPD units required for the renewal of license is 15 Units for the Accountancy Profession.

Practice of Public Accountancy

The CPD units required for the accreditation of CPAs in Public Practice is 120 Units.

Exemption from CPD

A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65
years.

However, this exemption applied only to the renewal of CPA license and not for the purpose
of Accreditation in Public Practice.
The Accounting Standards
The Philippine Financial Reporting Standards collectively include all of the following:

1. Philippine Financial Reporting Standards

a. Full PFRS based in IFRS
b. PFRS for Small-Medium sized Entities (SMEs) based on IFRS for SMEs
c. PFRS for Small Entities (SEs) locally produces standard.

2. Philippine Accounting Standards (PAS) based on IAS

3. Philippine Interpretations based on IFRIC

The need for Accounting Standards
• To ensure transparency, reliability, consistency, and comparability of financial statements.

Establishment of Accounting Standards

Democratic process in that a majority of practicing accountants must agree with the standards
before it becomes implemented or simpler term it must be “general acceptable”.

The term “generally acceptable” means that either:

a. The standard has been established by an authoritative accounting setting body
b. The principle has gained general acceptance due to practice over time and has proven to
be most useful.

The development of standards becomes complex and requires an international due process
that involves accountants and other various interested individuals and organization around
the world. This political process incorporates political actions of various interested user
groups as well as professional judgment, logic and research.
Hierarchy of Accounting Standards
1. PFRS
2. In the absence of PFRS that specifically applies to a transaction,
the requirements in PFRSs dealing with similar and related
issues
3. The Conceptual Framework
4. Pronouncement of other standard-setting bodies, accounting
literature and accepted industry practices
Conceptual Framework for Financial Reporting
Learning Objectives
• State the purpose, status, and scope of the Conceptual Framework.
• State the objective of financial reporting.
• Identify the primary users of financial statements.
• Explain briefly the qualitative characteristics of useful information and
how they are applied in financial reporting.
• Define the elements of financial statements and state their recognition
criteria and their derecognition.
• State the measurement bases used in financial reporting.
Purpose of the Conceptual Framework
The Conceptual Framework prescribes the concepts for general purpose financial
reporting. Its purpose is to:
a. assist the International Accounting Standards Board (IASB) in developing
Standards that are based on consistent concepts;
b. assist preparers in developing consistent accounting policies when no
Standard applies to a particular transaction or when a Standard allows a
choice of accounting policy; and
c. assist all parties in understanding and interpreting the Standards.
Status of the Conceptual Framework
• The Conceptual Framework is not a PFRS. When there is a conflict between the
Conceptual Framework and a PFRS, the PFRS will prevail.

• In the absence of a standard, management shall consider the Conceptual

Framework in making its judgment in developing and applying an accounting
policy that results in useful information.
Scope of the Conceptual Framework
The Conceptual Framework is concerned with general purpose financial
reporting. General purpose financial reporting involves the preparation of general
purpose financial statements. The Conceptual Framework provides the concepts
regarding the following:
• The objective of financial reporting
• Qualitative characteristics of useful financial information
• Financial statements and the reporting entity
• The elements of financial statements
• Recognition and derecognition
• Measurement
• Presentation and disclosure
• Concepts of capital and capital maintenance
Objective of general purpose financial reporting
• The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
primary users in making decisions about providing resources to the
entity.

• The objective of general purpose financial reporting forms the

foundation of the Conceptual Framework.
Primary Users
• Primary users – are those who cannot demand information directly
from reporting entities. The primary users are:
(a) Existing and potential investors
(b) Lenders and other creditors.

• Only the common needs of primary users are met by the financial
statements.
• Economic recourses of the entity, claims against the reporting entity and
changes in those resources and claims;
• How efficiently and effectively the entity’s management has utilized the
entity’s resources.
Qualitative Characteristics
I. Fundamental qualitative characteristics II. Enhancing qualitative characteristics (VCUT)
(RF) (1) Comparability
(1) Relevance (PC) (2) Verifiability
(3) Timeliness
(a) Predictive value
(4) Understandability
(b) Confirmatory value
• Materiality – entity-specific aspect of relevance

(2) Faithful representation (CoNeFree)

(a) Completeness
(b) Neutrality
(c) Free from error
Relevance
• Information is relevant if it can affect the decisions of users.
• Relevant information has the following:
a. Predictive value – the information can be used in making predictions
b. Confirmatory value – the information can be used in confirming past
predictions

➢ Materiality – is an ‘entity-specific’ aspect of relevance.

