CONCEPTUAL

FRAMEWORK FOR
FINANCIAL
REPORTING
• Financial Reporting
Standards Council - Philippine Financial
standard setting body Reporting Standards
created by the PRC upon
recommendation of the include:
BOA in carrying out its PFRS corresponding to
powers and functions IFRS issued by IASB
under R.A. 9298. It shall PAS corresponding to IAS
have 15 members: issued by IASC
Chairman, BOA, SEC, Phil. Interpretations
BSP, BIR, COA, FINEX, corresponding to IFRIC and
and 4 sectors of SIC Interpretations and
accounting practice (2 per Interpretations developed by
sector) public, commerce
PIC
& industry, academe and
government.
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING

• A conceptual framework is a theory of accounting prepared by a

standard-setting body against which practical problems can be tested
objectively.`

• The Conceptual Framework is not a reporting standard and therefore

does not define standard for any particular measurement or
disclosure issue.

• The Conceptual Framework is concerned with general purpose

financial statements including consolidated financial statements.
BASIC purpose of the CONCEPTUAL
FRAMEWORK

• To assist FRSC in developing accounting

standards that represents GAAP in the
Philippines.
• To assist FRSC in reviewing and adopting
existing international accounting standards.
• To assist auditors in forming an opinion as to
whether financial statements conform with
accounting standards.
SCOPE of the FRAMEWORK:

1. Objective of financial reporting

2. Qualitative characteristics of useful financial
information
3. Definition, recognition and measurement of
elements from which financial statements are
constructed
4. Financial statements and the reporting entity
5. Presentation and disclosure
6. Concepts of capital and capital maintenance
SCOPE of the FRAMEWORK:
1. Objective of financial reporting - According to
International Accounting Standard Board (IASB), the objective of
financial reporting is “to provide information about
the financial position, performance and changes in financial position
of an enterprise that is useful to a wide range of users in making
economic decisions.”
2. Qualitative characteristics of useful financial
information - QUALITATIVE characteristics are the attributes
that make the information provided in the financial statements useful to
users.
` Fundamental qualitative characteristics: Relevance and
Faithful Representations.
Enhancing qualitative characteristics: COMPARABILITY,
UNDERSTANDABILITY, VERIFIABILITY AND TIMELINESS.
SCOPE of the FRAMEWORK:
Fundamental Qualitative Characteristics
• Relevance - The information must be relevant to the needs of the
users, which is the case when the information influences the
economic decisions of users. This may involve reporting particularly
relevant information, or information whose omission or misstatement
could influence the economic decisions of users.
• Faithful Representations - To be useful, financial information must
not only be relevant, it must also represent faithfully the phenomena it
purports to represent. Faithful representation means representation of
the substance of an economic phenomenon instead of representation of
its legal form only. Meaning that the financial information must be:
a. Complete/ness- financial reports should include all information
necessary for a user to understand the phenomenon being depicted
including all necessary description and explanation
b. Neutral – unbiased, and
c. Free from error.
SCOPE of the FRAMEWORK: Enhancing
Qualitative Characteristics
a. COMPARABILITY – The information must be comparable to
the financial information presented for other accounting periods, so
that users can identify trends in the performance and financial
position of the reporting entity. Information exhibits when two
different entities has been prepared and presented in a similar
manner
b. UNDERSTANDABILITY – Information are classified,
characterized and presented clearly and concisely
c. VERIFIABILITY – high degree of consensus can be secured
among independent measures using the same measurement
method
d. TIMELINESS.- having information available to decision-makers
in time to be able of influencing their decisions
SCOPE of the FRAMEWORK:
3. Definition, recognition and measurement of elements
from which financial statements are constructed
3.1 Definition
3.1.1 Definitions of the elements relating to financial
position
Asset. An asset is 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.
Liability. A liability is 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.
Equity. Equity is the residual interest in the assets of the
entity after deducting all its liabilities.
SCOPE of the FRAMEWORK : Definition
3.1.Definitions of the elements relating to performance
Income. Income is 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, other than
those relating to contributions from equity participants.
The definition of income encompasses both revenue and gains.
Revenue arises in the course of the ordinary activities of an entity and
is referred to by a variety of different names including sales, fees,
interest, dividends, royalties and rent. Gains represent other items that
meet the definition of income and may, or may not, arise in the course
of the ordinary activities of an entity. Gains represent increases in
economic benefits and as such are no different in nature from revenue.
Hence, they are not regarded as constituting a separate element in the
IFRS Framework.
SCOPE of the FRAMEWORK: Definition
3.1 Definitions of the elements relating to performance
Expense. Expenses are 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.
The definition of expenses encompasses losses as well as
those expenses that arise in the course of the ordinary activities of the
entity. Expenses that arise in the course of the ordinary activities of the
entity include, for example, cost of sales, wages and depreciation. They
usually take the form of an outflow or depletion of assets such as cash
and cash equivalents, inventory, property, plant and equipment. Losses
represent other items that meet the definition of expenses and may, or
may not, arise in the course of the ordinary activities of the entity.
Losses represent decreases in economic benefits and as such they are
no different in nature from other expenses. Hence, they are not
regarded as a separate element in this Framework.
SCOPE of the FRAMEWORK: Recognition
3.2 Recognition of the elements of financial statements
• Recognition is the process of incorporating in the balance sheet or
income statement an item that meets the definition of an element and
satisfies the following criteria for recognition:
• It is probable that any future economic benefit associated with the item will
flow to or from the entity; and
• The item's cost or value can be measured with reliability.

