Financial Reporting

Standards Council
ABOUT FRSC
▪ he Financial Reporting Standards Council (FRSC) was established by the Professional
Regulatory Commission (PRC) under the Implementing Rules and Regulations of the
Philippine Accountancy Act of 2004 to assist the Board of Accountancy (BOA) in carrying out
its power and function to promulgate accounting standards in the Philippines. The FRSC’s
main function is to establish generally accepted accounting principles in the Philippines.

▪ The FRSC is the successor of the Accounting Standards Council (ASC). The ASC was created
in November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to
establish generally accepted accounting principles in the Philippines. The FRSC carries on the
decision made by the ASC to converge Philippine accounting standards with international
accounting standards issued by the International Accounting Standards Board (IASB).
The FRSC has full discretion in developing and pursuing the technical agenda for setting
accounting standards in the Philippines. Financial support is received principally from the
PICPA Foundation.

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ABOUT FRSC
▪ The FRSC monitors the technical activities of the IASB and invites comments on exposure drafts of proposed IFRSs
as these are issued by the IASB. When finalized, these are adopted as Philippine Financial Reporting Standards
(PFRSs). The FRSC similarly monitors issuances of the International Financial Reporting Interpretations Committee
(IFRIC) of the IASB, which it adopts as Philippine Interpretations. PFRSs and Philippine Interpretations approved for
adoption are submitted to the BOA and PRC for approval.

▪ Our relationship with the PIC

▪ The FRSC formed the Philippine Interpretations Committee (PIC) in August 2006 to assist the FRSC in
establishing and improving financial reporting standards in the Philippines. The role of the PIC is principally
to issue implementation guidance on PFRSs. The PIC Members are appointed by the FRSC and include
accountants in public practice, the academe and regulatory bodies and users of financial statements. The PIC
replaced the Interpretations Committee created by the ASC in 2000.

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ABOUT FRSC

STAKEHOLDERS
▪ Our stakeholders include preparers, auditors, regulators, investors, advisors, and the general public.

MEMBERS
▪ The FRSC consists of a Chairman and members who are appointed by the BOA and include representatives
from the BOA, Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), Bureau of
Internal Revenue (BIR), Commission on Audit (COA), Financial Executives Institute of the Philippines
(FINEX), and PICPA.

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STANDARDS
The Philippines has three financial reporting frameworks, namely the Philippine Financial
Reporting Standards (PFRSs), the Philippine Financial Reporting Standard for Small and
Medium-Sized Entities (PFRS for SMEs) and the Philippine Financial Reporting Standard
for Small Entities (PFRS for SEs). The Securities and Exchange Commission has the
authority to prescribe the financial reporting framework to be used by corporations in the
Philippines. These general financial reporting requirements are set out in the Revised
Securities Regulation Code (SRC) Rule 68

PFRS The Philippines has adopted the International Financial Reporting Standards (IFRSs) issued by the International
Accounting Standards Board (IASB) as PFRSs.

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 PFRS for SMEs)
▪ PFRS for SMEs consists of the following sections: • Section 18 - Intangible Assets other than Goodwill
• Section 1 - Small and Medium-sized Entities • Section 19 - Business Combinations and Goodwill
• Section 2 - Concepts and Pervasive Principles • Section 20 - Leases
• Section 3 - Financial Statement Presentation • Section 21 - Provisions and Contingencies
• Section 4 - Statement of Financial Position • Section 22 - Liabilities and Equity
• Section 5 - Statement of Comprehensive Income and Income Statement • Section 23 - Revenue
• Section 6 - Statement of Changes In Equity and Statement of Income and Retained • Section 24 - Government Grants
Earnings
• Section 25 - Borrowing Costs
• Section 7 - Statement of Cash Flows
• Section 26 - Share-based Payment
• Section 8 - Notes to the Financial Statements
• Section 27 - Impairment of Assets
• Section 9 - Consolidated and Separate Financial Statements
• Section 28 - Employee Benefits
• Section 10 - Accounting Policies, Estimates and Errors
• Section 29 - Income Tax
• Section 11 - Basic Financial Instruments
• Section 30 - Foreign Currency Translation
• Section 12 - Other Financial Instruments Issues
• Section 31 - Hyperinflation
• Section 13 - Inventories
• Section 32 - Events after the end of the Reporting Period
• Section 14 - Investments in Associates
• Section 33 - Related Party Disclosures
• Section 15 - Investments in Joint Ventures
• Section 34 - Specialized Activities
• Section 16 - Investment Property
• Section 35 - Transition to the PFRS for SMEs
• Section 17 - Property, Plant and Equipment
 PFRS for SE
▪ On December 13, 2017, the FRSC approved the adoption of PFRS for • Section 14 - Business Combinations and Goodwill
Small Entities effective for annual periods beginning on or after January
1, 2019. PFRS for SEs can be accessed here. • Section 15 - Leases