Faithful Representation
• Faithful representation means the information provides a true,
correct and complete depiction of what it purports to represent.
• Faithfully represented information has the following:
a. Completeness – all information necessary for users to understand the phenomenon being
depicted is provided.
b. Neutrality – information is selected or presented without bias.
c. Free from error – there are no errors in the description and in the process by which the
information is selected and applied.
Enhancing Qualitative Characteristics
1. Comparability – the information helps users in identifying
similarities and differences between different sets of information.
2. Verifiability – different users could reach consensus as to what the
information purports to represent.
3. Timeliness – the information is available to users in time to be able
to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.
Financial statements and the Reporting entity
Reporting period
• Financial statements are prepared for a specific period of time (i.e.,
the reporting period) and include comparative information for at
least one preceding reporting period.

Going concern
• Financial statements are normally prepared on the assumption that
the reporting entity is a going concern, meaning the entity has
neither the intention nor the need to end its operations in the
foreseeable future.
Financial statements and the Reporting entity
Reporting entity
• A reporting entity is one that is required, or chooses, to prepare
financial statements, and is not necessarily a legal entity. It can be a
single entity or a group or combination of two or more entities.
Elements of Financial Statements
Asset
• Asset is “a present economic resource controlled by the entity as a
result of past events. An economic resource is a right that has the
potential to produce economic benefits.” (Conceptual Framework 4.3 & 4.4)
Three aspects in the definition of an asset
1. Right – asset refers to a right, and not necessarily to a physical object, e.g.,
the right to use, sell, lease or transfer a building.

2. Potential to produce economic benefits – the right has a potential to produce

economic benefits for the entity that are beyond the benefits available to all
others. Such potential need not be certain or even likely – what is important
is that the right already exists and that, in at least one circumstance, it would
produce economic benefits for the entity.

3. Control – means the entity has the exclusive right over the benefits of an
asset and the ability to prevent others from accessing those benefits.
Liability
• Liability is “a present obligation of the entity to transfer an economic resource as
a result of past events.” (Conceptual Framework 4.26)
Three aspects in the definition of a liability
1. Obligation – An obligation is “a duty or responsibility that an entity has no
practical ability to avoid.” (CF 4.29) An obligation can be either legal obligation or
constructive obligation.

2. Transfer of an economic resource – the obligation has the potential to require

the transfer of an economic resource to another party. Such potential need not
be certain or even likely – what is important is that the obligation already exists
and that, in at least one circumstance, it would require the transfer of an
economic resource.
Three aspects in the definition of a liability
3. Present obligation as a result of past events – A present obligation
exists as a result of past events if:
a. the entity has already obtained economic benefits or taken an action; and
b. as a consequence, the entity will or may have to transfer an economic resource that it would
not otherwise have had to transfer.
(Conceptual Framework 4.43)
Executory contracts
• An executory contract “is a contract that is equally unperformed – neither party
has fulfilled any of its obligations, or both parties have partially fulfilled their
obligations to an equal extent.” (CF 4.56)
• An executory contract establishes a combined right and obligation to exchange
economic resources.
• The contract ceases to be executory when one party performs its obligation.
➢If the entity performs first, the entity’s combined right and obligation changes
to an asset.
➢If the other party performs first, the entity’s combined right and obligation
changes to a liability.
Equity
• “Equity is the residual interest in the assets of the entity after
deducting all its liabilities.” (Conceptual Framework 4.63)
• Equity equals Assets minus Liabilities
Income and Expenses
• Income
Income is “increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from
holders of equity claims.” (Conceptual Framework 4.68)

• Expenses
Expenses are “decreases in assets, or increases in liabilities, that result
in decreases in equity, other than those relating to distributions to
holders of equity claims.” (Conceptual Framework 4.69)
Recognition & Derecognition
The recognition process
• Recognition is the process of including in the statement of financial
position or the statement(s) of financial performance an item that
meets the definition of one of the financial statement elements (i.e.,
asset, liability, equity, income or expense). This involves recording the
item in words and in monetary amount and including that amount in
the totals of either of those statements.
Recognition & Derecognition
Recognition criteria
• An item is recognized if:
a. it meets the definition of an asset, liability, equity, income or expense; and
b. recognizing it would provide useful information, i.e., relevant and faithfully represented
information.
Recognition & Derecognition
Relevance
• The recognition of an item may not provide relevant information if, for example:
a. it is uncertain whether an asset or liability exists; or
b. an asset or liability exists, but the probability of an inflow or outflow of economic
benefits is low. (Conceptual Framework 5.12)

However, the presence of one or both of the foregoing does not automatically lead
to the non-recognition of an item. Other factors should also be considered.
Recognition & Derecognition
Faithful representation
• The level of measurement uncertainty and other factors can affect an item’s
faithful representation, but not necessarily its relevance.