• Based on these general criteria:

An asset is recognised in the balance sheet when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value that
can be measured reliably
A liability is recognised in the balance sheet when it is probable that an outflow
of resources embodying economic benefits will result from the settlement of a
present obligation and the amount at which the settlement will take place can
be measured reliably.
SCOPE of the FRAMEWORK: Recognition
3.2 Recognition of the elements of financial statements

Income is recognised in the income statement when an increase in

future economic benefits related to an increase in an asset or a
decrease of a liability has arisen that can be measured reliably. This
means, in effect, that recognition of income occurs simultaneously with
the recognition of increases in assets or decreases in liabilities (for
example, the net increase in assets arising on a sale of goods or
services or the decrease in liabilities arising from the waiver of a debt
payable).

Expenses are recognised when a decrease in future economic benefits

related to a decrease in an asset or an increase of a liability has arisen
that can be measured reliably. This means, in effect, that recognition of
expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets (for example, the accrual of employee
entitlements or the depreciation of equipment).
SCOPE of the FRAMEWORK: Measurement
3.3 Measurement of the elements of financial
statements
Measurement involves assigning monetary amounts at
which the elements of the financial statements are to be
recognised and reported
The IFRS Framework acknowledges that a variety of measurement
bases are used today to different degrees and in varying combinations
in financial statements, including:
• Historical cost - he measurement basis most commonly used today,
but it is usually combined with other measurement bases.
• Current cost
• Net realisable (settlement) value
• Present value (discounted)
SCOPE of the FRAMEWORK :
4. FINANCIAL STATEMENTS and Reporting Entity
Objective - To provide information about an entity's assets,
liabilities, equity, income and expenses that is useful to financial
statements users in assessing the prospects for future net cash
inflows to the entity and in assessing management's stewardship
of the entity's resources.

A complete set of financial statements includes: [IAS 1.10]

