CONCEPTUAL FRAMEWORK 6

PRESENTATION AND DISCLOSURE

The presentation and disclosure can be an effective communication tool about the
information in financial statements. A reporting entity communicates information about its assets,
liabilities, equity, income and expense.
Classification
Classification is the sorting of assets, liabilities, equity, income and expenses on the basis
of their shared characteristics.
Classifying dissimilar assets, liabilities, equity, income and expenses can obscure relevant
information, reduce understandability, and comparability and may not provide an faithful
representation of a financial information.
Classification of income and expenses
Income and expenses are classified as components of profit and loss and components of
other comprehensive income. The statement for profit or loss together with the statement
presenting other comprehensive income.
The statement of profit or loss is the primary source of information about an entity’s
financial performance for the reporting period. All income and expenses should be appropriately
classified and included in the statement of profit or loss.
However, there are certain items of income and expenses that are presented outside profit
or loss but included in other comprehensive income. The components of other comprehensive
income are subsequently recycled or reclassified to profit or loss or retained earning.
Aggregation
Aggregation is the adding together the assets, liabilities, equity, income and expenses that
have similar or shared characteristics and are included in the same classification.
Aggregation makes information useful by summarizing a large volume of detail. However,
aggregation may conceal some of the detail. Hence, a balance should be made so that relevant
information is not obscured either by a large amount of insignificant detail or by excessive
aggregation.
CAPITAL MAINTENANCE
The financial performance of an entity is determined using two approaches, namely
transaction approach and capital maintenance approach.
The transaction approach is the traditional preparation of an income statement.
 The capital maintenance approach means that net income occurs only after the capital
used from the beginning of the period is maintained. In other words, net income is the amount an
entity can distribute to its owner and be as well-off at the end of the year as at the beginning.
The distinction between return of capital and return on capital is important to the
understanding of net income.
Shareholder invest in entity to earn a return on capital or an amount in excess of their
original investment.
Return of capital is the erosion of the capital invested in the entity.
The Conceptual Framework considered two capital maintenance, namely financial capital
and physical capital.
Financial Capital
Under a financial capital concept, such as invested money or invested purchasing power,
capital is synonymous with net assets or equity of the entity
Financial capital is the monetary amount of the net assets contributed by shareholders and
the amount increase in net assets resulting from earnings retained by the entity.
Financial capital is the most traditional concept based on historical cost and adopted by
most entities.
Net Income under financial capital
Under financial capital concept, net income occurs when the nominal amount of the net
assets at the end of the year exceeds the nominal amount of the net assets at the beginning of the
period, after excluding distribution to and by owners during the period.
Example
The following assets, liabilities and other financial date pertain to the current year:
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
Computation:
Net assets – 12/31 1,300,000
Add: Dividends paid 300,000
Total 1,600,000
Less: Net Assets – 1/1 500,000
Additional Investments 400,000 900,000
Net Income 700,000

Physical Capital
Physical capital is the quantitative measure of the physical productive capacity to produce
goods and services. The physical productive capacity may be based on, for example, units of output
per day or physical capacity of productive assets to produce goods and services.
This concept requires that the productive assets be measured at current cost, rather than
historical cost.
Example
Assume previously given illustration, the net assets of P500,000 on January 1 had a current
cost of P800,000 by reason of inflationary condition.
Net assets – 12/31 1,300,000
Add: Dividends paid 300,000
Total 1,600,000
Less: Net Assets – 1/1 800,000
Additional Investments 400,000 1,200,000
Net Income 400,000