Summary Outline

Summary of Conceptual Framework
I. Purpose and Status of the Conceptual Framework

The Conceptual Framework prescribes concepts for general purpose financial
reporting. It serves as a guide in developing, interpreting, and understanding the
Standards. The Conceptual framework is not a Standard. In case of a conflict between
the two, the Standard shall prevail.
II. Scope
Conceptual Framework is concerned with general purpose financial reporting. General
purpose financial reporting involves the preparation of general purpose financial
statements.
III. The Objective of Financial Reporting
The objective of general purpose financial reporting is to provide financial information
that is useful for primary users in making decisions about providing resources to the
entity. The decisions they make depends on their assessment on the entity’s
prospects for future net cash inflows and management stewardship. And to make
these assessments, information on the entity’s financial position, changes in economic
resources and claims, and utilization of economic resources are essential.
 Liquidity – the entity’s ability to pay short-term obligation
 Solvency – entity’s ability to meet its long-term obligations
IV. Qualitative Characteristics
1. Fundamental Qualitative Characteristic – it includes a. Relevance (confirmatory
value and predictive value) and b. Faithful representation (free from error,
neutrality, completeness)
2. Enhancing Qualitative Characteristics – enhances the usefulness of information.
Its characteristics are a.) Comparability, b.) Verifiability, c.) Timeliness and d.)
Understandability.
V. Financial Statements and the Reporting Entity
 Objective: to provide information about the reporting entity’s financial position,
financial performance and other statements and notes.
 A reporting entity is one that is required, or chooses, to prepare financial
statements. The controlling entity is called the parent, while the controlled is
subsidiary.
 If a reporting entity comprises both, their financial statement is referred to as
Consolidated Financial Statements. If parent alone, Unconsolidated Financial
Statements. If two or more entities are not link of parent-subsidiary, then it is
referred as Combined Financial Statements.
VI. Elements of Financial Statements
The elements of financial statements are assets, liabilities, equity, income, and
expense. The first three relates to the entity’s financial position while income and
expenses related to financial performance.
VII. Recognition and Derecognition
An item is recognized if it meets the definition of an element and recognizing it would
provide useful information. On the other hand, an item is derecognized if it ceases to
meet the definition of an asset or a liability.
VIII. Measurement
The measurement bases in financial reporting are classified into two, namely historical
cost and current value (fair value, value in use and fulfilment value, current cost).
IX. Presentation and Disclosure
Financial information is communicated through presentation and disclosure.
Summary of PAS 1 (Presentation of Financial Statements)
I. Objective
PAS 1’s objective is to prescribe the basis for the presentation of general purpose
financial statements to ensure comparability. General purpose financial statements
cater most of the common needs of external users.
II. Purpose of Financial Statements
The purpose of financial statements is to provide information about the financial
position, performance, and cash flows of an entity and to show the result of
management’s stewardship.
III. General Features
The following are the general features of financial statements: 1.) Fair presentation
and Compliance with PFRSs, 2.) Going Concern, 3.) Accrual Basis, 4.) Materiality and
Aggregation, 5.) Offsetting, 6.) Frequency of Reporting Period, 7.) Comparative
Information, and 8.) Consistency Presentation.
IV. Structure and Content of Financial Statements
The following shall be displayed when relevant to the understanding of the information
presented: entity name, whether it is for individual entity or group of entities, ending
date of the reporting period, presentation currency, and level of rounding used.
V. Presentation of Statement of Financial Position
Pas 1 does not prescribe the order and format of presenting items in the statement of
financial position. However, it can be presented either showing current and non-
current distinction (classified) or based on liquidity (unclassified).
 Deferred tax assets and liabilities are always presented as noncurrent items.
VI. Refinancing Agreement
Refinancing refers to the replacement of an existing debt with a new one but with
different terms. Loan facility refers to a credit line.
VII. Statement of Profit or Loss and Other Comprehensive Income
Income and expenses may be presented either in a single statement of profit or loss
and other comprehensive income or with two statements, namely statement of profit or
loss and statement presenting comprehensive income.
 Profit or loss is income less expense, excluding the components of OCI.
VIII. Presentation of Expenses
Expenses may be presented using either nature of expense method or function of
expense method.
IX. Other Comprehensive Income
Other comprehensive income comprises items of income and expenses that are not
recognized in profit or loss as required or permitted by other PFRS. It may be
presented net or gross of related taxes.
 Reclassification adjustments are amounts reclassified from OCI to profit or loss.
X. Total Comprehensive Income
Total comprehensive income comprises all non-owner changes in equity. It is the sum
of profit or loss and OCI.
XI. Statement of Changes in Equity
Pas 1 allows the disclosure of dividends, and the related amounts per share, either in
the statement of changes in equity or in the notes.
XII. Notes
The notes are an integral part of the financial statements. It presents information about
the basis of preparation of financial statements and those required and not by PFRS
but relevant.
Summary of PAS 2 (Inventories)
I. Introduction
PAS 2 provides guidance in the determination of cost of inventories. Inventories are
assets:
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process
or in the rendering of services.
II. Cost of Inventories

