FINANCIAL ACCOUNTING
STANDARDS
AND REPORTING Chapter
2 Philippine Financial Reporting Standards
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Accounting - “the language of business", it also
follows basic concepts or principles for its proper
use.
Generally Accepted Accounting Principles
(GAAP) - comprises the conventions, rules,
processes, principles, standards, and underlying
assumptions that are used in preparing financial
statements.
-Members of the accounting profession have
agreed on these principles and accepted them on
the basis of experience, reason, custom, usage, and
practical necessity.
GAAP is not rigid or unchanging – accounting
principles continue to evolve as a response to the
changes in the financial information needs of
business stakeholders.
FINANCIAL REPORTING STANDARDS
COUNCIL (FRSC)
-the official accounting standard setting
body in the Philippines.
-Primary task of FRSC is to improve and
establish accounting standards that will be
generally accepted in the Philippines.
The chairman and the members of the FRSC serve
a term of three years that are renewable for another
term.
PHILIPPINE FINANCIAL REPORTING
(PFRS) - Accounting standards issued by FRSC.
-Constitute the generally accepted accounting
standards observed in the Philippines.
-PFRS include the following:
 Philippine Accounting Standards (PAS)
 Philippine Financial Reporting Standards
(PFRS)
 Philippine Interpretations developed by
the Philippine Interpretations Committee
THE ACCOUNTING FRAMEWORK
-Sets out the concepts that underlie the preparation
and presentation of financial statements for
external users.
PURPOSE OF THE FRAMEWORK
 Assist the FRSC in developing accounting
standards that represent GAAP in the
Philippines.
 Assist the FRSC in its review and
adoption of existing International
Financial Reporting Standards.
 Assist prepares of financial statements in
applying FRSC Philippine Financial
Reporting Standards and in dealing with
topics that have yet to from the subject of
an FRSC Statement.
 Assist auditors in forming an opinion as to
whether financial statements conform with
Philippine GAAP.
 Assists users of financial statements in
interpreting the information contained in
financial statements prepared in
conformity with Philippine GAAP.
 Provide those who are interested in the
work of the FRSC with information about
its approach to the formulation of
Philippine Financial Reporting Standards.
The Framework - is not a Philippine Financial
Reporting Standard (PFRS) and hence does not
define standards for any particular measurement or
disclosure issue. In case of conflict, the
requirements of the PFRS shall prevail over those
of the Framework
SCOPE OF THE FRAMEWORK
The Framework deals with the following matters:
 Objective of financial statements
 Underlying assumptions in the preparation
of financial statements
 Qualitative characteristics that determine
the usefulness of information in financial
statements
 Definition, recognition and measurement
of the elements of the financial statements
 Concepts of capital and capital
maintenance.
BASIC ACCOUNTING CONCEPTS
Accounting calls for scientific approach toward the
recording of innumerable business transactions.
There are various accounting conventions,
principles and concepts that are meant to serve as
guidelines to the whole process of accounting of a
business entity.
The following are basic concepts which form the
basis for proper accounting:
• Business Entity Principle - This concept states
the business is considered a separate accounting
entity, distinct and separate from the owner(s). The
personal transactions of owners are not included in
the records of the business.
Accounting entity - is an organization (or a
section or division of an organization) that is
accounted for as a separate economic unit.
• Dual-effect of Business Transactions - The
resources controlled by a business are referred to
as its assets. For a new business, these assets
originate from two possible sources:
o Owners
o Creditors who extend loans to the business
Those who contribute assets to a business have
legal claims on those assets.
The accounting equation states that the total assets
of the business are equal to the sum of the assets
contributed by owners and the assets contributed
by creditors.
ASSETS = LIABILITIES + EQUITY
• Matching Principle - Profit or loss is computed
by deducting expenses incurred from the income
earned during an accounting period.
-This means that the income recorded and reported
in one accounting period should be matched
against the expenses that directly or indirectly
contribute to the generation of the income.
• Accrual Basis - Income is recognized when it is
earned, regardless of when cash is received.
Expenses are recognized when incurred, regardless
of when cash is paid.
• Periodicity (Time Period Concept) - To make
effective economic decisions, timely financial
information must be made available to decision-
makers.
-The periodicity concept assumes that the
