lOMoAR cPSD| 22077003

lOMoAR cPSD| 22077003

Conceptual Framework – is a system of ideas and Required Information for lenders/investors to make
objectives that leads to the creation of consistent those decisions are the following:
accounting standards that sets the nature, function and
1. Economic resource, claims and changes in those
limits of financial accounting and statements.
resource and claims
Reasons: 2. How efficiently and effectively the entity
manages the use of their resources
1. Provides framework for accounting standards
2. Provides basis for accounting disputes Notes to remember regarding GPFR (Limitations)
3. Provides a fundamental principle for accounting
- It does not contain all information, it only
that needs not to be repeated in the standards
contains common information for its primary
Conceptual Framework describes the objective of users (but there are additional information for
General Purpose Financial Reports ONLY subset primary users)
- It does not reflect/show the value of the entity,
Purpose:
it only helps the investor/lenders to estimate
1. Assist IFRS/IASB in creating standards the value of the company
2. Assist preparers if there is no standard that - The board provides information based on the
applies in an accounting situation needs of the maximum number of primary
3. Assist parties to understand and interpret users
standards - Conceptual framework established concepts
that are based on estimate and judgment.
Nothing in the Conceptual Framework overrides
Standards Users need to know the economic resource and claims
of an entity to:
IFRS  IAS  Interpretation  Conceptual Framework
 other principles (GAAP) etc. 1. Assess Liquidity (availability of cash in the near
future after taking account of the financial
Conceptual Frameworks contains commitments in the current period)
1. Objective of Financial Report How to assess? – Current assets and Current
2. Qualitative characteristics of useful financial Liabilities
Information
3. Description of an entity and its boundaries 2. Assess Solvency (availability of cash over the
4. Elements of Financial Statement long-term to meet the financial commitments
5. Recognition (Assets and Liabilities) as they fall due)
6. Derecognition How to assess? – Total Assets and Total
7. Measurement Liabilities (Debt Ratio)
8. Presentation and Disclosure 3. Assess Management Stewardship to use the
economic resources
Objective of GPFA is to provide financial information How to assess? – based on the returns of the
about the entity that is useful to lenders, existing and resources
potential investors in making economic decision.
Changes in Economic resource and entity results
Decision that is based on: from the financial performance that is reflected by:
1. Buying/selling equity/debt instruments 1. Accrual Accounting – reflects the past and
2. Providing/settling loans and other claims future ability to generate cash (rather than
3. The right to vote or influence the managements solely relying to cash receipts and disb.)
decision in using the economic resources 2. Past Cash Flows – reflects the financing
These decisions is based on the returns of the of the evaluation and investing activities
investors and lenders (WHAT’S IN IT FOR ME?) 3. Profitability – reflects the ability to generate
cash flows from existing resource base
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How to measure: Profit/Gross Margin c. Free from error – no error in estimates,

4. Operating and Financial Flexibility – reflects the not necessarily means perfect but only
ability to adjust to an unexpected downturns in pertains to correct process (application)
the environment to take advantage of profitable
Steps in applying the fundamental characteristics
investments or opportunities.
How to measure: Activity ratio – Total Sales and 1. Identify the info that is capable of making useful
Total Assets decisions
5. Management Stewardship – reflects how 2. Identify the information which is more relevant
efficient/effective management of economic 3. Identify whether that information is available
resources in the future and if it can provide faithful representation
How to measure: Financial Ratio, Management
Decisions Enhancing Characteristics of Financial Information
Ex. Protecting resources from unfavorable (VCUT)
event, comply w/ applicable law etc. (non- 1. Comparability – enables users to identify
compliance leads to expenses such as penalty similarities and differences in an entity.
expense) Intra – Within an entity (period-period)
An information must both be relevant and faithful in Inter – across entity in same period (narrowing
order to be useful down alternatives of accounting methods)