a. Purchase Cost – includes purchase price, import duties, non-refundable or
non-receivable purchase taxes, and transport, handling and other costs
directly attributed to the acquisition of the inventory.
b. Conversion Cost – refers to costs that are necessary in converting raw
materials into finished goods.
c. Other Cost necessary in bringing the inventories to their present location and
condition.
Exclusions: abnormal waste, storage costs, administrative overheads
unrelated to production, and selling costs.
III. Cost Formulas

The cost formulas deal with the computation of cost of inventories that are charged as
expense when the related revenue is recognized and the cost of unsold inventories at
the end of the period that are recognized as asset.
a. Specific Identification – shall be used for inventories that are not ordinarily
interchangeable and those that are segregated for specific projects.
b. First-In, First-Out – this formula assumes that inventories that were purchased
or produced first are sold first. Therefore, unsold ones are those most recently
purchased or produced.
c. Weighted Average – cost of sales and ending inventory under this formula are
based on the weighted average cost of beginning inventory and all inventories
purchased or produced during the period. It may be calculated on a periodic
basis or as each additional purchase is made (moving average).
IV. Net Realizable Value

 Inventories are measured at the lower of cost and net realizable value (NRV).
 Net realizable value refers to the net amount that an entity expects to realize from
the sale of inventory in the ordinary course of business. It is the estimated selling
price in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.
 Write-downs of inventories are usually carried out on an item by item basis.
 Replacement Cost – the best evidence of NRV for war materials.
V. Recognition as an Expense
The carrying amount of a sold inventory is charged as expense in the period in which
the related revenue is recognized. Moreover, inventories used in the construction of
another asset is not expensed but capitalized as cost of the constructed asset.
Summary of PAS 7 (Statement of Cash Flows)
I. Introduction
The statement of cash flows provides information about the sources and utilization of
cash and cash equivalents during the period. The following are the definition of terms:
a. Cash – comprises cash on hand and cash in bank.
b. Cash Equivalents – are short-term, highly liquid investments which are subject
to an insignificant risk of changes in value. Only debt instruments acquired
within 3 months or less before their maturity date is qualified.
c. Cash Flows – include inflows and outflows of cash and cash equivalents.
II. Purpose
Statement of cash flows helps users assess:
a. the entity’s ability to generate cash and cash equivalents
b. the timing and certainty of the generation of cash flows, and
c. the needs of the entity to utilize cash flows
III. Classification of Cash Flows

a. Operating Activities – cash primarily derived from principal revenue-producing
activities of the entity. Other special items included are cash flows from buying and
selling held for trading securities, loan transactions of financial institutions, and
acquisition, rentals and subsequent sale of property, plant, and equipment.
b. Investing Activities – involve the acquisition and disposal of noncurrent assets and
other investments.
c. Financing Activities – those that affect the entity’s equity capital and borrowing
structure. Only cash flows on non-operating or non-trade liabilities are included in
this activity.
IV. General Concept in the Preparation of Statement of Cash Flows

The statement of cash flows is prepared using cash basis. By means, only
transactions affecting cash and cash equivalents are reported. Non-cash transactions
are excluded and disclosed.
V. Interests and Dividends

Entities expect financial institutions have option in presenting cash flows relating to
interests and dividends.
VI. Presentation
For the presentation of investing and financing activities, gross cash receipts and
gross cash payments for the related transactions are presented separately, unless
they qualify for net presentation.
However, cash flows from operating activities may be presented using either:
a. Direct Method – shows each major class of gross cash receipts and gross cash
payments; or
b. Indirect Method – profit or loss is adjusted for the effects of non-cash items and
changes in operating assets and liabilities.
 Materiality is an entity-specific aspect of relevance and that it is a matter of
judgement. Also, there is a non-mandatory guidance that can be followed in
making material judgements and it is called the Materiality Process. Materiality
Process involves these steps: identifying, assessing, organizing, and reviewing.
a. Materiality and Aggregation – material class of similar items is presented

separately immaterial items are aggregated with other items. A class of similar
items is called a line item.
b. Offsetting – assets, liabilities, income, and expense are presented separately and
are not offset, unless required or permitted.

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Summary of Conceptual Framework

I. Purpose and Status of the Conceptual Framework

II. Cost of Inventories

III. Cost Formulas

IV. Net Realizable Value

III. Classification of Cash Flows

IV. General Concept in the Preparation of Statement of Cash Flows

V. Interests and Dividends

a. Materiality and Aggregation – material class of similar items is presented

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