CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Lesson 1. Overview of International Accounting Standards and Conceptual Framework

Lesson Objectives:
At the end of this lesson, you will be able to:

 Understand the history, development and functions of the standard-setting bodies in

the development of financial reporting framework.
 Describe the developments in Philippine accounting standards.
 State the basic purpose, authoritative status, and scope of the Conceptual Framework.

Discussion:
Lesson 1: International Accounting Standards and Conceptual Framework
The Accounting Standards Council (ASC) is the body that prescribes the accounting
standards that will be generally accepted in the Philippines and for so many years it adopted
the US Financial Accounting Standards Board. However, in 1996, it began to issue standards
based on international accounting standards and eventually made a decision to move totally to
International Accounting Standards to the following factors:

 Support of IAS by Philippine organizations

 Increasing internationalization of business
 Improvement of IAS
 Increasing recognition of IASB standards
Such move proved to be not only cost effective but also due to the magnitude of international
financing transactions, securities trading and direct foreign investment is enormous in
different countries.
For a better understanding as to how international standards are developed and eventually
gain recognition worldwide, the following made it all possible:

- International Accounting Standards Committee (IASC) was formed in 1973 by

professional accountancy bodies from Australia, Canada, France, Germany, Japan,
Mexico, the Netherlands, United Kingdom & Ireland, and the USA.
- International Accounting Standards Committee Foundation (IASCF) was formed
in March 2001, at Delaware, USA, which is the parent entity of IASB and
independent accounting standard setter based in London, UK. This is now the IFRS
Foundation (IFRSF)
- Monitoring Board consists of Member of European Commission, Chairs of the
Financial Services Agency of Japan, US Securities and Exchange Commission, the
Emerging Markets Committee of the International Organization of Securities
Commissions (IOSCO) and the Technical Committee of IOSCO. Included is a non-
voting observer, the Chair of the Basel Committee on Banking Supervision. The
purpose is to serve as a mechanism for formal interaction between capital market
authorities and the IFRS Foundation in relation to investor protection, market
integrity and capital formation more effectively. It is responsible in appointing
trustees and approving the appointment of trustees according to IFRSF constitution. It
is also responsible in reviewing and providing advice to the trustees on their
fulfilment of the responsibilities set by IFRS constitution.
- International Financial Reporting Standards Foundation (IFRSF), formerly the
International Accounting Standards Committee Foundation (IASCF), is an
 independent, not-for-profit organization working in the public interest. Its objectives
are as follows:
 To develop a single set of high quality, understandable, enforceable and globally
accepted international financial reporting standards through its standard-setting
body, the IASB.
 To promote the use and rigorous application of those standards.
 To take account of the financial reporting needs of emerging economies and
small and medium-sized entities
 To bring about convergence of national accounting standards and IFRSs to high
quality solutions.
- International Accounting Standards Board (IASB) is established in 2001, an
independent private sector body whose objective is to achieve convergence in the
accounting principles used by businesses and other organizations for financial
reporting around the world. It assumed accounting standard setting responsibilities
from IASC. It is responsible for the development and publication of IFRSs and for
approving interpretations of IFRSs ad developed by IFRS Interpretation Committee.
All its meetings are held in public and webcast, regulators, business leaders,
accounting standard-setters and the accountancy profession.
- IFRS Advisory Council has 40 members that provides a forum for organizations and
individuals with an interest in international financial reporting to participate in the
standard setting process.
- IFRS Interpretation Committee is the interpretative body of IASB which consists
of 14 members appointed by the Trustees and drawn from a variety of countries and
professional backgrounds. It reviews accounting issues that have arisen within the
context of current IFRSs and to provide authoritative guidance on those issues. Its
meetings are open to public and webcast and it works closely with similar national
committees and follows open due process. The interpretations have the same
authority as accounting standards.

Developments in Philippine Accounting Standards

The Philippines, through the Accounting Standards Council, made a decision to move
totally to international standards in 1997 due to the following factors:
a. Support of International Accounting Standards by Philippine organizations such
as the Securities and Exchange Commission and the Board of Accountancy.
b. Increasing internationalization of business
c. Improvement of International Accounting Standards.
d. Increasing recognition of IASB standards
e. ASC approves re-issuance as Philippine Accounting Standards’ of previously
issued Statements of Financial Accounting Standards (SFAS).
f. ASC approves the issuance of new and revised accounting standrds
g. SEC adopts PFRS for SMEs

Conceptual Framework sets out concepts that underlie the preparation and presentation of
financial statement for external users. Its objective is to create a sound foundation for future
accounting standards that are principle-based, internally consistent and internationally
converged.
Purpose:
a. Assist the IASB to develop IFRS standards that are based on consistent concepts
 b. Assist preparers to develop consistent accounting policies when no standard applies
to a particular transaction or event or when a standard allows a choice of accounting
policy.
c. Assist all parties to understand and interpret the standards (auditors, users of financial
statements and those who are interested in the work of FRSC).
Please take note of the following:

 Conceptual framework is not a standard.

