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REVISED CONCEPTUAL FRAMEWORK FOR FINANCIAL ACCOUNTING
OVERVIEW
Purpose: to serve as a guide in developing future PFRS and as a guide in resolving accounting issues not directly addressed by existing PFRSs.
Authoritative Status:
- It is not a PFRS and does not define any instruction for measurement or disclosure.
- Conflict → the PFRS must prevail.
PART 1. INTRODUCTION
Conceptual Framework
- underlying theory or foundation for the development or/and revision of accounting standards
- contains concepts of General-Purpose Financial Reporting and summary of terms and concepts that underlie the preparation of
financial statements
Purpose:
- Assist the IASB in the development of existing and future policies
- Assist the Financial Statements prepares in the development of consistent accounting policies
- Assist all parties in understanding and interpreting the standards.
- Not an accounting standard. The hierarchy goes:
- PFRS specific to the transactions
- PFRS dealing with similar matters
- Conceptual Framework and Accounting Standards
- Most recent pronouncements
PART 2. OBJECTIVE OF GENERAL-PURPOSE FINANCIAL REPORTING
- This forms the foundation of conceptual framework; the “why” of accounting.
Limitations:
- do not and cannot provide all information;
- are not designed to provide/show the value of the entity;
- cannot accommodate every request of information; and
- based on estimates and judgements rather than exact.
PART 3. QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
- Qualities or attributes that make financial accounting information useful.
Fundamental Characteristics: relate to the content (or substance) of FI; these are
the characteristics that make financial information useful to users.
(1) Relevance – refers to the capacity of the information to affect a decision.
a. Predictive value – if the information can be used as an input to predict
future outcomes
b. Confirmatory value – if it provides feedback about previous valuations.
(2) Faithful Representation – descriptions and figures in the reports should match
what really existed (or happened).
a. Completeness – all information necessary for a user to understand must be
included and clearly stated in the reports
b. Neutrality – being neutral or fair. Prudence is the exercise of care and
caution when dealing with uncertainties in the measurement process.
c. Free from Error – This means there are no errors or omissions.
Enhancing Characteristics: are intended to increase the usefulness of FI.
(1) Verifiability - if it is supported by evidence; implies consensus.
(2) Comparability – information is measured and reported in a similar fashion
across entities. Consistency – information is measured and reported in a similar
fashion across points in time.
(3) Understandability – information should be presented in a form that users
understand.
(4) Timeliness – having the information available to users in time
PART 4. FINANCIAL REPORTING AND REPORTING ENTITY
Objective of Financial Statements: provide information about an entity’s A, L & E, Income and Expenses that are useful to users.
Reporting Period – span of time which transactions are accounted for.
Reporting Entity – main entity required or chooses to prepare FSs.
Types of Financial Statements:
Consolidated Financial Statements Unconsolidated FS Combined FS
when comprises both the parents and
subsidiaries
when reporting party is parent company
alone
prepared by two or more entities that are
not linked by a P/S relationship
PART 5. ELEMENTS OF FINANCIAL STATEMENTS
Elements of Financial Position ALOE
Elements of Financial Performance Income/Expenses
Sole proprietorship, Partnership & Corporation Parent Company
Parent and Subsidiaries Two or more entities
BASIC ACCOUNTING CONCEPTS AND PROCESS
Accounting
- Service activity
- To provide quantitative financial information about economic
entities that is useful in decisions; language of business.
Accounting Process and Cycle:
Step 1: Documenting Transactions
- Accountable events – if it could affect the elements of FS,
then journalized
o External events (exchange and non-reciprocal transfer).
o Internal events – happen without any other entity
involved.
Step 2: Journalizing Transactions
- General Journal: chronological list of transactions and other
events expressed in terms of debit and credits.
- Posting: process of transferring info from journal to GJ.
- Analyze the effects of transactions in debits and credits
Step 3: Posting to Ledger
- Ledger – accumulates the effect of transactions during a
period; to know the ending balance of each account
- Subsidiary ledger – contains the supporting details or
breakdown of the general ledger account
Step 4: Preparation of unadjusted Trial balance
- To determine the equality of debits and credits
- All accounts from the General Ledger will be transferred to
the trial balance
- It aids in locating errors in posting
Transplacement error Mixed Error
Omission
error Transposition Error Misposting
Step 5: Preparation of Adjusting Journal Entries
- To bring the accounts up to date of an accrual basis
- Affects at least one real account and one nominal account
Three classes of accounts:
- Real accounts – permanent or balance sheet accounts;
carried from one accounting period to another.
- Nominal accounts – temporary or income statement
accounts; they are closed at the end of every accounting
period.
