Tab 1

INTRODUCTION TO ACCOUNTING & THE ACCOUNTING PROFESSION

*from definition of accounting to Accounting Principles
ADDITIONAL INFO:
Types of Events
1.​ External - events involving external party
a.​ Exchange/Reciprocal transfer - giving & receiving
b.​ Non-reciprocal transfer - one way transaction
c.​ Other events other than transfer - involves changes in the economic
resources/obligation caused by an external source but does not involve transfer
of resources
2.​ Internal - events not involving an external party
a.​ Production - resources are transformed to finished goods
b.​ Casualty - unanticipated loss from disasters

Measurement
●​ The measurement bases in accounting include but are not limited to:
○​ Historical cost (most commonly used)
○​ Fair value
○​ Present value
○​ Realizable value
○​ Current cost; and
○​ Inflation adjusted cost (sometimes)
●​ FS are said to be prepared using a mix of costs and values

VALUATION BY FACT OR OPINION

●​ If measurement is affected by estimates, the items are valued by opinion; if not
affected, the items measured are valued by fact

MOVING TOWARDS IFRS

●​ In developing standards that will be generally accepted in the Philippines, standards
issued by other standard setting bodies like the USA Financial Accounting Standards
Board (FASB) & IASB are considered
●​ The FRSC has adopted all IAS and IFRS
●​ The move is to achieve one uniformed and globally accepted financial reporting
standards

Factors considered to move totally to the IAS:

●​ Support of international accounting standards by PH organizations
●​ Increasing internalization of business which has heightened interest in a common
language for financial reporting
●​ Improvement of international accounting standards by World Bank, Asian Development
Bank and World Trade Organization

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INTERNATIONAL FINANCIAL INTERPRETATION COMMITTEE (IFRIC)
●​ Committee that prepares interpretations on how specific issues should be accounted
under the application of the IFRS where:
○​ The standards do not include specific authoritative guidance; and
○​ There is a risk of divergent and unacceptable accounting practices
●​ They are composed of mostly technical partners in audit firms but also include preparers
and users
●​ Replaced the former Standing Interpretations Committee that was created by the ​IASC

PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)

●​ Formed in August 2006 replacing the Interpretations Committee created by the ASC
●​ Its role is to prepare interpretations of the PFRS for approval by the FRSC and to
provide guidance in financial reporting issues not specified in the PFRS
●​ Interpretations are intended to give authoritative guidance on issues that are likely to
receive divergent of unacceptable treatment because the standards do not provide
specific rules and guidelines

IFR'S ADVISORY (PREVIOUSLY STANDARD ADVISORY COUNCIL OR SAC)

●​ A group of organizations and individuals with interest in international financial reporting
●​ Its role includes advertising on priorities within the IASB's work program and is required
to consult to the Advisory Council in advance of any decision on major projects that
wishes to add to its agenda

INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC)

●​ Non-profit, non-governmental and non-political organization of the accountancy bodies
that represent the worldwide accountancy profession
●​ Its mission is to develop and enhance the profession to provide services consistently
high quality in public practice

INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO)

●​ International body of security commissions
●​ develops, implements and promotes adherence to internationally recognized standards
for security regulations

HIERARCHY OF REPORTING STANDARDS

●​ An entity should consider the hierarchy of reporting standards when selecting accounting
policies:
○​ PFRS Accounting Standards
○​ Management shall use judgement in applying and developing an accounting
policy in the absence of a PFRS that specifically applies to the situation. In
making judgements:
■​ Management shall refer to, and consider the applicability of the ff source
document: the requirement of PFRSs dealing with similar and related
issues and the conceptual framework

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 ■​ Management may also consider the ff: pronouncements of other
standard-setting bodies and accounting literature and accepted
industry practices

THE NEED FOR REPORTING STANDARDS

●​ Entities should follow a uniform set of accepted reporting standards when preparing FS,
if not then the information given is misleading
○​ Either the standard has been established already; or
○​ The principle has gained general acceptance due to practice overtime and been
proven to be useful
●​ The process of establishing standards is democratic; majority of accountants must
agree with the standard before it is implemented
●​ The purpose of the accounting standards is to identify proper accounting practices
●​ it creates a common understanding between preparers and users of FS
●​ A set of high quality standards is needed to ensure comparability and uniformity in the
FS