 It may be revised from time to time but will not automatically lead to changes in
the standards.
 It contributes to the stated mission of the IFRS Foundation
 Provides the foundation for standards
The IASB issued the revised Conceptual Framework for Financial Reporting on March 29,
2018 which has 8 chapters:
Chapter 1: The Objective of Financial Reporting

- The objective of general purpose financial reporting is to provide financial

information that is useful to users in making decisions relating to providing resources
to the entity.
- Users’ decisions involve decisions about
o Buying, selling or holding equity or debt instruments
o Providing or settling loans and other forms of credit
o Voting or influencing management’s actions
- To make decisions, users assess
o Prospects for future net cash inflows to the entity
o Management’s stewardship of the entity’s economic resources.
- To make both these assessments, users need information about both
o The entity’s economic resources, claims against the entity and changes in
those resources and claims
o How efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources.
- Users of accounting information:
o External Users – include owners/shareholders, creditors, potential investors,
suppliers, customers, labor unions, government agencies, trade associations
and the public
o Internal Users – board of directors, chief executive officers, chief financial
officers, vice presidents, business unit managers, plant managers and the
supervisors.

Chapter 2: Qualitative Characteristics of Useful Financial Information

- Apply equally to financial information in general purpose financial reports as well as

financial information provided in other ways.
- Fundamental qualitative characteristics of financial information:
o Relevance – capability of making a difference in decisions made by users if
information has predictive value, confirmatory value or both. Materiality is
an entity-specific aspect of relevance based on the nature or magnitude of the
items surrounding a specific entity.
o Faithful representation – IASB reintroduced explicit references to substance
over form and prudence. This seeks to maximize the underlying
characteristics of completeness, neutrality and freedom from error.
 - Enhancing qualitative characteristics include comparability, verifiability, timeliness
and understandability which should be maximized to an extent. However, enhancing
qualitative characteristic cannot render information useful if such information is
irrelevant or not represented faithfully.
- Cost is a pervasive constraint on the information that can be provided by financial
reporting. IASB assesses costs and benefits in relation to financial reporting in
general.

Chapter 3: Financial Statements and the Reporting Entity

- The objective of financial statements is to provide financial information about the

reporting entity’s assets, liabilities, equity, income and expenses that is useful to users
of financial statements in assessing the prospects for future net cash inflows to the
reporting entity and in assessing management’s stewardship of the entity’s economic
resources.
- Information is provided in –
o Statement of financial position
o Statements of financial performance
o Other statements and notes by presenting and disclosing information about
 Recognized assets, liabilities, equity, income and expenses including
information about their nature and risks arising from those
recognized assets and liabilities.
 Assets and liabilities that have not been recognized, including
information about their nature and about the risks arising from them.
 Cash flows
 Contributions from holders of equity claims and distributions to
them.
 The methods, assumptions and judgements used in estimating the
amounts presented or disclosed, and changes in those methods,
assumptions and judgements.
- Financial statements are prepared for a specified period of time (reporting period). It
also provides comparative information for at least one preceding reporting period to
help users to identify and assess changes and trends.
- Financial statements are prepared on the assumption that the reporting entity is a
going concern and will continue in operation for the foreseeable future.
- A reporting entity is an entity that is required or chooses to prepare financial
statements.
o It can be a single entity or a portion of an entity or can comprise more than
one entity. A reporting entity is not necessarily a legal entity.
- Parent that has control over its subsidiary.
o It can be a single entity or a portion of an entity or can comprise more than
one entity. A reporting entity is not necessarily a legal entity.
o Parent that has control over its subsidiaries, reporting entity’s financial
statements are referred to as consolidated financial statements.
o If reporting entity is parent alone, its financial statements are referred to as
unconsolidated financial statements.
o If reporting entity comprises 2 or more entities that are not all linked by a
parent-subsidiary relationship, the reporting entity’s financial statements are
referred to as combined financial statements.

Chapter 4: The Elements of Financial Statements

ITEM ELEMENT DESCRIPTION

 A present economic resource controlled by the entity as a
result of past events.
Economic Resource Asset
An economic resource is a right that has the potential to
produe economic benefits
A present obligation of the entity to transfer an economic
Liability
resource as a result of past events.
Claim
The residual interest in the assets of the entity after
Equity
deducting all its liabilities.
Increases in assets, or decreases in liabilities, that result in
Changes in
Income the increases in equity other than those relating to
economic resources
contributions from holders of equity claims
and claims,
Decreases in assets, or increases in liabilities, that result
reflecting financial
Expenses in the decreases in equity other than those relating to
performance
distributions to holders of equity claims
Contributions from holders of equity claims and
Other changes in -
distributions to them.
economic resources
Exchanges of assets or liabilities that do not result in
and claims -
increases or decreases in equity.