▪ • Section 16 - Provisions and Contingencies

PFRS for SEs consists of the following sections:
• Section 1 - Scope of the Framework • Section 17 - Equity

• Section 2 - Concepts and Pervasive Principles • Section 18 - Revenue

• • Section 19 - Borrowing Costs

Section 3 - Financial Statement Presentation
• Section 4 - Subsidiaries • Section 20 - Share-based payment

• Section 5 - Accounting Policies, Estimates and Errors • Section 21 - Impairment of Assets

• • Section 22 - Employee Benefits

Section 6 - Basic Financial Instruments
• Section 7 - Other Financial Instruments • Section 23 - Income Tax

• Section 8 - Inventories • Section 24 - Foreign Currency Translation

• • Section 25 - Events after the End of the Reporting Period

Section 9 - Investments in Associates
• Section 10 - Joint Arrangements • Section 26 - Related Party Disclosures

• • Section 27 - Biological Assets

Section 11 - Investment Property
• Section 12 - Property, Plant and Equipment • Section 28 - Government Grants

• • Section 29 - Transition to the Framework

Section 13 - Intangible Assets Other than Goodwill
Conceptual Framework for
the Preparation and
Presentation of Financial
Statements
CONCEPTUAL FRAMEWORK
▪ The revised Conceptual Framework for Financial Reporting (Conceptual
Framework) issued in March 2018 is effective immediately for the International
Accounting Standards Board (Board) and the IFRS Interpretations Committee. For
companies that use the Conceptual Framework to develop accounting policies when no
IFRS Standard applies to a particular transaction, the revised Conceptual Framework is
effective for annual reporting periods beginning on or after 1 January 2020, with earlier
application permitted. 

▪ The Conceptual Framework sets out the fundamental concepts for financial reporting that
guide the Board in developing IFRS Standards. It helps to ensure that the Standards are
conceptually consistent and that similar transactions are treated the same way, so as to
provide useful information for investors, lenders and other creditors.
CONCEPTUAL FRAMEWORK
The Conceptual Framework also assists companies in developing accounting policies when no IFRS Standard applies to a particular transaction,
and more broadly, helps stakeholders to understand and interpret the Standards.

The 2018 revised Conceptual Framework sets out:

• the objective of general purpose financial reporting;
• the qualitative characteristics of useful financial information;
• a description of the reporting entity and its boundary;
• definitions of an asset, a liability, equity, income and expenses and guidance supporting these definitions;
• criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition);
• measurement bases and guidance on when to use them;
• concepts and guidance on presentation and disclosure; and
• concepts relating to capital and capital maintenance.

Standard history
Conceptual Framework for Financial Reporting was issued by the International Accounting Standards Board in September 2010. It was revised in
March 2018.
 FRSC Framework

• Basic concepts by which financial

statements are prepared
• Sets out the concepts that underlie the
preparation and presentation of financial
statements for external users
 Purpose of the framework

• Assist the Financial Reporting Standards Council (FRSC) in developing accounting standards
that represent generally accepted accounting principle

• Assist the FRSC in its review and adoption of existing International Accounting Standards

• Assist preparers of the financial statements in applying FRSC Statements of Financial

Accounting Standards and in dealing with topics that have yet to form the subject of an FRSC
statement
 Purpose of the framework

• Assist auditors in forming an opinion as to whether financial statements conform with

Philippine GAAP

• Assist users of financial statements in interpreting information contained in the 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 Statements of Financial Accounting Standards
 Scope of the Framework
Defines the objective of financial statements
Identifies the qualitative characteristics that make
information in financial statements useful
Defines the basic elements of financial statements and the
concepts for recognizing and measuring them in financial
statements
Concepts of capital and capital maintenance
 Limitations of the Framework
• Addresses general purpose financial statements including
consolidated financial statements that a business enterprise
prepares and presents at least annually to meet the common
information
• The framework is not a standard, therefore when there is a
conflict between a standard and the framework, the standard
shall prevail over the framework
 Users and their Information Needs

• Investors - The providers of risk capital and their advisers are concerned with the risk
inherent in, and return provided by, their investments. They need information to help
them determine whether they should buy, hold or sell. Shareholders are also interested
in information which enables them to assess the ability of the entity to pay dividends.
• Employees - Interested in information about the stability and profitability of their
employers. They are also interested in information which enables them to assess the
ability of the entity to provide remuneration, retirement benefits and employment
opportunities.
• Lenders - Interested in information that enables them to determine whether their loans,
and the interest attaching to them, will be paid when due.