CONCEPTUAL FRAMEWORK
UPDATES IN ACCOUNTING BODIES
FINANCIAL AND SUSTAINABILITY REPORTING STANDARDS COUNCIL (FSRSC)
●​ In September 2022, BOA issues Board Resolution No. 44 that contains the approval of
the ff:
○​ Adoption of the IFRS Sustainability Disclosure Standard that will be developed by
the ISSB in preparation of the general-purpose FS
○​ Renaming the FRSC to the FSRSC which considers the expanded role in the
adoption of future Sustainability Disclosure Standards
○​ This is in light of the increasing demand for high quality, transparent, reliable
and comparable reporting by companies on climate and other environmental,
social and governance matters
●​ The FSRSC is now composed of 20 people with one chairman and 19 members:
○​ 1 from BOA, BSP, BIR, COA, and FINEX
○​ 2 from SEC, Insurance Commission, Cooperative Development Authority and
CPAs in public practice, commerce & industry, government & academe

INTERNATIONAL SUSTAINABILITY STANDARDS BOARD (ISSB)

●​ The trustees of the IFRS Foundation announced the formation of the ISSB on November
2021
●​ They are developing standards that will result in high-quality, comprehensive global
baseline of sustainability disclosures focused on the needs of investors and the
financial markets
●​ They have set out 4 key objectives:
1.​ Develop standards for a global baseline of sustainability disclosures
2.​ Meet the information needs of the investors

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 3.​ Enable companies to provide comprehensive sustainability information to the
global markets
4.​ Facilitate interoperability with disclosures that are jurisdiction-specific and/or
aimed at broader stakeholder groups
●​ They are committed to delivering standards that are cost-effective, decision-useful,
and market informed
○​ They are designed to provide the right information in the right way to support
investor decision making and facilitate international comparability to attract
capital
○​ Companies can avoid double-reporting by applying the standard

THE CONCEPTUAL FRAMEWORK

●​ Is a complete, comprehensive and single document promulgated by the IASB
●​ Summary of terms and concepts that underlie the preparation and presentation of FS
for external users
●​ Describes the general purpose financial reporting
●​ An attempt to provide an overall theoretical foundation for accounting
●​ Intended to guide standard-setters, prepares and users of financial information in the
preparation of the FS
●​ The underlying theory for the development and revisions of accounting standards
●​ It will be used for future standard setting decisions but no changes to the IFRS will be
made
●​ It provides a foundation for standards that contribute to transparency, strengthen
accountability, and contribute to economic efficiency

PURPOSE OF THE REVISED CONCEPTUAL FRAMEWORK

a.​ Assist the IASB in developing standards (IFRS) that are based on consistent concepts
b.​ Assist the preparers in developing consistent accounting policies when no standard
applies to a particular situation or when no standard allows a choice of accounting policy
c.​ Assist all parties in understanding and interpreting the standards

STATUS OF THE FRAMEWORK

●​ The framework is not a PFRS; if there is conflict with the framework and the PFRS, the
latter will prevail
●​ Nothing in the framework overrides any specific IFRS

USERS OF FINANCIAL INFORMATION

1.​ Primary users - who cannot demand information directly from reporting entities (existing
& potential investors, and leaders & other creditors)
2.​ Other users - employees, customers, government & their agencies, and the public

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SCOPE OF THE CONCEPTUAL FRAMEWORK
●​ The framework provides the concepts regarding the ff:
1.​ Objective of financial reporting
2.​ Qualitative characteristics of useful financial information
3.​ Financial statements and the reporting entity
4.​ Elements of the FS
5.​ Recognition and derecognition
6.​ Measurement
7.​ Presentation and disclosure
8.​ Concepts of capital and capital maintenance

OBJECTIVES OF FINANCIAL REPORTING

●​ The overall objective of financial reporting is to provide financial information about the
entity that is useful to existing primary users in making decisions about providing
resources to the entity
●​ It is the "why" purpose or goal of accounting and the foundation of the Conceptual
Framework
●​ Financial reporting is the provision of financial information about a entity to external
users that is useful to them in making decisions and assessing the company's
effectiveness of their management
●​ Financial reporting is not only the FS but also financial and non-financial information

SPECIFIC OBJECTIVES OF FINANCIAL REPORTING

●​ To provide information useful in making decisions about providing resources to the entity,
information useful in assessing the cash flow prospects of the entity, and information
about the entity's resources, claims, and changes in resources and claims

LIMITATIONS OF FINANCIAL REPORTING

●​ General purpose reports
a.​ Do not and cannot provide all information that primary users need
b.​ Are not designed to show the value of an entity but instead provide information to
help estimate the value of the entity
c.​ Are intended to provide common information and cannot accommodate to
every needs
d.​ Are based on estimates and judgement rather than exact depictions