- Mixed accounts – they have the nature of both real and
nominal accounts and are subject to adjustments; prepaid
expensed and unearned income.
Classification of Adjusting Journal Entries
(a) Accruals (b) Deferrals (c) Estimates
(d)
setting up of
ending
inventory
expense
income
expense
income
accounts
Step 6: Preparation of Worksheet / Adjusted Trial Balance
- Pertains to 10 - column sheet; not part of the formal
accounting records
- Output: Adjusted Trial Balance
Under the IS column in the worksheet:
Total Debits > Total Credits → Net Loss
Total Debits < Total Credits → Net Income
Under the BS column in the worksheet:
Total Debits > Total Credits → Net Income
Total Debits < Total Credits → Net Loss
Step 7: Preparation of Financial Statements
- SFP, SCI, SCE, SCF and Notes to FS
- Based on standard of uniformity
Step 8: Journalizing and posting of CE
- to bring temporary accounts to zero
- nominal accounts will be closed to income summary account
- Close all income accounts
- Close all expense accounts
- Close the balance of IS account to the drawings/dividends
accounts
- Close the drawing/dividends account to equity account
THE STANDARD (IFRS AND GAAP)
- PFRS are guiding principles rather than laws.
- Paragraphs and pronouncements in bold and plain wordings have equal authority; those in bold dictate principles, and those in
plain text are supporting principles.
- FSRSC – current setting body in the Philippines; the successor to the Accounting Standards Council (ASC). The FSRSC’s main
function is to prepare interpretations of PFRS for approval by the Philippine Interpretations Committee (PIC).
- IASB is the successor of the International Accounting Standards Council (IASC).
- The chairman and the members are appointed by the PRC upon BOA and the APO.
The Standard setting processes
- Consideration OF IASB pronouncements.
- Formulation of a task force to advise the FRSC
- Issuance for comment an exposure draft.
- Consideration of all comments received within the comment period
- Approval of a standard or an interpretation by a majority of FSRSC members.
Step 9: Preparation of post-closing Trial Balance
- Real accounts only; optional step
Step 10. Reversing Entries
- Optional step; simplifies recording of certain
transactions.
- is made if an adjustment previously entered increases
a SFP account.
Accrued Expense Accrued Income
Prepayment (expense
method)
Deferred Income (income
method)
CASH EQUIVALENTS
- These are short-term and highly liquid investments that are readily convertible into cash and so near maturity.
- All investments that are acquired three (3) months or less before their maturity can only qualify as part of CE.
Part of CE:
✓ Three-month time deposit
✓ Three-month money market
instrument or commercial papers
✓ Three-month treasury bills
Not part of CE:
Share investments
Treasury bonds
Equity securities
Not acquired within 3 months but with 1 year maturity
Not acquired within 3 months but beyond 1 year maturity
BANK RECONCILIATION
- A process of matching the cash balance per company’s books with the company’s cash balance per bank; usually prepared
monthly.
Cash balance per
company’s books
Company’s cash
balance per bank
- DIT – sent by depositor but the bank is yet to recognize.
- OC – disbursed by depositor but is yet to be reflected in
the bank.
- Certified check – no longer outstanding; should be
deducted from total OC.
- Bank errors – recorded twice, not recorded or incorrect
- Bank Credit memo – added by the bank but not yet added
by the book. (e.g bank loans, interest, collections)
- Bank Debit memo – deducted by bank but not by book.
(e.g NSF, DAIF or DAUD)
- Book Errors – recorded twice, not recorded or incorrect
Reported (adjusted cash balance) XX XX
Bank reconciling items
Deposit in Transit XX
Outstanding Checks (XX)
Bank Errors XX (XX)
Book reconciling items
Bank credit memo XX
Bank debit memo (XX)
Book Errors XX (XX)
Adjusted (or reconciled balances) XX XX
Deposit in Transit, beginning xx
Add: Book receipts (debits) xx
Less: Credit memos last month (xx) xx
Less: Bank receipts (credits) xx
Less: Credit memos this month (xx) (xx)
Deposit in Transit, ending xx
Outstanding Checks, beginning xx
Add: Book disbursements (credits) xx
Less: Debit memos last month (xx) xx
Less: Bank disbursements (debits) xx
Less: Debit memos this month (xx) (xx)
Outstanding Checks, ending xx
PETTY CASH FUND
- A type of cash fund set aside to cover relatively small expenditures.
- Expenses are not recorded until the fund is replenished or it is already the reporting date, whichever comes earlier.