Continued
 Users and their Information Needs
• Suppliers and other creditors - Interested in information that enables them to
determine whether amounts owing to them will be paid when due. Trade creditors
are likely to be interested in an entity over a shorter period than lenders unless
they are dependent upon the continuation of the entity as a major customer.
• Customers - Interested in information about the continuance of an entity,
especially when they have a long-term involvement with, or are dependent on, the
entity.
• Governments and their agencies - Interested in the allocation of resources and,
therefore, the activities of entities. They also require information in order to
regulate the activities of entities, determine taxation policies and as the basis for
national income and similar statistics.
• Public - Entities affect members of the public in a variety of ways. For example,
entities may make a substantial contribution to the local economy in many ways
including the number of people they employ and their patronage of local
suppliers. Financial statements may assist the public by providing information
about the trends and recent developments in the prosperity of the entity and the
range of its activities.
Responsibility for Financial Statements

The management of an
enterprise has the primary
responsibility for preparing and
presenting the enterprise's
financial statements.
 Objectives of the Financial Statements
I. Provide information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making economic
decisions.

II. Meet the common needs of most users. However, financial statements do not provide all the
information that users may need to make economic decisions since they largely portray the
financial effects of past events and do not necessarily provide non-financial information.

III. Financial statements also show the results of the stewardship of management.
 Financial Position Factors
• Economic Resources that an entity controls
• Liquidity - Availability of cash in the near future after
taking account of financial commitments over this period
• Solvency - Availability of cash over the longer term to
meet financial commitments as they fall due.
• Financial Structure - Useful in predicting future
borrowing needs and how future profits and cash flows
will be distributed among those with an interest in the
entity, it is also useful in predicting how successful the
entity is likely to be in raising further finance
• Capacity for Adaptation - Useful in predicting the ability
of the entity to generate cash and cash equivalents in the
future also know as financial flexibility.
 Performance of an Entity

• Profitability, is required in order to assess

potential changes in the economic resources that
it is likely to control in the future
• Information about performance is found in the
income statement
 Changes in Financial Position or Cash Flows

• Users of financial statements seek information about the

investing, financing and operating activities that an
enterprise has undertaken during the reporting period. This
information helps in assessing how well the enterprise is able
to generate cash and cash equivalents and how it uses those
cash flows. The cash flow statement provides this kind of
information.
 Underlying Assumptions (Postulates)

The Framework sets out two underlying assumptions of financial statements

Accrual Basis - The effects of transactions and other events are recognized when they
occur, rather than when cash or its equivalent is received or paid, and they are reported in
the financial statements of the periods to which they relate.  

Going Concern - The financial statements presume that an enterprise will continue in
operation indefinitely or, if that presumption is not valid, disclosure and a different basis of
reporting are required.
 Additional Postulates
• The FRSC conceptual framework mentions two assumptions only. However, it is
widely believed that an inherent trait of the financial statements are the basic
assumptions of:

Accounting Entity - The business is separate from the owners, managers, and
employees who constitute the business. Therefore transactions of the said
individuals should not be included as transactions of the business.

Time Period - Financial reports are to be prepared for one year or a period of
twelve months.

Monetary Unit - There are two aspects under this assumption. First is the
quantifiability of the peso, meaning that the elements of the financial statements
should be stated under one unit of measure which is the Philippine Peso. Second
is the stability of the peso, means that there is still an assumption that the
purchasing power of the peso is stable or constant and that instability is
insignificant and therefore ignored.
Qualitative Characteristics of Financial Statements

• These characteristics are the attributes that make the information

in financial statements useful to investors, creditors, and others.
The Framework identifies four principal qualitative characteristics:
a. Understandability
b. Relevance
c. Reliability
d. Comparability
 Primary Characteristics
• Relevance - Information in financial statements is relevant when it
influences the economic decisions of users. It can do that both by (a)
helping them evaluate past, present, or future events relating to an
enterprise and by (b) confirming or correcting past evaluations they
have made.

