Chapter 1

Accounting
Service entity
Function: to provide quantitative information
Primarily financial in nature, about economic entities that is intended to be useful in making economic
decisions.

Reporting entity Accounting entity
Accounting entity concept conventional concept that separates the personality of the enterprise from its
owners, members and employees.
Luca Pacioli
Summa de Arithmetica, Geometria, Proportioni et Proportionalita (1494)

International Accounting Standards Committee (IASC) 1973 2001
International Accounting Standards (IAS) uniform global accounting standards

International Accounting Standards Board (IASB) 2001-
International Financial Reporting Standards (IFRS)

Norwalk Agreement
memo. of understanding between IASB and FASB of US to eliminate some differences between US standards
and IFRS. (2002)

RA 9298 Phil. Accountancy Act of 2004

PICPA Philippine Institute of CPA
organized in late 1981 the
ASC that formalized the standard setting process in the Philippines
Nov. 18, 1981
main function: establish and improve GAAP in the Philippines
Statement of Financial Accounting Standards (SFAS)
8 members
-PICPA
- SEC
- BSP
-BOA
- Financial Executives of the Philippines
1997 2000 developed standards based on IAS
2005 full adoption of IAS

FRSC Financial Reporting Standards Council
Established in 2006 by BOA
Succeeded ASC
*composed of chairman and members
-BOA
-SEC
-BSP
-BIR
-Financial Executives of the Philippines
-COA
-accredited professional org. of CPAs (PICPA)

PIC Philippine Interpretations Committee
Formed in Nov 2006 by FRSC to assist in establishing and improving financial reporting standards in the
Philippines
Philippine Financial Reporting Standards (PFRS)

THE CONCEPTUAL FRAMEWORK 2010 (New Version)
September 2010 by IASB
Addresses the ff: (scope)
1. Objective of financial reporting
- 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 entity.
2. Qualitative characteristics of financial reporting
a) Fundamental
1. Relevance (predictive value, confirmatory value)
2. Faithful Representation (completeness, neutrality, freedom from error)
b) Enhancing (VCUT)
1. Verifiability 3. Understandability
2. Comparability 4. Timeliness
3. Reporting Entity
- Pending details
4. Definition, recognition and measurement of the elements
5. Concepts of Capital and Capital Maintenance

THE CONCEPTUAL FRAMEWORK (Old Version)
Purpose:
1) Assist FRSC in developing GAAP and its review and adoption of existing IFRS
2) Assist prepares of FS in applying PFRS
3) Assist auditors in forming an opinion
4) Assist users in interpreting FS
5) Provide interested parties with info about PFRS formulation by FRSC

- Facilitate the consistent and logical formulation of PFRS
- Provide basis for the use of judgment in resolving accounting issues
- Not an accounting standard
- In case of conflict between PAS/PFRS and Framework, the reqts of the specific PAS/IFRS shall prevail

Scope: COQE
1. Capital Concepts : Concepts of capital and capital maintenance
2. Objective: Objective of FS
3. Qualitative Characteristics: Qualities/attributes that make FS useful
4. Elements: Definition, recognition and measurement of the elements of FS

Objective of FS:
Provide information about the financial position, performance and changes in financial position.

Management primary responsible for preparation and presentation of FS

Underlying Assumptions:
1) Accrual basis
2) Going concern

Qualitative Characteristics: CURRy
Primary (Content)
1. Relevance
- Must be capable of making a difference in a decision
Predictive value
Feedback/confirmatory value
Timeliness
2. Reliability
- Free from bias and errors and can be depended upon by users to represent faithfully
Substance over form
Prudence
Neutrality
Completeness
Faithful representation
Presentation (Secondary)
3. Comparability
4. Understandability
- Compliance with PFRS to make information understandable

Elements:
Assets
- Resources controlled by the entity
- As a result of past events
- From which future economic benefits are expected to flow to the enterprise
Liabilities
- Present obligation of an enterprise
- Arising from past events
- The settlement of which is expected to result to an outflow from the entity of economic resources embodying
economic benefits
Equity
- Residual interest in the asset of entity after deducting all its liabilities

Income
- Increases in economic benefits during an accounting period
- In the form of enhancements of assets or decreases of liabilities that result in increases in equity

Expenses
- Decreases in economic benefits during the accounting period
- In the form of outflows or depletion of assets or incurred of liabilities that results in decreases in equity

Financial position: Assets, Liabilities, Equity
Performance: Income, Expenses

Recognition:
a) Probable: probable that any future economic benefit associated with the item will flow to or from the entity
b) Measurable: item has a cost/value that can be measured with reliably
Measurement basis:
1) Historical cost cost of acquisition
2) Current cost fair value
3) Realizable value assets disposal value reduced by disposed cost
4) Present Value discounted future cash flow

Capital Concepts:
1) Financial concept of capital
CAPITAL= Net Assets of the enterprise
- Does not require adoption of a specific measurement basis
Cash and financial assets measured @ FV (current cost)
PPE may be measured based on historical cost
2) Physical concept of capital
CAPITAL= Operating capacity of the enterprise
- Require the use of current cost as measurement basis of assets and liabilities

Capital Maintenance Concept:
- Measures profit as the amount of capital that the enterprise can distribute to its owners and be as well off at
the end of the period as it was at the beginning
1) Financial capital maintenance concept
Financial amount of Net asset End
- Financial amount of Net asset Beg
- Contributions from owners
+ Distributions to owner________
PROFIT

2) Physical capital maintenance concept
Productive capacity at the end of period
- Productive capacity at the beg of period
- Effects of transactions with owners
PROFIT

Accounting entity concept:
Accounting period concept Periodicity assumption
Unit of measurement concept Monetary unit assumption