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CONCEPTUAL FRAMEWORK-FINANCIAL REPORTING AND ASSUMPTIONS

Definition of Conceptual Framework

 The Conceptual Framework for Financial Reporting is a complete, comprehensive, and single
document promulgated by the International Accounting Standards Board.
 The Conceptual Framework is a summary of the terms and concepts that underlie the
preparation and presentation of financial statements for external users.
 The Conceptual Framework is an attempt to provide an overall theoretical foundation for
accounting.
 The Conceptual Framework is intended to guide standard-setters, preparers, and users of
financial information in the preparation and presentation of statements.
 The Conceptual Framework is concerned with the general-purpose financial statements,
including consolidated financial statements.

Purpose of the Conceptual Framework

a. To assist the FRSC in developing accounting standards and reviewing existing standards.
b. To assist preparers of financial statements in applying accounting standards and in dealing with
issues not yet covered by GAAP.
c. To assist the FRSC in the review and adoption of International Financial Reporting Standards.
d. To assist users of financial statements in interpreting the information contained in the financial
statements.
e. To assist auditors in forming an opinion as to whether financial statements conform with GAAP.
f. To provide information to those interested in the work of the FRSC in the formulation PFRS.

Users of financial information

 Primary users- includes the existing and potential investors, lenders, and other creditors.
 Other users- includes the employees, customers, governments and their agencies and the
public.

Primary users:

 Existing and potential investors-is concerned with the risk inherent in and return
provided by their investment, the investors need the information to help them
determine whether they should buy, hold, or sell.
 Lenders and other creditors- are interested in information which enables them to
determine whether their loans, interest thereon, and other amounts owing to them will
be paid when due.

Other users:

 Employees- are interested in the information about the stability and profitability of the
entity.
 Customers- are interested in the information about the continuance of an entity
especially when they have a long-term involvement with or are dependent to the entity.
 Government and their agencies- are interested in the information about the allocation
of resources and therefore the activities of the entity.
 Public- entities affects members of the public in a variety of ways, financial statements
may assist the public by providing information about the trend and the range of its
activities.

SCOPE OF CONCEPTUAL FRAMEWORK

A. Objective of financial reporting


B. Qualitative characteristics of useful financial information
C. Definition, recognition and measurement of the elements from which financial statements
are constructed
D. Concepts of capital and capital maintenance

FINANCIAL REPORTING

-Financial Reporting is the provision of financial information about an entity to external users that is
useful to them in making economic decisions and for assessing the effectiveness of the entity’s
management.
-The principal way of providing financial information to external users is through the annual financial
statements.
-Financial reports include not only financial statements but also other information such as financial
highlights, summary of important financial figures, analysis of financial statements and significant ratios.
-Financial reports also include nonfinancial information such as descriptions of products and a listing of
corporate officers and directors.

OBJECTIVE OF FINANCIAL REPORTING

-The objective of financial reporting forms the foundation of the Conceptual Frameworks.
-The overall objective of financial reporting is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.

TARGET USERS

-Financial reporting is directed primarily to the existing and potential investors, lenders and other
creditors which compose the primary user group.
-Primary users of financial information are the parties that provide resources to the entity.
-Information that meets the needs of the specified primary users is like to meet the needs of other users
such as employees, customers, governments and their agencies.
-The management of a reporting entity is also interested in financial information about the entity.
Management need not rely on general purpose financial reports because it is able to obtain or access
additional information internally.

SPECIFIC OBJECTIVES OF FINANCIAL REPORTING


A. To provide information useful in making decisions about providing resources to the entity.
B. To provide information useful in assessing the cash flow prospects of the entity.
C. To provide information about entity resources, claims, and changes in resources and claims.
ECONOMIC DECISIONS

Existing and potential investors need general purpose financial reports in order to enable them
in making decisions whether to buy, sell or hold equity investments.
Existing and potential lenders and other creditors need general purpose financial reports in
order to enable them in making decisions whether to provide or settle loans and other forms of credit.

ASSESSING CASH FLOW PROSPECTS


-Decisions by existing and potential investors about buying, selling or holding equity instruments depend
on the returns that they expect from an investment, for example, dividend.
-Decisions by existing and potential lenders and other creditors about providing and settling loans and
other forms of credit depend on the principle and interest payment or other returns that they expect.
-Financial reporting should provide information that is useful in assessing the amount, timing and
uncertainty of prospects for future net cash inflows to the entity.

ECONOMIC RESOURCES AND CLAIMS


-General purpose financial reports provide information about the financial position of a repoting entity.
-Financial position is information about the entity’s economic resources and the claims against the
reporting entity.
-The economic resources are the assets and the claims are the liabilities and equity of the entity.

