BABE 1 Reviewer - PAS (Philippine Accounting Standards)

STANDARD SETTING BODIES IAS – prepared by Int’l Accounting Standards

Committee(IASC)
FRSC (Financial Reporting STANDARDS Council)
- Philippine Interpretations
- Created by BOA( Board of Accountancy) in
2006 to assist them Interpretations of Int’l Financial Reporting
- Main function is to establish GAAP Interpretations Committee (IFRIC) and SIC
- Consists of 1 Chairman and 14 Members – (Standing Interpretations Committee)
appointed by PRC, recommended by BOA in - PFRS set out for RECOGNITION,
coordination with PICPA MEASUREMENT, PRESENTATION and
o BOA, SEC , BSP , FINEX , COA , BIR – 1 DISCLOSURE of transaction events.
o PICPA – 8 ( 2 per sector – Academe, - PFRS are designed to apply to the general
Govt., Commerce, Public) purpose financial statements
- Has no regular compensation, only - Standards approved by the FRSC include
Honorarium paragraphs in bold type and plain type,
- Successor of ASC ( Accounting Standards which have equal authority.
Council)
DUE PROCESS of deV’t Of PFRS
ASC (Accounting Standards Council)
1. Consideration of Pronouncements of IASB
- Was created on November 1981 by PICPA
to establish GAAP 2. Formation of Task Force
- Creates SFAS ( Statement of Financial
3. Issuing for comment an exposure draft
Accounting Standards)
approved by a majority of the FRSC
- Has 8 members including the Chairman
members (Comment period: 30-60 days)
- 4 from PICPA including the Chairman
o BOA, SEC, BSP, FINEX – 1 4. Consideration of all comments

PIC (Philippine Interpretations Committee) 5. Approval of a standard or an interpretation

by a majority of the FRSC members
- Created by FRSC in 2006
- Issue authoritative guidance 6. Each final standard and interpretation shall
- Replaced the IC (Interpretations be submitted to PRC through BOA for
Committee) approval

Pronouncements of FRSC ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

- PFRS ( Philippine Financial Reporting

Standards)

IFRS – prepared by Int’l Accounting Standards

Board(IASB)
INTERMEDIATE ACCOUNTING rules, hopefully top management’s financial
reporting focus will shift from demonstrating
compliance with rules to demonstrating that a
company has attained financial reporting
objectives.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

CONCEPTUAL FRAMEWORK
Chapter 2: Conceptual Framework for Financial Development of a Conceptual Framework
Reporting
Presently, the Conceptual Framework is comprises
Conceptual Framework of the following.
- establishes the concepts that underlie • Chapter 1: The Objective of General Purpose
financial reporting. Financial Reporting
Need for a Conceptual Framework • Chapter 2: The Reporting Entity (not yet issued)
► Rule-making should build on and relate to • Chapter 3: Qualitative Characteristics of Useful
an established body of concepts. Financial Information
► Enables IASB to issue more useful and • Chapter 4: The Framework, comprised of the
consistent pronouncements over time. following:
What do numbers mean? What’s your principle? 1. Underlying assumption—the going concern
assumption;
The need for a conceptual framework is highlighted
2. The elements of financial statements;
by accounting scandals such as those at Royal
3. Recognition of the elements of financial
Ahold (NLD), Enron (USA), and Satyan Computer
statements;
Services (IND). To restore public confidence in the
4. Measurement of the elements of financial
financial reporting process, many have argued that
statements; and
regulators should move toward principles-based
5. Concepts of capital and capital
rules. They believe that companies exploited the
maintenance.
detailed provisions in rules-based pronouncements
Overview of the Conceptual Framework
to manage accounting reports, rather than report
the economic substance of transactions. For Three levels:
example, many of the off–balance-sheet
arrangements of Enron avoided transparent First Level = Objectives of Financial Reporting
reporting by barely achieving 3 percent outside
Second Level = Qualitative Characteristics and
equity ownership, a requirement in an obscure
Elements of Financial Statements
accounting rule interpretation. Enron’s financial
engineers were able to structure transactions to Third Level = Recognition, Measurement, and
achieve a desired accounting treatment, even if Disclosure Concepts.
that accounting treatment did not reflect the
transaction’s true nature. Under principles-based
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

FIRST LEVEL: BASIC OBJECTIVE

“To provide financial information about the

reporting entity that is useful to present and
potential equity investors, lenders, and other
creditors in making decisions about providing
resources to the entity.

