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BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 1 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02
Financial Reporting Standards
Council and Conceptual
Framework for the preparation
and Presentation of Financial
Statement
BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 2 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02
MODULE CONTENT
COURSE TITLE: FINANCIAL ACCOUNTING AND REPORTING 1
MODULE TITLE Financial Reporting Standards Council and Conceptual Framework for the preparation and Presentation of Financial Statement NOMINAL DURATION: 3 HRS (NO. of Hours per topic) SPECIFIC LEARNING OBJECTIVES: At the end of this module you MUST be able to:
- Rationalize the concepts and principles relating to the preparation and presentation of financial statements TOPIC: (SUB TOPIC)
- The nature, principles and scope meaning of accounting
- Nature principles and objectives of financial and related records of an organization
- Nature role and significance of accounting theories and principle
- Principles of conceptual framework of accounting
- Philippine financial reporting standard Philippine accounting standard
- The concept and role of the true and fair presentation of financial statement REFERENCE/S:
- https://www.investopedia.com/terms/f/financialinstrument.asp
- https://www.ifrsbox.com/ifrs-conceptual-framework-2018/
- https://www.accountingtools.com/articles/2017/5/17/accounts- receivable-accounting
BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 4 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02 The objective of general purpose financial reporting The main objective of general purpose financial reports is to provide the financial information about the reporting entity that is useful to existing and potential:
- Investors,
- Lenders, and
- Other creditors To help them make various decisions (e.g. about trading with debt or equity instruments of a reporting entity). Chapter 1 is NOT about the financial statements itself – these are described in Chapter 3. Instead, Chapter 1 describes more general purpose reports that should contain the following information about the reporting entity:
- Economic resources and claims (this refers to the financial position);
- The changes in economic resources and claims resulting from entity’s financial performance and from other events. Chapter 1 puts an emphasis on accrual accounting to reflect the financial performance of an entity. It means that the events should be reflected in the reports in the periods when the effects of transactions occur, regardless the related cash flows. However, the information about past cash flows is very important to assess management’s ability to generate future cash flows. Qualitative characteristics of useful financial information In this Chapter, the Framework describes 2 types of characteristics for financial information to be useful:
- Fundamental, and
- Enhancing. Fundamental qualitative characteristics
- Relevance : capable of making a difference in the users’ decisions. The financial information is relevant when it has predictive value,
BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 5 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02 confirmatory value, or both. Materiality is closely related to relevance.
- Faithful representation : The information is faithfully represented when it is complete, neutral and free from error. Enhancing qualitative characteristics
- Comparability : Information should be comparable between different entities or time periods;
- Verifiability : Independent and knowledgeable observers are able to verify the information;
- Timeliness : Information is available in time to influence the decisions of users;
- Understandability : Information shall be classified, presented clearly and concisely. Financial Statements and the Reporting Entity Financial Statements The financial statements should provide the useful information about the reporting entity:
- In the statement of financial position , by recognizing o Assets, o Liabilities, o Equity
- In the statements of financial performance , by recognizing o Income, and o Expenses
- In other statements , by presenting and disclosing information about o recognized and unrecognized assets, liabilities, equity, income and expenses, their nature and associated risks; o Cash flows; o Contributions from and distributions to equity holders, and o Methods, assumptions, judgements used, and their changes. .
BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 7 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02 This chapter extensively deals with the definitions of individual elements of the financial statements. There are five basic elements:
- Asset = a present economic resource controlled by the entity as a result of past events;
- Liability = a present obligation of the entity to transfer an economic resource as a result of past events;
- Equity = the residual interest in the assets of the entity after deducting all its liabilities;
- Income = increases in assets or decreases in liabilities resulting in increases in equity, other than contributions from equity holders;
- Expenses = decreases in assets or increases in liabilities resulting in decreases in equity, other than distributions to equity holders; The Framework then discusses each aspect of these definitions and provides wide guidance on how to decide what element you are dealing with. Recognition and DE recognition This chapter discusses the recognition and DE recognition process. Recognition Simply speaking, recognition means including an element of financial statements in the financial statements.
BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 8 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02 In other words, if you decide on recognition, you decide on WHETHER to show this item in the financial statements. Recognition process links the elements in the financial statements according to the following formula: Please let me stress here that not all items that meet the definition of one of the elements listed above are recognized in the financial statements. The Framework requires recognizing the elements only when the recognition provides useful information – relevant with faithful representation. Then, the Framework discusses the relevance, faithful representation, cost constraints and other aspects in a detail. DE recognition DE recognition means removal of an asset or liability from the statement of financial position and normally it happens when the item no longer meets the definition of an asset or a liability. Again, the Framework discusses the DE recognition in a greater detail. Measurement Measurement means IN WHAT AMOUNT to recognize asset, liability, piece of equity, income or expense in your financial statements. Thus, you need to select the measurement basis , or the method of quantifying monetary amount for elements in the financial statements. The Framework discusses two basic measurement basis:
- Historical cost – this measurement is based on the transaction price at the time of recognition of the element;
- Current value – it measures the element updated to reflect the conditions at the measurement date. Here, several methods are included: o Fair value; o Value in use;
BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 10 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02 The Framework explains two concepts of capital:
- Financial capital – this is synonymous with the net assets or equity of the entity. Under the financial maintenance concept, the profit is earned only when the amount of net assets at the end of the period is greater than the amount of net assets in the beginning, after excluding contributions from and distributions to equity holders. The financial capital maintenance can be measured either in o Nominal monetary units, or o Units of constant purchasing power.
- Physical capital – this is the productive capacity of the entity based on, for example, units of output per day. Here the profit is earned if physical productive capacity increases during the period, after excluding the movements with equity holders. The main difference between these concepts is how the entity treats the effects of changes in prices in assets and liabilities. You can watch a video with the summary of the Conceptual Framework here:
BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM FAR 113 Bulacan Polytechnic College Date Developed: June 2020 Date Revised: July 2020 Page 11 of 11 Document No. Developed by: Sarah Joy Dumalay Martin Revision # 02