• a statement of financial position (balance sheet) at the end of the period
• a statement of profit or loss and other comprehensive income for the
period (presented as a single statement, or by presenting the profit or
loss section in a separate statement of profit or loss, immediately
followed by a statement presenting comprehensive income beginning
with profit or loss)
• a statement of changes in equity for the period
• a statement of cash flows for the period
• notes, comprising a summary of significant accounting policies and other
explanatory notes
• comparative information prescribed by the standard.
Statement of financial position (balance sheet) - a statement of the
assets, liabilities and capital of a business at a particular time. In other
words, it lists the resources, obligations, and ownership details of a
company on a specific day.
• Statement of financial performance (income statement) - a
financial statement that reports a company's financial
performance over a specific accounting period. Financial performance
is assessed by giving a summary of how the business incurs
its revenues and expenses through both operating and non-operating
activities. It also shows the net profit or loss incurred over a specific
accounting period
Statement of changes in equity - Statement of Changes
in Equity, often referred to as Statement of Retained
Earnings, details the change in owners' equity over an
accounting period by presenting the movement in reserves
comprising the shareholders' equity.
Statement of cash flows - a financial statement that
shows how changes in balance sheet accounts and income
affect cash and cash equivalents, and breaks the analysis
down to operating, investing and financing activities.
Notes to financial statement - Also referred to as footnotes. These
provide additional information pertaining to a company's operations
and financial position and are considered to be an integral part of the financial
statements. The notes are required by the full disclosure principle. The
main purpose of the notes to the financial statements is to further clarify
accounting procedures used by a company, as well as to divulge information that
has occurred during and immediately after the close of the accounting period.
SCOPE of the FRAMEWORK
5. Presentation and disclosure (IAS 1, PAS 1)
• To prescribe the basis for presentation of general purpose
financial statements, to ensure comparability both with the
entity's financial statements of previous periods and with the
financial statements of other entities. IAS 1 sets out the overall
requirements for the presentation of financial statements,
guidelines for their structure and minimum requirements for
their content. [IAS 1.1] Standards for recognising, measuring,
and disclosing specific transactions
• IAS 1 applies to all general purpose financial statements that
are prepared and presented in accordance with International
Financial Reporting Standards (IFRSs).
• General purpose financial statements are those intended to
serve users who are not in a position to require financial
reports tailored to their particular information needs
Fair presentation and compliance with
IFRSs
The financial statements must "present fairly" the
financial position, financial performance and cash
flows of an entity. Fair presentation requires the
faithful representation of the effects of
transactions, other events, and conditions in
accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses
set out in the Framework. The application of
IFRSs, with additional disclosure when necessary,
is presumed to result in financial statements that
achieve a fair presentation.
 Fair Presentation requires the following
principle:
Going concern
The Conceptual Framework notes that financial statements are normally
prepared assuming the entity is a going concern and will continue in operation
for the foreseeable future.
Accrual Basis of Accounting
IAS 1 requires that an entity prepare its financial statements, except for cash
flow information, using the accrual basis of accounting

Consistency of presentation
The presentation and classification of items in the financial statements shall
be retained from one period to the next unless a change is justified either by
a change in circumstances or a requirement of a new IFRS
Materiality and aggregation
Each material class of similar items must be presented separately in the
financial statements. Dissimilar items may be aggregated only if the are
individually immaterial. [IAS 1.29]
 Fair Presentation requires the following
principle:
Offsetting
Assets and liabilities, and income and expenses, may not be offset unless
required or permitted by an IFRS.
Comparative information
IAS 1 requires that comparative information to be disclosed in respect of the
previous period for all amounts reported in the financial statements, both on the
face of the financial statements and in the notes, unless another Standard
requires otherwise

Reporting period
There is a presumption that financial statements will be prepared at least
annually. If the annual reporting period changes and financial statements are
prepared for a different period, the entity must disclose the reason for the change
and state that amounts are not entirely comparable
 Fair Presentation requires the following
principle:
Format of statement
IAS 1 does not prescribe the format of the statement of financial position. Assets can be
presented current then non-current, or vice versa, and liabilities and equity can be
presented current then non-current then equity, or vice versa. A net asset presentation
(assets minus liabilities) is allowed. The long-term financing approach used in UK and
elsewhere – fixed assets + current assets - short term payables = long-term debt plus
equity – is also acceptable.
Share capital and reserves
Regarding issued share capital and reserves, the following disclosures are required:
[IAS 1.79]
numbers of shares authorised, issued and fully paid, and issued but not fully paid
par value (or that shares do not have a par value)
a reconciliation of the number of shares outstanding at the beginning and the end
of the period
description of rights, preferences, and restrictions
treasury shares, including shares held by subsidiaries and associates
shares reserved for issuance under options and contracts
a description of the nature and purpose of each reserve within equity.
 Fair Presentation requires the following
principle:
Statement of financial position (balance sheet)

Current and non-current classification

An entity must normally present a classified statement of financial position,
separating current and non-current assets and liabilities, unless presentation
based on liquidity provides information that is reliable. [IAS 1.60] In either case,
if an asset (liability) category combines amounts that will be received (settled)
after 12 months with assets (liabilities) that will be received (settled) within 12
months, note disclosure is required that separates the longer-term amounts
from the 12-month amounts. [IAS 1.61]