 Provided by issuing general-purpose

financial statements. A. Fundamental Quality—Relevance
- To be relevant, accounting information
 Assumption is that users need reasonable must be capable of making a difference in a
knowledge of business and financial decision.
accounting matters to understand the
information.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Qualitative Characteristics of Accounting

Information
- Financial information has predictive value if
IASB identified the Qualitative Characteristics of it has value as an input to predictive
accounting information that distinguish better processes used by investors to form their
(more useful) information from inferior (less useful) own expectations about the future.
information for decision-making purposes. - Relevant information also helps users
confirm or correct prior expectations.
- Information is material if omitting it or
misstating it could influence decisions that
 users make on the basis of the reported
financial information.

 Information that is measured and reported

in a similar manner for different companies
is considered comparable.
 Verifiability - occurs when independent
measurers, using the same methods, obtain
similar results.
 Timeliness - means having information
available to decision-makers before it loses
its capacity to influence decisions.
B. Fundamental Quality—Faithful
 Understandability - is the quality of
Representation
information that lets reasonably informed
users see its significance.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Faithful representation

- means that the numbers and descriptions

match what really existed or happened.
 Completeness - means that all the
information that is necessary for faithful
representation is provided.
 Neutrality - means that a company cannot
select information to favor one set of
interested parties over another.
 An information item that is free from error
will be a more accurate (faithful)
representation of a financial item.

C. Enhancing Qualities
SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

1. Asset
- A resource controlled by the entity as a
result of past events and from which future
economic benefits are expected to flow to
the entity.
2. Liability
- A present obligation of the entity arising
from past events, the settlement of which is
expected to result in an outflow from the
entity of resources embodying economic
benefits.
3. Equity
- The residual interest in the assets of the
entity after deducting all its liabilities.
4. Income
- 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, THIRD LEVEL: RECOGNITION, MEASUREMENT,
other than those relating to contributions AND DISCLOSURE CONCEPTS
from equity participants.
5. Expenses
- Decreases in economic benefits during the
accounting period in the form of outflows or
depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
equity participants.

Basic Assumptions

Economic Entity

- company keeps its activity separate from its

owners and other business unit.

Going Concern

- company to last long enough to fulfill

objectives and commitments.

Monetary Unit

- money is the common denominator.

Periodicity - IASB established a fair value hierarchy that
provides insight into the priority of
- company can divide its economic activities
valuation techniques to use to determine
into time periods.
fair value.
Accrual Basis of Accounting

- transactions are recorded in the periods in

which the events occur.

Revenue Recognition

- When a company agrees to perform a

service or sell a product to a customer, it
has a performance obligation.
- Requires that companies recognize revenue
in the accounting period in which the
performance obligation is satisfied.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
THIRD LEVEL: BASIC PRINCIPLES
THIRD LEVEL: BASIC PRINCIPLES

Measurement Principles

1. Historical Cost
- generally thought to be a faithful
representation of the amount paid for a
given item.

2. Fair value
- defined as “the price that would be
received to sell an asset or paid to transfer a
liability in an orderly transaction between
market participants at the measurement
date.”
3. IASB has given companies the option to use
fair value as the basis for measurement of
financial assets and financial liabilities. Expense Recognition

Measurement Principles - Outflows or “using up” of assets or incurring

of liabilities during a period as a result of
 delivering or producing goods and/or  In order to justify requiring a
rendering services. particular measurement or
disclosure, the benefits perceived to
be derived from it must exceed the
costs perceived to be associated
with it.

“Let the expense follow the revenues.”

Full Disclosure

- Providing information that is of sufficient

importance to influence the judgment and
decisions of an informed user.

