CPAR Conceptual Framework

5/21/2018 CPAR Conceptual Framework

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FRAMEWORK FOR THE PREPARATIONAND

PRESENTATION OF FINANCIAL STATEMENTS

PURPOSE AND STATUS OF THE FRAMEWORK

The FRSC Framework for the Preparation and Presentation of Financial Statements describes thebasic concepts by which financial statements are prepared. The Framework serves as a guide tothe Board in developing accounting standards and as a guide to resolving accounting issues thatare not addressed directly in Philippine ccounting Standards or Philippine Financial ReportingStandards or !nterpretations. The purpose of the framework as outlined is to"

a. ssist the Financial Reporting Standards Council #FRSC$ in developing accountingstandards that represent generally accepted accounting principle%

b. ssist the FRSC in its review and adoption of e&isting !nternational ccounting Standards%

c. ssist preparers of the financial statements in applying FRSC Statements of Financialccounting Standards and in dealing with topics that have yet to form the sub'ect of anFRSC statement%

d. ssist auditors in forming an opinion as to whether financial statements conform with

Philippine (P%e. ssist users of financial statements in interpreting information contained in the financial

statements prepared in conformity with Philippine (P%

f. Provide those who are interested in the work of the FRSC with information about itsapproach to the formulation of Statements of Financial ccounting Standards

Scope of the Framework

)efines the o!"ect#$eof financial statements%!dentifies the %&a'#tat#$e character#(t#c( that make information in financial statementsuseful% andDef#)e(the basic elements of financial statements and the concepts for reco*)#+#)*and

mea(&r#)*them in financial statements.Concepts of cap#ta' a), cap#ta' ma#)te)a)ce.

-e)era' P&rpo(e F#)a)c#a' Stateme)t(

The Framework addresses general purpose financial statements including consolidated financialstatements that a business enterprise prepares and presents at least annually to meet thecommo) #)format#o)needs of a wide range of users e&ternal to the enterprise. Therefore* theFramework does not necessarily apply to special purpose financial reports such as reports to ta&authorities* reports to governmental regulatory authorities* prospectuses prepared in connectionwith securities offerings* and reports prepared in connection with business combinations.

U(er( a), the#r I)format#o) Nee,(

The principal classes of users of financial statements are pre(e)t a), pote)t#a' #)$e(tor(.emp'o/ee(. 'e),er(. (&pp'#er( a), other tra,e cre,#tor(. c&(tomer(. *o$er)me)t( a), the#ra*e)c#e( a), the *e)era' p&!'#c. ll of these categories of users rely on financial statements tohelp them in ,ec#(#o) mak#)*.

+hile financial statements cannot meet all of the information needs of these user groups* there areinformation needs that are common to all users* and general,purpose financial statements focus onmeeting these needs.

Re(po)(#!#'#t/ for F#)a)c#a' Stateme)t(

The ma)a*eme)tof an enterprise has the pr#mar/ re(po)(#!#'#t/for preparing and presenting

the enterprise-s financial statements.

The O!"ect#$e of F#)a)c#a' Stateme)t(

The ob'ective of financial statements is to provide information about the f#)a)c#a' po(#t#o).performa)ce a), cha)*e( #) f#)a)c#a' po(#t#o)of an enterprise that is useful to a wide range ofusers in making economic decisions.

F#)a)c#a' Po(#t#o)


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The financial position of an enterprise is affected by the eco)om#c re(o&rce( it controls* itsf#)a)c#a' (tr&ct&re. #t( '#%,#t/ a), (o'$e)c/. a), #t( capac#t/ to a,apt to cha)*e( #) thee)$#ro)me)tin which it operates. The !a'a)ce (heetpresents this kind of information.

Performa)cePerformance is the ability of an enterprise to earn a profit on the resources that have been invested

in it. !nformation about the amounts and variability of profits helps in forecasting future cash flowsfrom the enterprise-s e&isting resources and in forecasting potential additional cash flows fromadditional resources that might be invested in the enterprise. The Framework states thatinformation about performance is primarily provided in an #)come (tateme)t.

Cha)*e( #) F#)a)c#a' Po(#t#o) or Ca(h F'ow(sers of financial statements seek information about the #)$e(t#)*. f#)a)c#)* a), operat#)*act#$#t#e(that an enterprise has undertaken during the reporting period. This information helps inassessing how well the enterprise is able to generate cash and cash e/uivalents and how it usesthose cash flows. The ca(h f'ow (tateme)tprovides this kind of information.