- Establishment of PCF:
PCF xx
CIB xx
Expenses xx
CIB xx
Computations related to PCF:
- PCF overage/shortage
PCF per count Xx
Less: PCF per accountability (xx)
PCF Overage (Shortage) xx
(xx)
Per count > Per accountability → PCF overage (debit Cash S/O)
Per count < Per accountability → PCF shortage (cr Cash S/O)
- Formula to compute the PCF per count:
Coins and currencies (cash items) xx
Add: PCF Vouchers (NCI) xx
Replenished Check xx
IOUs or advances to employees (NCI) xx
Employee’s NSF Check (xx)
PCF per count xx
- Amount of PCF ending balance
Coins and currencies xx
Add: Replenishment Check (xx)
PCF, End xx (xx)
Special Sales Consideration
Bill and Hold arrangement Sold upon issuance of the bill/invoice
Layaway sales Goods are delivered upon final installment, sold in installments
Goods shipped awaiting instructions Sold upon completion of installments and inspections
Sales on approval Sold upon formal acceptance
Sales to distributors Treated as consigned out to the buyer-consignee
Sales partially paid in advance Sold upon completion of delivery
Subscription sales Sales is recognized over a straight-line basis
Installment sales Exclusive of interest, recognize sale upon delivery of goods
Credit card sales Sold upon purchase by buyer
NOTES RECEIVABLE
- customer accounts supported by formal
promises to pay.
- Initially measured at Fair Value plus DACs.
Dishonored notes – a promissory note that is not paid
at maturity; should be transferred from notes to
accounts receivable account. It shall include:
✓ Face amount
✓ Interest
✓ Other fees and charges.
Accounts Receivable, gross xx
ADA (xx)
SD (xx)
Freight (xx)
SRA (xx)
Net Realizable Value xx
Interest-bearing
S = E
Interest-bearing
S ≠ E
Non-interest
bearing
Initial Meas Face PV PV
Subsequent Out. FA AC AC
Int. income Face x SIR CV = EIR CV x EIR
Int. rec Face x SIR Face x SIR Face x SIR
LOANS RECEIVABLE
- a financial asset arising from a loan granted by a financial institution.
Principal Amount xx
To record the origination fees received:
Cash xx
Unearned Int. Inc xx
To record payment of DOC:
Unearned Int. Inc xx
Cash xx
Less: Origination Fees received (xx)
Add: Direct Origination Cost (xx)
Initial Measurement of LR xx
IMPAIRMENT OF LOANS RECEIVABLE
- an entity shall recognize a loss allowance for expected credit loss on financial asset measured at amortized cost.
✓ Debt instrument at AC
✓ Debt instrument at FVOCI
✓ Loan under PFRS 16
Equity instrument at FVPL
Equity instrument at FVOCI
Debt instrument at FVPL
CA of long-term receivable
Less: PV of expected future CF
Impairment loss
xx
xx
xx
Stage 1 Stage 2 Stage 3
✓ DI that has not declined significantly
since recognition.
✓ No significant increase in credit risk.
Carrying amount of loan xx
PV of ECL (xx)
Expected lifetime credit loss xx
Multiply by probability x%
Impairment loss xx
✓ No objective evidence of impairment
✓ Int Income is still based on CA
Carrying amount of loan xx
PV of ECL (xx)
Expected lifetime credit loss xx
Multiply by probability x%
Required loss allowance xx
Already recognized (xx)
Impairment loss xx
✓ There is already objective evidence of
impairment
Carrying amount of loan xx
PV of ECL (xx)
Expected lifetime credit loss xx
Already recognized (xx)
Impairment loss xx
OBJECTIVE EVIDENCE OF IMPAIRMENT
- Significant financial difficulty of the issuer or obligor
- Breach of contract, such as a default or delinquency in interest or principal payments
- The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that
the lender would not otherwise consider
- High probability that the borrower will enter bankruptcy or other financial reorganization
- Measurable decrease in the estimated future cash flows from the financial asset
DISCOUNTING OF ACCOUNTS RECEIVABLE
- Discount rate – discount on the note (not market rate)
- Discount period – unexpired portion of the note. [Age
of note – (Date of receivable up to date of discount)]
- Interest – use market rate for rate; use age of note for
period)
DERECOGNITION OF RECEIVABLES
- Contractual right to receive cash expires
- The entity transfers the financial asset ceding its control to some other entity
- Gain or Loss = Net proceeds – Book Value
PRESENTATION
- Presented as one line-item as Trade and Other Receivables under current assets
- Long-term receivables are reported as Long-term investments and or other non-current assets
DISCLOSURES
- Nature of receivables
- Credit risk exposures without taking into account any collaterals
- Information regarding interest rate risk exposures
- Receivable financing as to the nature, the terms/conditions/fair values
- Interest income, accrued interest, and impairment losses.