Provided through:

 Financial Statements

 Notes to the Financial Statements

 Supplementary information

Global Accounting Insights

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The Conceptual Framework
THIRD LEVEL: COST CONSTRAINT
- The IASB and the FASB have been working
Cost Constraint together to develop a common conceptual
framework. This framework is based on the
- Companies must weigh the costs of
existing conceptual frameworks underlying
providing the information against the
U.S. GAAP and IFRS. The objective of this
benefits that can be derived from using it.
joint project is to develop a conceptual
 Rule-making bodies and framework consisting of standards that are
governmental agencies use cost- principles-based and internally consistent,
benefit analysis before making final thereby leading to the most useful financial
their informational requirements. reporting.
Relevant Facts Differences

Following are the key similarities and differences • Although both U.S. GAAP and IFRS are
between U.S. GAAP and IFRS related to the increasing the use of fair value to report
Conceptual Framework for Financial Reporting. assets, at this point IFRS has adopted it
more broadly. As examples, under IFRS,
Similarities
companies can apply fair value to property,
• In 2010, the IASB and FASB completed the plant, and equipment; natural resources;
first phase of a jointly created conceptual and, in some cases, intangible assets.
framework. In this first phase, they agreed
• U.S. GAAP has a concept statement to guide
on the objective of financial reporting and a
estimation of fair values when market-
common set of desired qualitative
related data is not available (Statement of
characteristics. These were presented in the
Financial Accounting Concepts No. 7, “Using
Chapter 2 discussion. Note that prior to this
Cash Flow Information and Present Value in
converged phase, the Conceptual
Accounting”). The IASB has not issued a
Framework gave more emphasis to the
similar concept statement; it has issued a
objective of providing information on
fair value standard (IFRS 13) that is
management’s performance (stewardship).
converged with U.S. GAAP.
• The existing conceptual frameworks
• The monetary unit assumption is part of
underlying U.S. GAAP and IFRS are very
each framework. However, the unit of
similar. That is, they are organized in a
measure will vary depending on the
similar manner (objective, elements,
currency used in the country in which the
qualitative characteristics, etc.). There is no
company is incorporated (e.g., Chinese
real need to change many aspects of the
yuan, Japanese yen, and British pound).
existing frameworks other than to converge
different ways of discussing essentially the • The economic entity assumption is also part
same concepts. of each framework although some cultural
differences result in differences in its
• The converged framework should be a
application. For example, in Japan many
single document, unlike the two conceptual
companies have formed alliances that are
frameworks that presently exist. It is
so strong that they act similar to related
unlikely that the basic structure related to
corporate divisions although they are not
the concepts will change.
actually part of the same company.
• Both the IASB and FASB have similar
About The Numbers
measurement principles, based on historical
cost and fair value. In 2011, the Boards  While the conceptual framework that
issued a converged standard on fair value underlies U.S. GAAP is very similar to that
measurement so that the definition of fair used to develop IFRS, the elements
value, measurement techniques, and identified and their definitions under U.S.
disclosures are the same between U.S. GAAP are different.
GAAP and IFRS when fair value is used in
On the Horizon
financial statements.
  The IASB and the FASB face a difficult task in
attempting to update, modify, and
complete a converged conceptual
framework. There are many challenging
issues to overcome. For example, how do
we trade off characteristics such as highly
relevant information that is difficult to
verify? How do we define control when we
are developing a definition of an asset? Is a
liability the future sacrifice itself or the
obligation to make the sacrifice? Should a
single measurement method, such as
historical cost or fair value, be used, or does
it depend on whether it is an asset or
liability that is being measured? We are
optimistic that the new converged
conceptual framework will be a significant
improvement over its predecessors and will
lead to standards that will help financial
statement users to make better decisions.

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 CONCEPTUAL FRAMEWORK Qualitative characteristics

- Describes the basic concepts that underlie - Attributes that make the information
the preparation and presentation of provided in the F.S. useful to others
financial statements
- Concerned with general purpose financial
statements
- It is not PFRS and does not define standards
- In case of conflict, PFRS prevail over those
of the Framework.
- Underlying theme - Decision usefulness

Purposes of Framework

- Assist the FRSC in developing future PFRS

Fundamental qualitative characteristics
and reviewing existing PFRS
- Assist the FRSC in promoting harmonization  Relevance
of regulations, accounting standards and - capable of making difference
procedures
- Assist preparers of financial statements in a. Predictive value – evaluating past,
applying PFRS present and future events
- Assist auditors in forming an opinion as to b. Confirmatory value – confirming past
whether FS conform with PFRSs evaluations
- Assist users of financial statements in
interpreting information in the FS  Faithful Representation
- represent faithfully the transactions and
SCOPE events
- Objective of financial reporting a. Neutrality – free from bias toward a
- Qualitative Characteristics predetermined result
- Reporting Entity
- Elements of Financial Statements b. Completeness – complete within bounds
- Concepts of Capital and Capital of materiality and cost
Maintenance
c. Free from error – absence of material
Objective of financial reporting error