New IASB definitions:

Elements Previous Definition
A resource controlled by an entity as a
result of past events and from which
Asset future economic benefits are expected
to flow to the entity.
A present obligation of the entity
arising from past events, the
settlement of which is expected to
Liability
result in an outflow from the entity of
resources embodying economic
benefits.
New Definition
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.
A present obligation of the entity to
transfer an economic resource as a result
of past events. An obligation is a duty or
responsibility that the entity has no
practical ability to avoid.

Chapter 5: Recognition and Derecognition

- Recognition is the process of capturing, for inclusion in the financial statements, an

item that meets the definition of an asset, a liability, equity, income or expenses.

- How recognition links the elements of financial statements:

Statement of Financial Position at the beginning of the reporting period (Assets –
Liabilities=Equity)
Add
Statement of Financial Performance (Income – Expenses)
Add
Contributions from Holders of Equity Claims – Distributions to Holders of Equity
Claims
Equals
 Statement of Financial Position at the end of the reporting period (Assets –
Liabilities=Equity)

- Derecognition is the removal of all or part of a recognized asset or liability from an

entity’s statement of financial position.

Chapter 6: Measurement
This is the process of determining the monetary amounts at which the elements of the
financial statement are to be recognized.

- In the revised conceptual framework, the Board identified 2 categories of

measurement were identified to provide useful information to users:
o Historical cost – derived from the historical price of the transaction or event
being considered for measurement.
o Current value – uses updated information to reflect conditions at the
measurement date which include fair value, value in use for assets, present
value, realizable value, fulfilment value for liabilities and current cost as
bases for measurement.

See the table measurement summary on the next page, extracted from Win Ballada’s
book:
Measurement Entry or Exit
Information Provided by the Measurement Basis
Basis Value?
Asset Entry
Historical cost, including transaction costs, to the extent
unconsumed (or uncollected) and recoverable. It includes interest
accrued on any financing component.
Historical Cost Liability
Consideration received (net of transaction costs) for taking on the
unfulfilled part of the liability, increased by excess of estimated
cash outflows over consideration received. It includes interest
accrued on any financial component.

Fair Value The price that would be received to sell an asset, or paid to Exit
(Market transfer a liability, in an orderly transaction between market
Participant participants at the measurement date. It excludes any potential
Assumptions) transaction costs on sale or transfer.

Asset Exit
Value in
Present value of future cash flows from the continuing use of the
Use/Fulfilment
asset and from disposal, net of transaction costs on disposal.
Value (Entry-
Liability
Specific
Present value of future cash flows that will arise in fulfilling the
Assumptions)
liability, including future transaction costs.

Asset Entry
Considerations that would be given to acquire an equivalent asset
at measurement date plus trnasactions costs. It reflects the current
Current Cost age and condition of the asset.
Liability
Consideration that would be received to incur an equivalent
liability at measurement date minus transaction costs.
Chapter 7: Presentation and Disclosure
A reporting entity communicates information about its assets, liabilities, equity,
income and expenses by presenting and disclosing information in its financial
statement. Proper classification of each element on the basis of shared characteristics
should be made to come up with relevant information to its users:

- Classification of assets and liabilities

o Current
o Non-current
- Classification of equity – it is necessary to classify components of equity if some are
subject to legal, regulatory or other requirements so as to provide useful information
- Classification of income and expenses
o Income and expenses from the unit of account selected for an asset or liability
o Components of such income and expenses if it can be identified separately.
- Profit or loss and other comprehensive income
o In the statement of profit or loss
o Outside the statement of profit or loss (other comprehensive income)
- Aggregation – adding together of assets, liabilities, equity, income or expenses that
have shared characteristics and are included in the same classification.

Chapter 8: Concepts of Capital and Capital Maintenance

- Financial concept of capital – capital is regarded as the invested money or invested

purchasing power. Capital is synonymous with equity or net assets.
- Financial capital maintenance concept – profit is earned if the net assets at the end of
the period exceed the net assets at the beginning of the period after excluding
contributions to and from owners during the period.
- Physical concept of capital – capital is regarded as the entity’s productive capacity or
output.
- Physical capital maintenance concept – profit is earned only if entity’s productive
capacity at the beginning of the period, after excluding any distributions to and
contributions from owners during the period.