Measurement uncertainty
• Measurement uncertainty exists if the asset or liability needs to be estimated. A
high level of measurement uncertainty does not necessarily lead to the non-
recognition of an asset or liability if the estimate provides relevant information
and is clearly and accurately described and explained.
• However, measurement uncertainty can lead to the non-recognition of an asset
or a liability if making an estimate is exceptionally difficult or exceptionally
subjective.
Recognition & Derecognition
Derecognition
• Derecognition is the removal of a previously recognized asset or
liability from the entity’s statement of financial position.
• Derecognition occurs when the item ceases to meet the definition of
an asset or liability.
Unit of account

• Unit of account is “the right or the group of rights, the obligation or

the group of obligations, or the group of rights and obligations, to
which recognition criteria and measurement concepts are applied.”
(Conceptual Framework 4.48)
Measurement bases
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
Historical cost
• The historical cost of:
a. an asset is the consideration paid to acquire the asset plus transaction costs.
b. a liability is the consideration received to incur the liability minus transaction costs.
• Historical cost is updated over time to depict the following:
✓Depreciation, amortization, or impairment of assets
✓Collections or payments that extinguish part or all of the asset or liability
✓Unwinding of discount or premium when the asset or liability is measured at
amortized cost
Fair value
• Fair value is “the price that would be received to sell an asset, or paid
to transfer a liability, in an orderly transaction between market
participants at the measurement date.” (Conceptual Framework 6.12)
Value in use and fulfilment value

• Value in use is “the present value of the cash flows, or other

economic benefits, that an entity expects to derive from the use of an
asset and from its ultimate disposal.” (Conceptual Framework 6.17)
• Fulfilment value is “the present value of the cash, or other economic
resources, that an entity expects to be obliged to transfer as it fulfils a
liability.” (Conceptual Framework 6.17)
Current cost
• The current cost of:
a. an asset is “the cost of an equivalent asset at the measurement
date, comprising the consideration that would be paid at the
measurement date plus the transaction costs that would be
incurred at that date.”
b. a liability is “the consideration that would be received for an
equivalent liability at the measurement date minus the transaction
costs that would be incurred at that date.”
(Conceptual Framework 6.21)
Entry values vs. Exit values
• Current cost and historical cost are entry values (i.e., they reflect
prices in acquiring an asset or incurring a liability), whereas fair value,
value in use and fulfilment value are exit values (i.e., they reflect
prices in selling or using an asset or transferring or fulfilling a liability).
Considerations when selecting a measurement basis

• When selecting a measurement basis, it is important to consider

the following:
a. The nature of information provided by a particular
measurement basis (e.g., measuring an asset at historical cost
may lead to the subsequent recognition of depreciation or
impairment, while measuring that asset at fair value would lead
to the subsequent recognition of gain or loss from changes in fair
value).

b. The qualitative characteristics, the cost-constraint, and other

factors (e.g., a particular measurement basis may be more
verifiable or more costly to apply than the other measurement
bases).
Measurement of Equity
• Total equity is not measured directly. It is simply equal to difference
between the total assets and total liabilities.
• Because different measurement bases are used for different assets
and liabilities, total equity cannot be expected to be equal to the
entity’s market value nor the amount that can be raised from either
selling or liquidating the entity.
• Equity is generally positive, although some of its components can be
negative. In some cases, even total equity can be negative such as
when total liabilities exceed total assets.
Presentation and Disclosure
• Information is communicated through presentation and
disclosure in the financial statements.
• Effective communication makes information more useful.
Effective communication requires:
a. focusing on presentation and disclosure objectives and principles rather
than on rules.
b. classifying information by grouping similar items and separating
dissimilar items.
c. aggregating information in a manner that it is not obscured either by
excessive detail or by excessive summarization.
Presentation and disclosure objectives and principles

• The objectives are specified in the Standards.

• The principles include:
a. the use of entity-specific information is more useful that
standardized descriptions, and
b. duplication of information is usually unnecessary.
Classification
• Classifying means combining similar items and separating
dissimilar items.
• Offsetting of assets and liabilities is generally not appropriate.

Classification of income and expenses

• Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income.
Aggregation
• Aggregation is “the adding together of assets, liabilities, equity,
income or expenses that have shared characteristics and are included
in the same classification.” (Conceptual Framework 7.20)
Concepts of Capital
• Financial concept of capital – capital is regarded as the invested money or
invested purchasing power. Capital is synonymous with equity, net assets,
and net worth.

• Physical concept of capital – capital is regarded as the entity’s productive

capacity, e.g., units of output per day.
Concepts of Capital Maintenance
• Financial capital maintenance– profit is earned only if the financial amount of
net assets at the end of the period exceeds the financial amount of the net
assets at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period.

• Physical capital maintenance– profit is earned only if the physical productive

capital at the end of the period exceeds the physical productive capital at the
beginning of the period, after excluding any distributions to, and contributions
from, owners during the period.
Assignment 2
Problem 1: True or False
Problem 3: Multiple Choice
Submission via Google Forms until August 20, 2021 (Friday) 11:59
PM.
Next Meeting: Preliminary Quiz
August 30, 2021: Preliminary Exam
(Multiple Choice Questions 90 minutes)