operating life of an enterprise may be conveniently
divided into time periods of equal length (such as
one year), called accounting periods. This allows
accounting to provide information on a timely
basis and makes it possible for users of financial
statements to assess the condition and performance
of the business across time periods (for example,
comparing the amount of net income this year to
last year).
• Going Concern (Continuity Assumption) - The
financial statements are normally prepared on the
assumption that an enterprise is a going concern
and will continue in operation for the foreseeable
future. It is assumed that the enterprise has neither
the intention nor the need to liquidate or curtail
materially the scale of its operations.
• Cash Basis of Accounting - A method used in
accounting for business transactions. Under this
method, income is recognized when cash is
received, and expenses are recognized when cash
is paid.
FINANCIAL STATEMENTS
-The basic purpose of accounting is to provide
quantitative financial information about a business
that is useful to users in making economic
decisions.
Accountants/bookkeepers - accumulate financial
information through the preparation of financial
statements.
Financial Statements - is where the information
collected and processed in financial accounting is
communicated to users on a periodic basis.
-Financial statements are the end-product
of the financial accounting process.
TYPES OF FINANCIAL STATMENTS
 Statement of financial position or balance
sheet
 Statement of comprehensive income
 Statement of changes in equity
 Statement of cash flows
 Notes to the financial statements.
THE ELEMENTS OF THE FINANCIAL
STATEMENTS
Financial statements - portray the financial
effects of transactions and other events by
grouping them into broad classes according to
their economic characteristics. These broad classes
are termed the elements of financial statements.
Elements for the measurement of financial
position:
 Assets
 Liabilities
 Equity
Elements for the measurement of performance are:
 Revenue/income
 expenses
Elements for the statement of changes in equity
and the statement of cash flows:
 Assets
 Liabilities
 Equity
 Revenue/income and
 Expenses
ASSETS
Assets - is a resource owned and/or controlled by
the enterprise. It is expected to provide future
economic benefits to the enterprise.
- Are acquired by an enterprise as a result
of a past transaction or event.
- The enterprise should have the capacity
to restrict or prevent other entities from enjoying
the economic benefits arising from the use of the
resource or item.
Cash – money on hand, or in banks, and other
items considered as medium of exchange in
business transactions.
Accounts receivable – valid claims from
customers or clients arising from the provision of
services or delivery of goods wherein the price for
these services or goods have not yet been paid (on
account or on credit).
Supplies on hand – refers to supplies purchased
by an enterprise (Ex: bond paper, envelopes,
printer cartridges, pencils, etc.) which are unused
as of the reporting date.
Merchandise inventory – goods which have been
bought from suppliers for resale to customers at a
price higher than cost.
Property, Plant, and Equipment – long-lived
assets which have been acquired for use in
operations. (Ex: Land, building, machinery,
furniture, fixtures, equipment, vehicles)
LIABILITIES
Liability - is a present obligation of the enterprise
arising from past events, which are to be settled in
the future.
-Liabilities are settled by paying cash, the
delivery of goods, the provision of services, or
settled in some other form.
Accounts Payable – amounts due to suppliers for
goods purchased on account or for services
received on account.
Salaries Payable – salaries due to employees
which are unpaid as of reporting date.
Utilities Payable – amounts due to utility
companies for electricity, heat, light and water
charges.
Advances from Customers – amounts received
from customers, in advance, for the delivery of
goods or provision of services. (Unearned
Revenue)
Loans Payable – obligations of an enterprise to
lenders (such as banks and finance companies) to
be paid on demand or at a specified future date
agreed between the enterprise and the lender.
EQUITY
Equity - Creditors and owners both have claims
on the assets of the enterprise. The claim of
creditors is known as creditors’ equity or simply,
liabilities. The claim of owners is known as
owner’s equity or simply, equity or capital.
- Is the residual interest in the assets of the
enterprise after deducting all its liabilities. Equity
refers to the claim of the owner(s) of the enterprise
to the assets of the business after all the claims of
creditors have been settled or paid.
-Equity arises from the original investment
by an owner (proprietor, partner, or shareholder)
into the business. Equity is increased by additional
investments by the owner/s, and by profit earned