So information about financial position can help users to assess the entity’s liquidity, solvency
and the need for additional financing.
*Liquidity- availability of cash in the near future to cover currently maturing obligations.
*Solvency- availability of cash over a long term to meet financial commitments when they fall due.

CHANGES IN ECONOMIC RESOURCES AND CLAIMS


-General purpose financial reports also provide information about the effects of transactions and other
events that change the economic resources and claims.
-Changes in economic resources and claims result from financial performance and from other events or
transactions, such as issuing debt or equity instruments.
-The financial performance of an entity comprises revenue, expenses and net income or loss for a period
of time.

USEFULLNESS OF FINANCIAL PERFORMANCE

-Information about financial performance helps users to understand the return that the entity has
produced on the economic resources.
-Information about the return the entity has produced provides an indication of how well management
has discharged its responsibilities to make efficient and effective use of the entity’s economic resources.
-Information about past financial performance is usually helpful in predicting the future returns on the
entity’s economic resources.
-Information about financial performance during a period is useful in assessing the entity’s ability to
generate future cash inflows from operations.
ACCRUAL ACCOUNTING

Accrual accounting means that income is recognized when earned regardless of when received
and expense is recognized when incurred regardless of when paid.
Information about financial performance measured in accordance with accrual accounting
provides a better basis for assessing past and future performance than information solely about cash
receipts and payments during a period.

Underlying Assumptions

Accounting assumptions are the basic notions or fundamental premises on which the accounting
process is based. Accounting assumptions are also known as postulates.

Accounting assumptions serve as the foundation or bedrock of accounting in order to avoid


misunderstanding but rather enhance the understanding and usefulness of the financial statements.

The Conceptual Framework for Financial Reporting mentions only one assumption, namely
going concern.

However, implicit in accounting are basic assumptions of accounting entity, time period and
monetary unit.

Going Concern

The going concern or continuity assumption means that in the absence of evidence to the
contrary, the accounting entity is viewed as continuing in operation indefinitely.

The going concern postulate is the very foundation of the cost principle.

Thus, assets are normally recorded at cost. As a rule, market values are ignored.

However, some new standards require measurement of certain assets at fair value.

If there is evidence that the entity would experience large and persistent losses or that the
entity’s operations are to be terminated, the going concern assumption is abandoned.

Accounting Entity

In financial accounting, the accounting entity is the specific business organization, which may be
a proprietorship, partnership or corporation.

Under this assumption, the entity is separate from the owners, managers, and employees who
constitute the entity.

Accordingly, the transactions of the entity shall not be merged with the transactions of the
owners.

The personal transactions of the owners shall not be allowed to distort the financial statements of the
entity.
If an enterprising entrepreneur owns department store, restaurant and bookstore, separate
statements shall be prepared for each business in order to determine which business is profitable.

Each business is an independent accounting entity. The shareholder is not the corporation and
the corporation is not the shareholder.

Time period

A completely accurate report on the financial position and performance of an entity cannot be
obtained until the entity is finally dissolved and liquidated.

However, users of financial information need timely information for making an economic
decision.

The time period assumption requires that the indefinite life of an entity is subdivided into
accounting periods which are usually of equal length for the purpose of preparing financial reports on
financial position, performance and cash flows.

By convention, the accounting period or fiscal period is one year or a period of twelve months.

The accounting period maybe a calendar year or a natural business year.

A calendar year is a twelve-month period that ends on December 31.

A natural business year is a twelve-month that ends on any month when the business is at the
lowest or experiencing slacks season.

Monetary unit

The monetary unit assumptions has two aspects, namely quantifiability and stability of the peso.

The quantifiability aspect means that the assets, liabilities, equity, income and expenses should
be stated in the terms of a unit of measure which is the peso in the Philippines.

The stable peso postulate is actually an amplification of the going concern assumption so much
so that adjustments are unnecessary to reflect any changes in purchasing power.

The accounting function is to account for nominal peso only and not for constant peso or
changes in purchasing power.

In today’s world, the assumption that the peso is a stable measure over time is not necessarily
valid. Consider an equipment that was imported 10 years ago from the United States for $100,000 when
the exchange rate was P35 to $1 or an equivalent of P3,500,000.

If the same equipment is purchased now and assuming there is no charge in the $100,00
purchase price, the replacement cost in terms of peso would be in the vicinity of P5,000,000,
considering the current exchange rate of P50 to $1.

In this regard, an entity may choose the revaluation model as an accounting policy.

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