Fundamental Characteristics of Financial Information Consistency refers to the same method used in
an entity’s financial reports. (entity itself)
1. Relevance – the ability of an information to
make a difference in making decision. An
information is relevant if it has a predictive Consistency helps to achieve  Comparability
value and confirmatory value 2. Verifiability – the information if faithfully
represented, different independent and
a. Predictive Value – information that
knowledgeable observer should reach
allows user to predict the future
consensus (not total agreement) regarding the
Ex. Net income – assess future cash flow
same information
prospects
a. Direct Verification – Directly such as
b. Confirmatory Value – provides
counting money etc. or by supporting
feedback pertaining the past evaluation
documents such as invoice
Relevance is affected by nature and materiality b. Indirect Verification – Recalculating the
formulas and methods in order to come
Materiality – if omission of the information can
up with the same result
influence the decision of the user (Entity-
3. Timeliness – availability of the information in
specific)
time for user’s decision making
2. Faithful representation – Information must 4. Understandability – classifying, characterizing
represent what it purports to represent. A and presenting information clearly can help
faithful representation should be complete, users understand the financial info. It assumes
neutral and free from error (Substance over the users have the knowledge in diligently
form) analyzing the report.
a. Complete - when it shows all info
Cost constraint means that the cost must be justified by
+ Description of nature (ex. Cash)
the benefits of reporting that information
+ Numerical Description (amount)
+ Description of what the numerical
desc. Represents (date, year)
b. Neutral – Without bias
Application of prudence – exercise
judgement with caution
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Financial statements provide information about

1. Asset
2. Liability
3. Equity
4. Income
5. Expense

Forward-looking information may be included in the

financial statement if:

1. It includes assets and liability

2. It is useful to users

Financial statement can also include information even

after the reporting period given that it is necessary to
achieve the objective of the financial statements

Financial Statements provides perspective as a whole

entity (not from a specific group etc.)

Going concern – assumption that the entity is a going ASSET

concern and will continue operation in the foreseeable
future. They do not have the intention to enter Economic Resource – A right to produce economic
liquidation or cease trading. benefits.

A reporting entity is the entity that chooses/provides Sources of Rights

the financial statements, can be a single or more than 1 1. Contract
entity/portion 2. Legislation
Conceptual Framework  Financial Reporting 3. Acquiring (Knowledge)
4. Customary Practice
Types of Financial Statements
RIGHTS
1. Consolidated – Parent and subsidiaries
2. Unconsolidated – Parent (50 + 1% in control) 1. Gives rise to an obligation of another party
3. Combined – 2 or more parent and subsidiaries a. Receive cash, goods and services
not linked b. Exchange economic resource in
favorable terms
Boundaries of Reporting entities c. Benefit from an obligation of another
1. The boundary should not contain an arbitrary or party to transfer an economic resource
incomplete economic set of activities under uncertain future events may
2. The boundary must result to neutral occur
information 2. Does not rise from an obligation from another
3. A description about how the boundary was party
determined a. Right to physical property
b. Right to intellectual property
Financial Statement vs. General Purpose
Other ways to obtain a right
1. FS states the elements of FS, assess future cash
flow prospect and assess management 1. Acquiring or creating a know-how not known to
stewardship public domain
2. GPFR is for the use of existing/potential lenders 2. Through an obligation of another party that
and investors arises because the other party cannot act in a
manner inconsistently
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It is the entity’s asset if it has the control over it 6. All rights and obligations in a dissimilar portfolio
7. Risk exposure within a portfolio
An entity cannot have a right to obtain economic
benefits in debt/equity instruments they held
Equity – claims that do not meet the requirements of a
Legal ownership of a physical object might give rise to
liability
the ff:
Non recognition - gives rise to incomplete and may
1. Right to use the object
exclude useful information
2. Right to sell the right of the object
3. Right to pledge rights of the object An asset and lilability can only be recognized when it
4. Other rights not listed results to income, expense or changes in equity.

Potential – meaning the right should already exist Recognition should be faithful and relevant

Control – the ability of the entity to direct the use of the Recognition requires judgement thus, it varies within
economic resource and prevent other parties from different standards.
controlling it.
Recognition might not give relevant information when:
Use  Lease  Sale  Exchange  payment of
1. The asset/liability’s existence is uncertain
liabilities  Return to the owner
2. The flow of economic benefit is low
LIABILITY
NOTE: The uncertainty of these must be given an
There is liability if:
explanation in the financial statement
1. The entity has an obligation
Even with low economic benefit, an information can still
2. The obligation is to transfer economic resource
be relevant when it incurred in an exchange
to another entity
transactions in market terms
3. The obligation is present arising from past
events FAITHFUL REPRESENTATION
Obligation – the entity has no practical ability to avoid. If the uncertainty is high, it must be accompanied by
estimates and explanation in the financial statement
Obligation to transfer economic resources includes:
If it is highly uncertain, but the information will not be
1. Pay cash, goods or services
useful, then it should not be recognized
2. Exchange economic resources with another
party with unfavorable terms A faithfully represented information must not just
3. Transfer economic resources under uncertain include disclosures but also:
future event occurrence
4. Issue a financial instrument that will oblige the 1. The depiction of the resulting income and
entity to transfer economic resources expenses or changes in equity