during a period. On the other hand, losses and
withdrawals by the owner/s decrease equity.
- Also called partners’ equity, in the case
of partnerships, and shareholders’ equity in the
case of corporations.
ELEMENTS PERTAINING TO
PERFORMANCE OR PROFITABILITY
• Income - refers to increases in economic benefits
during the accounting period in the form of
inflows or enhancements of assets, or decreases of
liabilities that result in increase in equity, other
than those a relating to contributions from equity
participants. The definition of income
encompasses both revenue and gains.
Revenue - arises in the course of the ordinary
activities of an enterprise and is referred to by
different names such as: sales, fees, interest,
dividends, royalties, and rent.
• Expenses - refers to the decreases in economic
benefits during the accounting period in the form
of outflows or depletions of assets or incidences of
liabilities that result in decreases in equity, other
than those relating to distributions to equity
participants.
-The definition of expenses encompasses losses as
well as those expenses that arise in the course of
the ordinary activities of the enterprise.
RECOGNITION OF THE ELEMENTS OF
THE FINANCIAL STATEMENTS
Recognition - the process of incorporating in the
statement of financial position, or statement of
comprehensive income, an item that meets the
definition of an element and satisfies the criteria
for recognition.
-An item that meets the definition of an element
should be recognized if:
 It is probable that any future economic
benefit associated with the item will flow
to or from the enterprise
 The item has a cost or value that can be
measured with reliability.
-Following these two main criteria, we can
summarize the recognition principles for each
element, as follows:
 Asset is recognized in the statement of
financial position when it is probable that
the future economic benefits will flow to
the enterprise and the asset has a cost or
value that can be measured reliably.
 Liability is recognized in the statement of
financial position when it is probable that
an outflow of resources embodying
economic benefits will result from the
settlement of a present obligation and the
amount at which the settlement will take
place can be measured reliably.
 Income is recognized in the statement of
comprehensive income when increase in
future economic benefits related to an
increase in an asset or a decrease of a
liability has arisen that can be measured
reliably.
 Expenses are recognized in the statement
of comprehensive income when a decrease
in future economic benefits related to a
decrease in an asset or an increase of a
liability has arisen than can be measured
reliably.
MEASUREMENT OF THE ELEMENTS OF
THE FINANCIAL STATEMENTS
Measurement - is the process of determining the
monetary amounts at which the elements of the
financial statements are to be recognized and
carried in the financial statements.
MEASUREMENT BASES
• Historical cost - Assets are recorded at the
amount of cash or cash equivalents paid or the fair
value of the consideration given to acquire them at
the time of their acquisition. Liabilities are
provided at the amount of proceeds received in
exchange for the obligation or in some
circumstances, at the amounts of cash or cash
equivalents expected to be paid to satisfy the
liability in the normal course of business.
- Is the most commonly used measurement
basis in accounting because it is deemed as the
most objective basis.
• Current cost - Assets are carried at the amount
of cash or cash equivalents they would have to be
paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the
undiscounted amount of cash or cash equivalents
that would be required to settle the obligation
currently.
• Realizable (settlement) value - Assets are
carried at the amount of cash or cash equivalent
that could currently be obtained by selling the
asset in an orderly disposal. Liabilities are carried
at their settlement values; that is the undiscounted
amounts of cash or cash equivalents expected to be
paid to satisfy the liabilities in the normal course
of business.
(Users of financial statements are mentioned
again. See reviewer 1)
INFORMATION PROVIDED BY
FINANCIAL STATEMENTS
• Financial position - This refers to the condition
of a business, in monetary terms, as of a given date
or point in time.
-The financial position of an enterprise is
affected by the economic resources it controls, its
financial structure, its liquidity and solvency, and
its capacity to adapt to changes in the environment
in which it operates.
-Information about financial position is
primarily provided in a statement of financial
position or balance sheet.
o Liquidity - the availability of cash in the
near future to cover currently maturing
liabilities or obligations.
o Solvency - the availability of cash over the
long term to meet obligations when they
fall due.
o Capacity for adaptation - the ability of
the enterprise to use its available cash for