- Objective of General purpose financial Enhancing qualitative characteristics

reporting is to provide financial information
 Comparability
about the reporting entity that is useful to
- identify and understand similarities and
present and potential investors, lenders,
differences among items
and other trade creditors in making
decisions in their capacity as capital a. Consistency – same presentation and
providers classification from year to year
 b. Regular Reporting periods – same of time such as quarterly, semi-
reporting periods for different entities annually or annually.
 Substance over form
 Understandability
o conveys the true intention of the
- classifying, characterizing and presenting of
contract or true meaning of an
information is clear and concise
economic transaction rather than
 Timeliness
the customary words embodies in a
- available to decision makers in time to
legal document
influence their decisions
 Conservatism (Prudence)
 Verifiability
o provides the anticipated losses while
- different knowledgeable and independent
not recognizing anticipated gains
observers must reach same consensus
Users and information needs
Underlying assumption
PRIMARY USERS
 Going Concern
- it is presumed that an entity will continue in  Investors
operation indefinitely or if that presumption o (as well as potential investors) are
is not valid, disclosure and a different basis concerned with the:
of reporting are required
(1) risk inherent in, and the return provided by
Cost constraint their investment

 Costs should be justified by the benefits of (2) whether to buy, hold or sell interest
reporting information
(3) assess the ability of entity to pay dividends
Other assumptions, concepts and principles
 Lenders
 Accrual Basis o (as well as banks and other lending
o FS are prepared to include all institutions) enables them to
income as long as it is earned and all determine whether loans, and the
expenses that has been incurred interest attached to such loans could
 Accounting Entity be paid when due.
o Business enterprise is considered as  Suppliers and other trade creditors
a separate and distinct from the o (as well as potential creditors)
person or people who owns and whether amounts owing them will
runs it be paid when due
 Monetary unit
SECONDARY USERS
o quantify transactions into a common
unit of measurement known as  Employees
money o they are concerned with:
 Time Periods
o economic life of the business is (1) Stability and profitability of their
divided into relatively short period employers
 (2) Employers’ ability to pay remuneration, Expense
retirement benefits and opportunities
- decreases in economic benefits in the form
 Customers - continuance of an entity of
 Government – activities of entities (1) outflows or depletions of assets
especially allocation of resources or
 Public – trends and recent development in (2) increases of liabilities
the entity - decreases in equity other than those
relating to distributions from equity
Elements of financial statements participants
ELEMENTS RELATED TO FINANCIAL POSITION Recognition of the elements of financial
Asset statements

- resources controlled by entity Recognition

- result of past events - process of incorporating in the balance
- future economic benefits are expected sheet or income statement an item that
to flow to the entity meets the definition of an element and
Liability (1) It is “probable” that any future economic
- present obligation benefit will flow to or from the entity; and
- arising from past events (2) The item’s cost or value can be “measured
- settlement of which is expected to with reliability”
result in an outflow from entity resources
Measurement of elements of financial statements
Equity
Measurement
- residual interest in the assets after
deducting all its liabilities - involves assigning monetary amounts at
which the elements of the FS are to be
ELEMENTS RELATED TO FINANCIAL recognized and reported
PERFORMANCE (1) Historical Cost
Income - acquisition cost ; past purchase exchange
price
- increases in economic benefits in the form (2) Current Cost (Replacement Cost)
of - equivalent asset was acquired cost currently
(1) inflows or enhancements of ; current purchase exchange rate
assets or (3) Realizable (settlement) value
(2) decreases of liabilities - amount that could currently be obtained by
- increases in equity other than those relating selling the asset in an orderly disposal ;
to contributions from equity participants current sale exchange price
Concepts of capital and capital maintenance

Concepts of Capital

(1) Financial Concept of Capital

- invested money or invested purchasing
power
- net asset or equity of the entity
(2) Physical Concept of Capital
- productive capacity

Concepts of Capital Maintenance and the

determination of Profit

(1) Financial capital maintenance

- 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
distributions to, and contributions from
owners during the period

(2) Physical capital maintenance

- profit is earned if the physical productivity

capacity at the end of the period exceeds
the physical productivity capacity at the
beginning of the period after excluding
distributions to, and contributions from
owners during the period