NEW CONCEPTUAL FRAMEWORK

LETTERS TALKWEARFMORK TAULEONCCPOVERALL THEORETICAL FOUNDATION FOR ACCOUNTINGERNGRAL SEOPURP FSINTENDED FOR USE FOR WIDE VARIETY OF EXTERNAL USERS

PURPOSE OF CONCEPTUAL FRAMEWORKIs to assist the:FRSCPreparersUsersAuditorsInterested in the work of FRSC

Underlying Assumptions: MeaningPostulatesFoundation

Underlying AssumptionsWhat is the only one underlying assumption of accounting?GOING CONCERNContinuity assumptionAccounting entity is viewed as continuing in operation indefinitely

Basic assumptionsA- - - - E - - -M- - - - U - - -Q - - - -S - - - - - of P - --T - - - P - - - -

Accrual accountingEffects of transactions and other events are recognized when they occurIn is recognized when earnedExpense is recognized when incurred

Qualitative characteristicsQualities or attributes that makes financial accounting information USEFUL to the usersWhat are classifications of qualitative characteristics?Fundamental qualitative characteristicsEnhancing qualitative characteristics

Fundamental qualitative characteristicsRelate to the CONTENT OR SUBSTANCE of financial statementsRelevantFaithful representation

Ingredients of relevancePredictive valueConfirmatory value

Materiality

Quantitative THRESHOLDIf its omission or misstatement could influence the economic decision of the user of FS Good judgmentProfessional expertiseCommon sense

Factors of materialitySize of the itemNature of the item

Faithful representationThe description and figures match what really existed or happenedActual effects of the transactions shall be properly accounted for in the FS

Ingredients of faithful representationCompletenessNeutralityFree from error

Completeness Result of adequate disclosure or full disclosureNOTES TO FINANCIAL STATEMENTSTo provide necessary disclosure required by PFRSNarrative description of the items presented in the FS

Neutrality

Without bias

Free from error

Substance over form

Conservatism/prudence

In case of doubt record any loss and do not record any gainUnderstate rather than overstate net income and net assets

Enhancing qualitative characteristicsRelate to the presentation or form of the financial informationIncrease usefulness of the financial information

Enhancing qualitative characteristicsC- - - - -- -- -- -yU - - - - - - --- --- yV - - -- - -- -- -- yT- - - - - --- - s

Comparability

Horizontal or intra-comparabilityComparability within the entity

AndDimensional or inter-comparabilityComparability between and across entities

Understandability

Verifiability

Supported by evidence

Timeliness

Financial information must be communicated early enough when a decision is to be made

Users of financial informationP ------ y U ---- sO---r U- --s

OrInternal usersExternal users

Primary users

Parties to whom general purpose financial reports are primarily directedExisting and potential investors Lenders and other creditors

Other users

EmployeesCustomersGovernments and their agenciesPublic

F-------l R-p-----gIt includes not only the financial statements but also other informationSignificant ratiosFinancial highlightsNon-financial information

Forms of business organizationSole proprietorshipPartnershipCorporationCooperative

Sole proprietorshipO by O PS F of B OAdvantagesE to SFew legal restrictionEasy to discontinueGets all the profit

Sole proprietorshipDisadvantagesUnlimited liabilityLacks business continuity

Partnership

O by t or m pAdvantagesGreater source of capitalBetter credit standing than sole proprietorship

Partnership: DisadvantagesRestricted transfer of ownershipUnlimited liability of partnersPartners friction may terminate the partnershipLimited life

Corporation

Artificial being created by operation of lawOwners is called stockholders or shareholders

Corporation: Advantages

Term of existenceOwnership is easily transferableLimited liabilityGreater source of capital

Corporation: Disadvantages

More costly organizationSubject for more legal restrictionHigh taxStockholders have little control over management of business

Cooperative

Duly registered association of persons, with common bond of interest, who have voluntarily joined together to achieve lawful common social or economic endOpen and voluntary memberships, division of net surplus, cooperation among cooperativesFollow generally accepted principles of cooperative

GAAP: generally Accepted Accounting Principles Collection of commonly followed accounting rules, standards and procedures for financial reportingTo ensure that financial reporting is transparent and consistent in preparation and presentation

Main purpose of accountingTo provide quantitative, financial information about economic entities that is intended to be useful in making economic decisions

Self studyBranches of accountingCareer opportunities in accounting professionsHistorical development of accountingComparative meaning topicsImportance of ethics in accountingProblems of ethics in accounting

Elements of financial statementsQuantitative information reported in the statements of financial position and income statement

Statement of financial positionAssetsLiabilitiesequity

Income statement or statement of financial performanceIncomeexpenses

Assets

Resources controlled by the entityFuture economic benefits are expected to flow to the entity

Liabilities

Present obligations of the entity arising from past transactionsSettlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

Equity

Residual interestAssets minus liabilities

Income

Increase in economic benefit during the accounting periodInflow or increase in assetDecrease in liabilityIncrease in equity other than contribution from equity participants

Expense

Decrease in economic benefit during the accounting periodOutflow or decrease in assetIncrease in liabilityDecrease in equity other than distribution to equity participants

Recognition

Reporting of an asset, liability, income and expense on the face of the FS

Recognition principlesAsset recognition principleLiability recognition principleIncome recognition principleExpense recognition principle

Asset recognition principleProbable that future economic benefits will flow to the entityCost of the asset can be measured reliably (cost principle)

Liability recognition principleIt is probable that an outflow of economic benefits will be required for the settlement of a present obligationThe amount of obligation can be measured reliably

Income recognition principleIt is recognized when earnedProbable that future economic benefits will flow to the entity as a result of an increase in an asset or a decrease in a liabilityThe economic benefits can be measured reliably

Expense recognition principleExpenses are recognize when incurredIt is probable that a decrease in future economic benefits has occurred as a result of a decrease in an asset or an increase in a liabilityThe decrease in economic benefits can be measured reliably

Expense recognition principleMatching principleSystematic and rational allocationImmediate recognition

Measurement of elementsProcess of determining the monetary amounts at which the elements of the FS are to be recognized and carried in the financial position and financial performance

Measurement of elementsHistorical costMost commonly usedamount of cash paid or received at the time of acquisition or settlementCurrent costamount of cash paid or received if the asset or liability was acquired or settled currently

Measurement of elementsRealizable (settlement) ValueAmount that can be obtained by selling the assets in an orderly disposalAmount of cash expected to be paid to satisfy the liability in the normal course of businessPresent valueDiscounted value of future cash inflowsDiscounted value of future cash outflow

AssignmentExercise 1-2Graded recitationExercise 1-3Exercise 1-4Exercise 1-5Exercise 1-6Exercise 1-7