Unit of account – are right or group of rights or 2. ACCOUNTING MISMATCH - if the related assets
obligations or group of obligations and both where the and liab are not recognized
recognition and measurement concepts are applied 3. Presentation and disclosure of A,L,E,EXP,INC
Includes:

1. All individual rights

2. All individuals obligation
3. All rights and obligation arising from a single 3 BASES OF RECOGNITION
source 1. Associating cause and effect (matching principle)
4. Subgroups of those rights
5. All rights and obligation in a similar portfolio 2. Systematic and rational allocation (depreciation)
 lOMoAR cPSD| 22077003

3. Immediate recognition (no future benefits) 1. The method/techniques that must be used to
estimate a measure
Derecognition - is the removal of part or all recognized
asset/liab 2. The simplifies approach to measure for similar
information
- Asset (the entity does not have control over the part
or all of the asset) 3. Explanation on how to modify measurement
basis
- Liability (when there is no more present obligation)
HISTORICAL VALUE
Accounting requirement for derecognition faithfully
represents: Does not reflect change in value (unless there is an
impairment)
1. The retained asset/liab after derecognition
Impairment - excess of carrying value over its
2. The change in that asset/liab
recoverable amount w/c is higher of:
Derecognition includes:
1. Asset’s (fair value - cost to sell)
1. Derecognition of expired/consumed items
2. Asset value in use
(transferred components)
Historical cost of Asset is updated (+transaction costs)
2. Continuition of recognition of the Retained
Components 1. The asset has been partly or wholely consumed

3. Presentation of retained components in the 2. Payment has been received

financial position
3. Asset has been impaired
4. Presentation of the incom and expense in the
4. Accrual of interest
financial performane as a result of the
transferred component. Historical cost of Liability is updated (-transaction cost)
CONTRACT Modification 1. The obligation has been partly/wholely fulfilled
1. If the contract modification only eliminates the 2. The liability has become onerous (the historical
existing rights/obligations the derecognition cost is not sufficient to fulfill the obligation)
requirements must be followed
3. Accrual of interest
2. If the contract modification adds new
rights/obligation, it must be considered if the One way to apply historical cost is on amortized cost -
new right/obligation is a separate account or estimated cash flow discounted at a rate determined at
included in the old unit of account the initial recognition

3. If the contract modification eliminated the old CURRENT VALUE - reflects the updated condition at the
right/obligation and replaces it with new measurement date, it reflects the change in values
right/obligation, it is necessary to cnsider the 1. Fair Value
effect of this modificaiton. (if intensive, then the
old account must be derecognized while the 2. Value in use
new accoutn should be recognized) 3. Current Cost
Qualitative characteristics of a useful information and FAIR VALUE -is the price received when selling an asset
cost constraint must be considered in selecting the or paid to transfer an obligation in market at a
measurement basis measurement date (does not reflect transaction cost)
A standard should specify how to implement Can be measured:
measurement basis
Directly - in an active market
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Indirectly - measurement methods

VALUE IN USE - is the present value of the future cash

flow of an economic resource upon its disposal

FULFILLMENT VALUE - is the present value of the

economic resource to transfer for the fulfillment of an
obligation

Both value doesnt require transaction cost in acquisition

but needs the present value of transaction cost upon
payment/disposal

Asset - (-transaction cost)

Liability - (+transaction cost)

Both are also entity-specific

CURRENT VALUE - is the cost of an equivalent

asset/liability which reflects prices in the market
(replacement cost - magkano now?)

Asset - (+transaction cost)

Liability - (-transaction cost)

It cannot be measured directly, only indeirectly

Entry Value - Price acquired

Exit Value - price at measurement date