U),er'/#)* A((&mpt#o)(0Po(t&'ate(1

The Framework sets out the underlying assumptions of financial statements"Accr&a' 2a(#(3The effects of transactions and other events are recogni0ed when theyoccur* rather than when cash or its e/uivalent is received or paid* and they are reported inthe financial statements of the periods to which they relate.

-o#)* Co)cer)3 The financial statements presume that an enterprise will continue inoperation indefinitely or* if that presumption is not valid* disclosure and a different basis ofreporting are re/uired.

The FRSC conceptual framework mentions two assumptions only. 1owever* it is widely believedthat an inherent trait of the financial statements are the basic assumptions of"

Acco&)t#)* E)t#t/3 The business is separate from the owners* managers* and employeeswho constitute the business. Therefore transactions of the said individuals should not beincluded as transactions of the business.

T#me Per#o,3 Financial reports are to be prepared for one year or a period of twelve

months.

Mo)etar/ &)#t3 There are two aspects under this assumption. First is the %&a)t#f#a!#'#t/

of the pe(o* meaning that the elements of the financial statements should be stated underone unit of measure which is the Philippine Peso. Second is the (ta!#'#t/ of the pe(o*means that there is still an assumption that the purchasing power of the peso is stable orconstant and that instability is insignificant and therefore ignored.

4&a'#tat#$e Character#(t#c( of F#)a)c#a' Stateme)t(

These characteristics are the attributes that make the #)format#o) #) f#)a)c#a' (tateme)t(&(ef&' to investors* creditors* and others. The Framework identifies four principal /ualitativecharacteristics"

a3 U),er(ta),a!#'#t/!3 Re'e$a)cec3 Re'#a!#'#t/,3 Compara!#'#t/

Pr#mar/ Character#(t#c(

Re'e$a)ce , !nformation in financial statements is relevant when it influences the economicdecisions of users. !t can do that both by #a$ helping them evaluate past* present* or future eventsrelating to an enterprise and by #b$ confirming or correcting past evaluations they have made.

I)*re,#e)t( of re'e$a)ce

Pre,#ct#$e 5a'&e 2 !nformation can help users increase the likelihood of correctly

predicting or forecasting the outcome of certain events.


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Fee,!ack 5a'&e2 !nformation can help users confirm or correct earlier e&pectations.

3ote that the predictive and confirmatory roles of information are interrelated.

T#me'#)e((, !nformation loses its relevance if it is not timely

Re'#a!#'#t/, !nformation in financial statements is reliable if it is free from material error and biasand can be depended upon by users to represent events and transactions faithfully. !nformation isnot reliable when it is purposely designed to influence users- decisions in a particular direction.

Factor( of re'#a!#'#t/

Fa#thf&' Repre(e)tat#o) 2 !nformation must represent faithfully the transactions and

events it either purports to represent or could reasonably purport to represent.

S&!(ta)ce o$er form 6 Transactions are to be accounted for and presented according

to their substance and economic reality and not merely their legal form.

Ne&tra'#t/ 7 !nformation contained in the financial statements must be free from bias

and error.

Pr&,e)ce 0Co)(er$at#(m12 The inclusion of a degree of caution in the e&ercise of

'udgments needed in making estimates or choosing alternatives so that the outcome willhave the least effect on e/uity.

Comp'ete)e(( 6 to be reliable* the information in the financial statements must be

complete within the bounds of materiality and cost.

Co)(tra#)t( to Re'e$a)t a), Re'#a!'e I)format#o)

T#me'#)e(( 6 ndue delay in reporting of information may lead to the loss of relevance

even though enhancing it reliability. +hile providing information before all aspects of atransaction or other events are known may increase the relevance of information* thusimpairing its reliability.

2a'a)ce !etwee) 2e)ef#t a), Co(t 7 The benefits derived from relevant and reliable

information should e&ceed the cost of providing it.

Seco),ar/ Character#(t#c(

U),er(ta),a!#'#t/, !nformation should be presented in a way that is readily understandable byusers who have a reasonable knowledge of business and economic activities and accounting andwho are willing to study the information diligently.

Compara!#'#t/ , sers must be able to compare the financial statements of an enterprise o$ert#meso that they can identify trends in its financial position and performance. sers must also be

able to compare the financial statements of ,#ffere)tenterprises. )isclosure of accounting policiesis essential for comparability especially when the enterprise adopts a new or changes itsaccounting policies.