Discounting without Recourse Basis Discounting with Recourse Basis
Holder is not liable in case the maker
fails to pay. The note is essentially sold
and derecognized.
Holder is held liable.
Proceeds Equity
MV (Principal + Total Interest) xx
Discount (MV x DR x DP) (xx)
Net Proceeds xx
SP (net proceeds) xx
CA of NR (xx)
G/L on discounting xx
INVENTORIES (IAS 2 )
OVERVIEW
(a) are held for sale in the ordinary course of business
(b) in process of production for such sale
(c) materials and supplies (RM, WIP & FGI)
Initial Measurement Subsequent Measurement: LCNRV
Write-down: Cost > NRV
➢ Direct – loss is already included
in LCNRV
➢ Indirect – loss is separately
recognized (allowance)
Reversal – allowed up to write-down
balance. Gain on allowance (under
allowance only)
Cost inclusions
- Purchase price
- Import duties and taxes
- Transport
- Conversion & other DACs
Cost Exclusions
Abnormal waste
Selling costs
Admin costs
Storage costs
Inventory Inclusions: all goods which the entity has
title in it.
Estimate SP xx
Estimated cost of disposal (xx)
Estimated cost to complete (xx)
Net Realizable Value xx
INVENTORY SYSTEMS ACCOUNTING FOR DISCOUNTS
Period Inventory Systems
- Physical count is required
- Low price, large quantities
- Uses purchase-related accounts
Perpetual Inventory Systems
- Physical count not required
- High price, low quantities
- Do not use purchase accounts
COST FORMULAS
Gross Sales xx
Sales Return (xx)
Employee Discount xx
Normal spoilage xx
COGAS at retail xx
Less: COGS at retail (xx)
Estimated Ending Inv xx
LCNRV/
Conservative
Average FIFO
Estimated Ending
Inventory at retail
xx xx xx
x cost-to-retail
ratio
x% x% x%
Estimated cost of
ending inventory
xx xx xx
INVENTORY ESTIMATION METHODS
- When physical count is impossible to perform, inventory estimation methods may be performed. Done for the reasons:
Interim financial statements
are prepared.
Necessary to prove the correctness and
reasonableness of such count by making an estimate
The inventory is destroyed by fire and
inventory is required for insurance purposes.
Gross Profit Method – assumes that the GPR remains approximately the same from period to period.
Sales xx
Sales Return xx
Net Sales xx
Sales Allowances and Sales Discount are
not included since these do not decrease
the physical flow of inventories.
Estimated cost of inventory on
hand
xx
Inventory on physical count xx
Inventory shortage/(overage) xx
Retail Method – used in the retail industry for measuring large quantities of inventories with rapidly changing items.
Cost Retail Cost rate
Beginning Inventory xx xx
Purchases xx xx
Freight In xx
Purchase returns (xx) (xx)
Purchase allowances (xx)
Purchase discounts (xx)
Department Transfer-In xx xx
Department Transfer-Out (xx) (xx)
Stolen/Abnormal spoilage xx xx
Net Mark-up xx xx
COGAS – LCNRV/Conservative xx xx x%
Net Markdown (xx) (xx)
COGAS – Average xx xx x%
Beginning Inventory (xx) (xx)
COGAS – FIFO xx xx x%
INVESTMENT IN EQUITY SECURITIES
EQUITY INVESTMENTS DEBT SECURITIES
- Represents a share in a company’s ownership
- Includes: (a) ordinary shares; (b) preference shares: (c)
rights and options to acquire shares
- Any security that represents a creditor relationship with an entity
- Features: (a) maturity value; (b) interest payments; (c) date of maturity
- Includes: (a) corporate bonds; (b) BSP treasury shares; (c) government
securities; (d) commercial papers; (e) redeemable preference shares
The substance of security, not its legal form or structure, determines whether it will be classified as equity or debt security.