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFORMATION
●​ Are qualities and attributes that make financial information useful to others
●​ To ensure that the info is useful to the users in making decisions
●​ They are classified into fundamental and enhancing qualitative characteristics

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ADDITIONAL INFO:
New definition of Materiality
●​ According to the IASB: "Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence the economic decision that the primary
users of general-purpose financial statements make on the basis of those statements
which provide financial information about a specific reporting entity"
○​ Obscured material information are:
■​ Language is vague
■​ Information is scattered throughout the FS
■​ Dissimilar/similar items are aggregated/combined inappropriately

Prudence vs. Conservatism

●​ Prudence - exercise of care and caution when dealing with uncertainties in the
measurement process such that assets & income are not overstated while liabilities
and expenses are not understated
●​ Conservatism - when an alternative exists, if it has the least effect on the equity, then it
should be chosen

Substance over Form

●​ Usually emphasized when the economic substance differs from the legal form
●​ It is not a separate component of faithful representation because it would be redundant

FINANCIAL STATEMENTS AND THE REPORTING ENTITY

FINANCIAL STATEMENTS
●​ Provide information about the economic resources of the reporting entity, claims against
the entity and the changes in the economic resources and claims
●​ Provide financial information about the entity's assets, liabilities, equity, income and
expenses
●​ Information is provided in the ff:
○​ Financial Position/Balance Sheet - recognizes the assets, liabilities and equity
○​ Financial Performance/Income Statement - recognizes the income and expenses
○​ Other statements and notes - presents and discloses information about:
■​ Recognized assets, liabilities, equity, income and expenses
■​ Unrecognized assets and liabilities
■​ Cashflows
■​ Contributions from and distribution to equity holders
■​ Method, assumption and judgement in estimating amount presented

TYPES OF FINANCIAL STATEMENTS

●​ If a reporting entity comprises both parent and subsidiaries, the reporting entity's
financial statements are referred to as Consolidated FS; they provide information on a
parent company and its subsidiaries as one reporting entity
●​ If a reporting entity is a parent alone, the financial statements are referred to as
Unconsolidated FS

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 ●​ If a reporting entity comprises two or more entities that are not linked, the financial
statements are referred to as Combined FS

REPORTING ENTITY
●​ An entity required/chose to prepare the FS
●​ Can be a single entity, a portion of an entity, or can comprise of more than one entity

REPORTING PERIOD
●​ Period where the FS are prepared for general purpose
●​ FS are prepared for a specific period of time and provide information about:
○​ assets, liabilities, and equity at the end of the period
○​ income and expenses during the reporting period
●​ The FS also provides comparative information for at least once preceding period as
well as include the transactions and events after the reporting period

ELEMENTS OF FINANCIAL STATEMENT

ASSET
●​ "Present economic resources controlled by the entity as a result of past events. And
economic resource is a right that has the potential to produce economic benefits"

Rights
●​ Rights that have the potential to produce economic benefits include:
a.​ Rights corresponding to an obligation of another party
i.​ Right to receive cash, goods or services
ii.​ Right to exchange economic resources with another party on favorable
terms
iii.​ Right to benefit from an obligation of another party to transfer an
economic resource if specifies uncertain future event occurs
b.​ Rights that do not correspond to an obligation of another party
i.​ Right over physical objects
ii.​ Right to use intellectual property
●​ Rights normally arise from law
●​ Not all rights are assets; they must be able to produce economic benefits beyond the
benefits available to all other parties, and those must be controlled by the entity
●​ An entity cannot have the right to obtain economic benefits for itself which is why
treasury shares are not assets
●​ The asset is the set of rights, not the physical item itself (ex.: people who rent properties
only obtain the right to use the property, but they don't own the property legally)

Potential to produce Economic Benefits

●​ The asset is the present right that has the potential to produce economic benefits, not
the actual benefits itself
○​ What's important is that the asset can produce a potential benefit for the
company instead of what the benefit is

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 ●​ The asset exists even if the potential to produce benefits is low, it will only affect the
decision on whether or not it will be recognized
●​ An acquired asset can be recognized even when the asset itself has not been paid (ex.:
equipments bought on account)

Control
●​ The entity has the only right on the benefits of the asset; if one party controls the asset,
no other party can have control over it
●​ It does not mean that the entity can be sure that the asset can produce benefits
●​ It stems from legal ownership, but ownership itself is not necessary for control to exist
○​ Ex.: If the entity buys an asset through bank financing, though the bank still has
legal ownership, the entity still has control over the asset
●​ Possession of the asset is also not necessary for control to exist
○​ Ex.: If the entity sold goods to another on consignment, the entity still has
control over the asset until the goods have been sold to a third party
○​ Consignment - process whereby a person gives permission to another party to
take care of their property