The E'eme)t( of F#)a)c#a' Stateme)t(

Financial statements portray the financial effects of transactions and other events by groupingthem into broad classes according to their economic characteristics. These broad classes aretermed the elements of financial statements.

The elements directly related to f#)a)c#a' po(#t#o) and their ,ef#)#t#o) accor,#)* to theframeworkare"

A((et7n asset is a resource controlled by the enterprise as a result of past events andfrom which future economic benefits are e&pected to flow to the enterprise.

L#a!#'#t/7 liability is a present obligation of the enterprise arising from past events* thesettlement of which is e&pected to result in an outflow from the enterprise of resourcesembodying economic benefits.

E%t/74/uity is the residual interest in the assets of the enterprise after deducting all itsliabilities.


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The elements directly related to performa)ceand their ,ef#)#t#o) accor,#)* to the frameworkare"

I)come7!ncome is increases in economic benefits during the accounting period in the formof inflows or enhancements of assets or decreases of liabilities that result in increases ine/uity* other than those relating to contributions from e/uity participants.

E8pe)(e74&penses are decreases in economic benefits during the accounting period in

the form of outflows or depletions of assets or incurrence of liabilities that result indecreases in e/uity* other than those relating to distributions to e/uity participants.

Reco*)#t#o) of the E'eme)t( of F#)a)c#a' Stateme)t(

Recognition #( the proce(( of #)corporat#)*in the balance sheet or income statement an itemthat meets the ,ef#)#t#o) of a) e'eme)t a), (at#(f#e( the fo''ow#)* cr#ter#a for reco*)#t#o)

!t is probable that any future economic benefit associated with the item will flow to or fromthe enterprise% and

The item-s cost or value can be measured with reliability.

Based on these general criteria"

A) a((etis recogni0ed in the balance sheet when it is probable that the future economicbenefits will flow to the enterprise and the asset has a cost or value that can be measuredreliably.

A '#a!#'#t/ is recogni0ed in the balance sheet when it is probable that an outflow ofresources embodying economic benefits will result from the settlement of a presentobligation and the amount at which the settlement will take place can be measured reliably.

I)come is recogni0ed in the income statement when an increase in future economicbenefits related to an increase in an asset or a decrease of a liability has arisen that can bemeasured reliably. This means* in effect* that recognition of income occurs simultaneouslywith the recognition of increases in assets or decreases in liabilities

E8pe)(e( are recogni0ed 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 e&penses occurs simultaneously with therecognition of an increase in liabilities or a decrease in assets.

Mea(&reme)t of the E'eme)t( of F#)a)c#a' Stateme)t(

5easurement involves a((#*)#)* mo)etar/ amo&)t( at which the elements of the financialstatements are to be recogni0ed and reported. The Framework acknowledges that a variety ofmeasurement bases are used today to different degrees and in varying combinations in financialstatements* including"

H#(tor#ca' co(tC&rre)t co(t

Net rea'#+a!'e 0(ett'eme)t1 $a'&ePre(e)t $a'&e 0,#(co&)te,1

1istorical cost is the measurement basis most commonly used today* but it is usually combinedwith other measurement bases. The Framework does not include concepts or principles forselecting which measurement basis should be used for particular elements of financial statementsor in particular circumstances. The /ualitative characteristics do provide some guidance in thismatter.

Co)cept( of Cap#ta'

F#)a)c#a' co)cept of cap#ta', capital is synonymous with net assets of the enterprise.

This is the concept of capital adopted by most enterprises.

Ph/(#ca' co)cept of cap#ta' 2 capital is regarded as the productive capacity of the

enterprise based on* for e&ample* units of output per day.

Co)cept( of Cap#ta' Ma#)te)a)ce

F#)a)c#a' cap#ta' ma#)te)a)ce2 nder this concept* a profit is earned only if the financial

#or money$ amount of the net assets at the end of the of the period e&ceeds the financial #or


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money$ amount of the net assets at the beginning of the period* after e&cluding anydistributions to* and contributions from* owners during the period.

Ph/(#ca' cap#ta' ma#)te)a)ce2 nder this concept* a profit is earned only if the physical

productive capacity #or operating capability$ of the enterprise #or the resources need toachieve that capacity$ at the end of the period e&ceeds the physical productive capacity atthe beginning of the period* after e&cluding any distributions to* and contributions from*

owners during the period.

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CPAR Conceptual Framework