Classification
Ownership
percentage
Purpose of investment
Ownership Shares
Ordinary Shares Preference Shares
FVPL Less than 20% For trading ✓ ✓
FVOCI Less than 20% Non-trading ✓ ✓
Investment in Associate 20%-50% Significant Influence ✓
Investment in Subsidiary More than 50% Control ✓
FVPL FVOCI
Initial measurement Fair Value – Div on FV + TC – Div on
Transaction cost Expensed Capitalized
Subsequent measurement FV at year-end FV at year-end
Reporting of changes Profit or loss OCI
FS classification Current asset Non-current
Impairment consideration N/A N/A
FV at year end > CA = unrealized gain Disposition:
FV at year end < CA = unrealized loss FVPL → P/L
FVOCI → OCI → RE
OTHER ISSUES:
- Purchase Differential
- Cost > FVINA → Goodwill
- Cost < FVINA → Gain on acquisition (included in income in
share in associate)
Elim of UP/L Recognition of RP/L
Inventory In the year of
intercompany
sales
When sold
Land When disposed/sold
Depreciable asset Over its remaining life
- Intercorporate sales
Downstream Sales Upstream Sales
Transaction Investor to investee Investee to investor
UG/L Eliminate in full Eliminate the share
RG/L Recognize in full
Recognize the share
- Associate with heavy losses absorbed by:
a. CA of investment in JV/Associate
b. Investment in Preferred Shares over JV/Associate
c. Unsecured long-term receivables or unsecured
loans/Loans advances to associates.
- Impairment loss
CV before impairment
Recoverable amount (FVLCTS vs VIU)
Impairment loss
xx
xx
xx
- Step Acquisition – achieved in staged; Δ in FV → P/L (FV – CA)
Cost of additional
Add: FV of previous
Initial measurement
xx
xx
xx
- Associate with Preferred Shares
NI (NL) of associate
Less: Dividends of PS
NI (NL) to OS
x % of ownership
Share in P/L
xx
(xx)
xx
x%
xx
Cumulative – 1 year only
(declared or not
Non-cumulative – actual
dividends only
Redeemable PS – liability
- Investment of <20%
- FV method – applicable to FVPL & FVOCI
- Cost method – applicable to investment in unquoted
equity securities
- Deemed disposal – if the investor is unable to preserve its
ownership interest; the investor did not acquire new shares
when investee issued additional shares.
Loss in SI Not lose in SI
Gain on partial disposal → P/L ✓ ✓
Equity method Discontinued Applied
Reclass OCI to P/L ✓ ✓
Standard PFRS 9 PAS 28
INVESTMENT IN DEBT SECURITIES
OVERVIEW
- Represents right for the holder to receive cash; debtor-creditor relationship
- Example of debt securities is Bond; can be bought or sold.
- Bond is a formal, unconditional promise made under seal to pay a defined sum of money at a predetermined future date.
- FVPL (for trading securities); FVOCI (available for sale investments); AC (held to maturity).
Transfers of investment –
Prospective application
Transfers – @carrying
amount and no change in
FV
BUSINESS MODELS
FVPL FVOCI FVAAC
- Managing financial assets to hold
investments to realize FV changes
- To collect contractual cash flows and sell
the asset
- Solely payments of principal and interest
- To hold financial assets in order to collect
contractual cash flows.
CLASSIFICATION OF DEBT SECURITIES
Reclassification IM/New CA Treatment
FVPL Amortized Cost
Fair Value at
Reclassifica
tion Date
Δ of new CA and Face is amortized; New EIR
Amortized Cost FVPL Δ of new CA and Face is recognized in P/L
Amortized cost FVOCI Δ of new CA and prev CV is recognized in OCI; Same EIR
FVOCI Amortized Cost cumulative UG/UL is eliminated; Same EIR
FVPL FVOCI New EIR
FVOCI FVPL cumulative UG/UL is reclassified in P/L
Bonds with different EIR:
✓ Use this year’s EIR
FVOCI:
Recoverable Amt (@FV)
Amortized cost
Impairment Loss
xx
xx
xx
FVAAC:
RA (PV of FCF @ orig EIR)
CA at amortized cost
Impairment loss
xx
xx
xx
FVPL FVOCI Amortized cost
Initial measurement Fair Value FV + TC FV + TC
Treatment of transaction cost Expensed Capitalized Capitalized
Interest income Face x stated rate CA, beg x EIR CA, beg x EIR
Interest received/receivable Face x stated rate Face x stated rate Face x stated rate
Year-end valuation Fair value at year-end Fair value at year-end Carrying value
Reporting of changes in FV Profit or loss OCI N/A
FS Presentation Current Asset Non-current Asset NCA
Reporting of G/L Profit or Loss Profit or Loss Profit or Loss
Subject to impairment No Yes Yes
FV (based on new EIR)
CA (based on prev EIR)
Unrealized Gain or Loss
xx
xx
xx
Debt Securities with Attached Warrants – a compound financial instrument
entitling the holder to both Equity and Debt Securities.
No reclassification in:
EIFVPL – measured at FVPL
EIFVOCI and DIFVPL by irrevocable election – cannot be changed
anymore