LIABILITY
●​ "The present obligation of an entity to transfer an economic resource as a result of
past events"

Obligation
●​ "A duty or responsibility that an entity has no practical ability to avoid"
●​ They can either be:
a.​ Legal - results from a contract or other construction of law
b.​ Constructive - results from an entity's actions that create valid expectation on
others that the entity will accept and discharge certain responsibilities
●​ It is always owed to a third party; even without the identity of the said third party
●​ One party's obligation is another party's rights (ex.: a buyer has the obligation to pay to
the seller who has the right to collect the payment), but this is not always maintained, as
the standards sometimes has different recognition and measurement requirements for a
liability of an entity to be the rights of another

Transfer of economic resources

●​ The liability is the obligation that may require the transfer of an economic resource, not
the potential benefit that the obligation can result
●​ The obligation's cause to transfer an economic resource does not need to be
determined, so long as the entity is still required to transfer a resource to the other party
●​ A liability can still exist even if the probability of the transfer of economic good is low, it
just affects whether or not the liability is to be recognized

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Present obligation as a result of past events
●​ A present obligation exists as a result of past events if:
○​ The entity has already received the benefits
○​ The entity may need to transfer an economic resource that they wouldn't as a
consequence

Executory Contracts
●​ "A contract that is equally unperformed– neither party has fulfilled any of its obligations,
or both parties have partially fulfilled their obligation to an equal extent"
●​ Establishes a combined right and obligation to exchange economic resources that are
independent and inseparable
●​ The entity has an asset if the terms of the contract are favorable to them, if not then it is
considered as a liability
●​ If the entity performs their obligation first, their combined right and obligation turns
into an asset, but if the third party performs their obligation first, the entity now has a
liability

EQUITY
●​ "The residual interest in the assets of the entity after deducting all the liabilities"
●​ This applies to all entities regardless of form

Income Expenses

-​ Increases in assets, decreases in liabilities -​ Decreases in assets, increases in liabilities

-​ Results in increase in equity -​ Results in decrease in equity

-​ Excludes contributions* from entity's owners -​ Excludes distributions* to entity's owners

*They don't count as income or expense, but rather direct adjustments to the equity itself

RECOGNITION & DERECOGNITION

RECOGNITION
●​ Process of including in the statement of financial position or financial performance items
that meet the definition of the FS elements
●​ Involves recording the item in words and in monetary amount, including that amount in
the totals of either of the FS
●​ It links the elements, and the statements of financial position and financial performance
as follows:

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 ●​ The FS are all linked because the recognition of one element requires the
recognition/derecognition of another
●​ Sometimes the recognition of income results in the recognition of related expenses
(matching principle)
○​ Ex.: sale of goods results in the recognition of sales as income and cost of sales
as expense

Recognition Criteria
●​ An item is recognized if:
a.​ It meets the definition of asset, liability, equity, income or expense
b.​ It can provide useful information if recognized; information is relevant and
faithfully represented
●​ Both must be met before recognition, if not or if only one of the criteria is met then the
item in question is not recognized
●​ The entity should consider the cost constraint (cost-benefit principle) when making
recognition decisions such as that the usefulness of the information justifies its cost
●​ Judgement is required on deciding whether or not an item needs to be recognized, thus
the recognition requirements in the standards may vary
●​ If an item that meets the definition of the elements of the FS is not recognized, its
information may be disclosed in the notes; it is referred to as an unrecognized asset or
liability

Relevance
●​ The recognition of an item may not be relevant if:
a.​ It's uncertain whether an asset or liability exists
b.​ An asset or liability exists, but the probability of in/outflow of economic benefit is
low
●​ Uncertainty or low probability may result in, but not always leads to the non-recognition
of of an asset or liability
●​ If one of the factors results in the non-recognition of asset or liability, the unrecognized
asset/liability may still be required in the notes to FS
●​ Even if one or both of the factors exist, an asset or liability may still be recognized if it
provides relevant information

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Faithful Representation
●​ The level of measurement uncertainty and other factors (presentation and disclosure)
can affect an item's faithful representation
●​ Assets or liabilities must be measured for it to be recognized; measurement requires
estimation and thus subjected to measurement uncertainty