 unexpected requirements and investment
opportunities.
Summary of Information Provided by Financial
Statements and Elements of Financial Statements
EXAMPLE OF STATEMENT OF
FINANCIAL POSITION
FINANCIAL PERFORMANCE
Performance or profitability - refers to whether a
company is able to generate profit or incur a loss
during a particular accounting period. Information
about performance is primarily provided in a
statement of comprehensive income.
The statement of comprehensive income has two
parts
o the profit/loss portion (income statement)
o the other comprehensive income portion.
Income Statement - also called statement of
performance, profit/loss statement, or statement of
earnings
- Is a useful tool for evaluating
management’s stewardship of the resources of the
enterprise. It is also useful in assessing the inflow
and outflow of cash.
CHANGES IN FINANCIAL POSITION
Information concerning changes in the financial
position of an enterprise is useful in order to assess
its investing, financing and operating activities
during the reporting period. This information
provides financial statement users with a basis to
assess the ability of the enterprise to generate cash
and cash equivalents and the needs of the
enterprise to utilize those cash flows.
Statement of Changes in Equity - shows the
balance of the owner’s investment in the business
at the beginning of the accounting period,
additional investments made by the owner,
withdrawals (drawings) by the owner for personal
use, the profit or loss for the period, and the
balance of the owner’s investment at the end of the
accounting period.
GENERAL-PURPOSE FINANCIAL
STATEMENTS
While all of the information needs of these users
cannot be met by financial statements, there are
needs which are common to all users. As investors
are providers of risk capital to the enterprise, the
provision of financial statements that meet their
needs will also meet most of the needs of other
users that financial statements can satisfy.
Financial statements that meet most of the needs of
other users are known as general- purpose
financial statements.
FREQUENCY OF PREPARATION OF
FINANCIAL STATEMENTS
Financial statements are prepared at least
annually.
Interim Financial Statements - shorter- period
financial statements that are prepared for periods
less than a year such as monthly, quarterly, and
semi-annually .
The frequency of preparation of financial
statements depends on the needs of users and the
cost-benefit consideration (the cost of preparing
financial statements more frequently must not
exceed the benefits obtained from the use of these
financial statements).
RESPONSIBILITY FOR FINANCIAL
STATEMENTS
Management - has the primary responsibility for
the preparation and presentation of the financial
statements of the enterprises.
- Responsible for selecting and applying
the accounting policies and principles which are
appropriate for the company.
UNDERLYING ASSUMPTIONS IN THE
PREPARATION OF FINANCIAL
STATEMENTS
Underlying assumptions - refer to concepts
which are assumed to have been applied in
preparing financial statements. There are two
underlying assumptions:
 Accrual Basis
 Going Concern
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
Qualitative characteristics - are the attributes that
make the information provided in financial
statements useful to users. The four principal
qualitative characteristics are:
 Relevance
 Reliability
These refer to the content of financial statements.
 Understandability
 Comparability
These Refer to the way financial statements are
presented.
Relevance - Information has the quality of
relevance when it influences the economic
decisions of users by helping them evaluate past,
present or future events, or confirming or
correcting, their past evaluations.
The following are the ingredients of relevance:
o Predictive role - Information is relevant if
it is used to make predictions of, say,
future cash inflows or income in future
periods.
o Confirmatory role - Information is
relevant if it is used to confirm or correct
the earlier expectations of a financial
statement user.
 o Materiality - Information is material if its
omission or misstatement could influence
the economic decisions of users taken on
the basis of the financial statements.
-There is no clear-cut amount
considered to be material. In determining
materiality, management would ask: “If
this item is misstated or omitted from the
financial statements, would it affect the
economic decisions of users?” If the
answer to the question is yes, then the item
is considered material.
Reliability - Information should be free from
material error and bias, and can be depended upon
by users to represent faithfully that which it either
purports to represent or could reasonably be
expected to represent.
-Elements that enhance reliability include:
o Faithful representation - information
must represent faithfully the transactions
and other events it either purports to
represent or could reasonably be expected