Ingredients of relevance: 
Predictive Value – Information can help users increase the likelihood
of correctly predicting or forecasting the outcome of certain events.
Feedback Value – Information can help users confirm or correct
earlier expectations. Note that the predictive and confirmatory roles of
information are interrelated.
Timeliness - Information loses its relevance if it is not timely

Continued
 Primary Characteristics

• Reliability - Information in financial statements is reliable if it is free from material error and bias and can be
depended upon by users to represent events and transactions faithfully. Information is not reliable when it is
purposely designed to influence users' decisions in a particular direction.

Factors of reliability
 

Faithful Representation – Information must represent faithfully the transactions and events it either purports to
represent or could reasonably purport to represent.
 
Substance over form – Transactions are to be accounted for and presented according to their substance and
economic reality and not merely their legal form.
 

Continued
 Primary Characteristics

Neutrality - Information contained in the financial statements must be free from bias and
error.
 
Prudence (Conservatism) – The inclusion of a degree of caution in the exercise of
judgments needed in making estimates or choosing alternatives so that the outcome will
have the least effect on equity.
 
Completeness – to be reliable, the information in the financial statements must be
complete within the bounds of materiality and cost.
Constraints to Relevant and Reliable Information
• Timeliness – Undue delay in reporting of information may
lead to the loss of relevance even though enhancing it
reliability. While providing information before all aspects
of a transaction or other events are known may increase
the relevance of information, thus impairing its reliability.

• Balance between Benefit and Cost - The benefits derived

from relevant and reliable information should exceed the
cost of providing it.
 Secondary Characteristics
• Understandability - Information should be presented in a way that is
readily understandable by users who have a reasonable knowledge of
business and economic activities and accounting and who are willing
to study the information diligently.

• Comparability - Users must be able to compare the financial

statements of an enterprise over time so that they can identify trends
in its financial position and performance. Users must also be able to
compare the financial statements of different enterprises. Disclosure
of accounting policies is essential for comparability especially when
the enterprise adopts a new or changes its accounting policies.
 The Elements of Financial Statements

• The elements directly related to financial position and their definition according to the framework are:

Asset - An asset is a resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise.
 
Liability - A liability is a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
 
Equity - Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

Continued
 The Elements of Financial Statements

• The elements directly related to performance and their definition according to the
framework are:

Income - Income is increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result in increases
in equity, other than those relating to contributions from equity participants.
 
Expense - Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrence of liabilities that result in decreases
in equity, other than those relating to distributions to equity participants.
 Recognition of the Elements of Financial
Statements
• Recognition is the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element and satisfies the
following criteria for recognition:
1. It is probable that any future economic
benefit associated with the item will flow
to or from the enterprise and
2. The item's cost or value can be measured
with reliability.
 Specific Recognition Principles
• An asset is recognized in the balance sheet 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.
• A liability is recognized in the balance sheet 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 income statement when an 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. This means, in effect, that
recognition of income occurs simultaneously with the recognition of
increases in assets or decreases in liabilities
• Expenses are recognized when a decrease in future economic benefits related
to a decrease in an asset or an increase of a liability has arisen that can be
measured reliably. This means, in effect, that recognition of expenses occurs
simultaneously with the recognition of an increase in liabilities or a decrease
in assets.
 Measurement of the Elements of Financial
Statements
Measurement involves assigning monetary amounts at which the elements
of the financial statements are to be recognized and reported. The
Framework acknowledges that a variety of measurement bases are used
today to different degrees and in varying combinations in financial
statements, including:
• Historical cost
• Current cost
• Net realizable (settlement) value
• Present value (discounted)
 Concepts of Capital

• Financial concept of capital - capital is synonymous with net assets

of the enterprise. This is the concept of capital adopted by most
enterprises.
 
• Physical concept of capital – capital is regarded as the productive
capacity of the enterprise based on, for example, units of output per
day.
 Concepts of Capital Maintenance

• Financial capital maintenance – Under this concept, a profit is earned only if the financial (or
money) amount of the net assets at the end of the of the period exceeds the financial (or money)
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 – Under this concept, a profit is earned only if the physical
productive capacity (or operating capability) of the enterprise (or the resources need to achieve
that capacity) at the end of the period exceeds the physical productive capacity at the beginning
of the period, after excluding any distributions to, and contributions from, owners during the
period.