DERECOGNITION
●​ The removal of a previously recognized item from the entity's SFPosition
●​ Occurs when the item no longer meets the definition of an asset or liability (if the entity
no longer has control over the item or they no longer have any present obligation)
●​ The entity:
○​ Derecognizes assets or liabilities that have expired or consumed (transferred
component), and recognizes any resulting income or expense
○​ Continues to recognize any asset or liability retained after derecognition (retained
component) but no income or expense is recognized; retained component
becomes a unit of account separate from the transferred component

Unit of Account
●​ The right/obligation or group of rights/obligations to which recognition criteria and
measurement concepts are applied
●​ Can be an account title, a group of similar assets, or a group of assets and liabilities
●​ It is selected for an asset or liability when determining how that, and the income &
expenses related, will be measured and recognized

Transfers
●​ Derecognition is not applicable if the entity retains substantial control of transferred asset
●​ The entity continues to recognize the transferred asset and recognizes any proceeds
received from the transfer as a liability
●​ If there is a partial transfer, the entity derecognizes the transferred component, but
continues to recognize the retained component

MEASUREMENT
●​ Recognition requires quantifying an item in monetary terms
●​ The standards has specific measurement beses for different types of assets, liabilities,
income and expenses

Historical Cost
●​ The consideration paid to acquire the asset plus the transaction costs; the
consideration received to incur the liability minus the transaction costs
●​ In cases where the cost is unidentifiable, the asset or liability is initially recognized at
current value

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 ●​ Historical cost does not reflect changes in value, but is updated overtime to depict the ff:

For Asset For Liability

-​ Increase in the obligation resulting from the

-​ Impairment, depreciation or amortization
liability becoming onerous

-​ Collections that extinguish part or all of the -​ Payments or fulfillments made that extinguish
asset part or all of the liability

-​ Discounts or premium amortization when the -​ Discounts or premium amortization when the
asset is measured at amortization cost liability is measured at amortization cost

Current value
●​ Measures reflect changes in values at the measurement date
●​ Current value is not derived from the price of the transaction or other event that gave rise
to the asset or liability
●​ Includes fair value, value in use (asset) and fulfillment value (liability), and current cost
1.​ Fair value
●​ It reflects the perspective of the market participants
●​ It is not an entity-specific measurement nor is it adjusted for transaction costs
●​ It can be measured directly by observing prices in an active market

2.​ Value in use (asset) and fulfillment value (liability)

●​ Value in use is the present value of cash flows or other economic benefits that an
entity expects to derive from the use of an asset and from its ultimate disposal
●​ Fulfillment value is the present value of cash, or other economic resource that an
entity expects to be obliged to transfer as they fulfill their liability
●​ They both reflect entity-specific assumptions rather than by market participants
●​ They're both measured indirectly by cash-flow-based measurement techniques
similar to fair value, but from an entity-specific perspective
●​ They do not include transaction cost in acquiring asset or incurring a liability, but
they include the cost expected to be inccured on the ultimate disposal of the
asset or the fulfillment of the liability

3.​ Current Cost

●​ For an asset, it is the cost of an equivalent asset at the measurement date
comprising the consideration that would be paid at the measurement date plus
transaction costs that would be incurred at that date
●​ For a liability, it is the consideration that would be received for an equivalent
liability at the measurement date minus the transaction costs that would be
incurred at that date
●​ Current and historical costs are entry values (they reflect prices in acquiring an
asset or incurring a liability), but current cost reflects conditions at the
measurement date

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Considerations when choosing a measurement basis
●​ It's important to consider the ff when choosing a measurement basis:
a.​ Nature of the information provided by a particular measurement basis
b.​ Qualitative characteristics, cost constraint, and other factors

Nature of the information provided by a particular measurement basis

●​ Different measurement bases results in different information to be provided in the FS
○​ Measuring assets at historical cost may result in the recognition of depreciation
or impairment, while measuring it at fair value would result in the recognition of
gain or loss from changes in fair value
○​ Historical and current costs include the transaction cost in acquiring an asset,
while fair value excludes it, and value in use only considers the transaction cost
on the asset's disposal

Qualitative characteristics, cost constraint, and other factors

●​ Information is useful if it's relevant, faithfully represented, and if possible, it has the
enhancing qualitative characteristics
●​ The relevance of the information is affected by
a.​ The characteristics of the asset or liability
b.​ How that asset/liability contributed to future cash flows
●​ The level of measurement of uncertainty may affect the faithful representation of
information
○​ Measurement uncertainty arises when a measure cannot be determined directly
by observing prices in an active market

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