to represent.
-This means that the actual effects
of transactions should be properly
accounted for and reflected in the
financial statements.
o Substance over form - It is necessary
that transactions and other accountable
events are accounted for and presented in
accordance with their substance and
economic reality and not merely their
legal form.
-The substance of transactions or
other events is not always consistent with
that which is apparent from their legal
form.
o Neutrality - Financial statements must be
free from bias. Financial statements are
not neutral if, by the selection or
presentation of information, they
influence the making of a decision or
judgment in order achieve a
predetermined result or outcome.
o Prudence (Conservatism) - Is the
inclusion of a degree of caution in the
exercise of judgment needed in making
the estimates required under conditions of
uncertainty, such that assets or income
are not overstated and liabilities or
expenses are not understated.
-Whenever an accountant
encounters situations involving reporting
uncertainties, application of prudence
requires the accountant to choose an
alternative or accounting method which
results in higher expense or lower
income. The intentional understatement
of income or overstatement of expenses
is not a proper application of prudence.
o Completeness - The information in
financial statements must be complete
within the bounds of materiality and cost.
An omission can cause information to be
false or misleading and thus unreliable.
Understandability - Financial statements should
be readily understandable by its users. Words and
other accounting terminology being used are those
expected to be known and understood by users of
the financial statements.
-For this purpose, users are assumed to
have a reasonable knowledge of business and
economic activities and accounting and a
willingness to study the information with
reasonable diligence. Information about complex
matters which are relevant to users should not be
excluded merely on the grounds that it may be too
difficult for certain users to understand. Where
necessary, additional explanations need to be
included in the financial statements in order to
facilitate understanding.
Comparability - Users must be able to compare
the financial statements of an enterprise across
accounting periods (this is known as intra-
comparability).
-For example, well-prepared and presented
financial statements for 2012 can be compared to
financial statements for 2011 and other prior
periods for the purpose of determining
improvements in business performance.
-Users must also be able to compare the
financial statements of different enterprises, such
as comparing financial information for two or
more enterprises in the same industry, in order to
evaluate their relative financial position, financial
performance and cash flows (this is known as
inter-comparability).
-A company usually compares its
performance against the performance of
competitors and industry leaders in order to
motivate itself to greater achievement and address
any identified areas for improvement.
information should not exceed the benefits of
having these information available for decision-
makers.
• Balance between Qualitative Characteristics.
In practice, a balancing, or trade-off, between
qualitative characteristics is often necessary.
Oftentimes, relevance and reliability are not
present simultaneously as desired. Generally, the
aim is to achieve an appropriate balance among the
characteristics in order to meet the objective of
financial statements. The relative importance of
the characteristics in different cases is a matter of
professional judgment.

CONSTRAINTS ON RELEVANT AND

RELIABLE INFORMATION

While management desires to provide the most

relevant and reliable information to financial
statement users, there are several constraints that
may cause financial statement preparers to issue
financial statements which are less relevant or less
reliable than they want it to be. These constraints
are:

• Timeliness. If there is undue delay in the

reporting of information it may lose its relevance.
Management may need to balance the relative
merits of timely reporting and the provision of
reliable information. To provide information on a
timely basis it may often be necessary to report
before all aspects of a transaction or other event
are known, thus impairing reliability.

-Conversely, if reporting is delayed and all

aspects are known, the information may be highly
reliable but of little use to users who have had to
make decisions in the interim. In achieving a
balance between relevance and reliability, the
overriding consideration is how best to satisfy the
economic decision-making needs of users.

• Cost-benefit. The cost of providing financial

information include the cost of maintaining
financial records, computerization, salaries of
accounting personnel, supplies (paper, ink,
electricity), etc. The cost of providing financial