Accounting framework-part 3

Qualitative characteristics

• Four PRINCIPAL qualitative characteristics (CRRU):
• Relevance-capacity of the information to make difference in a decision
• Predicitive value-users can accurately forecast the outcomes of events
• Feedback value-users can confirm or correct earlier expectations
• Timeliness
• Reliability-quality of information that assures that infos are free from bias or error
• Faithful representation-actual effects should be properly accounted
• Substance over form-content of the the documents should prevail over its form
• Neutrality-FS should not be bias
• Conservatism or prudence-least effect on equity should be chosen
• recognition of errors should be understatement of assets rather than overstatement
• lower figure should be selected
• contingent loss is recognized as "provision" when it is probable and measurable.
• contingent gain SHOULD not be recognized but disclosed only.
• Completeness-"principle of full disclosure"
• Notes to financial statements-necessary disclosure to supplement financial statement
• Understandability-financial info should be comprehensible and intelligible
• Comparability-comparable info should present similarities and dissimilarities
• Comparability within entity-comparability from period to period
• horizontal comparibility
• intracomparability
• Comparability across or between entities
• dimensional comparability
• intercomparability

Accounting Constraints-factors that may affect the relevance and reliability of FS

• Timeliness
• Cost-benefit
• cost should not exceed benefit
• Materiality-"Doctrine of Convenience"
• should consider material info only
• When is an item material?"-based on judgment and common sense
• Factors:
• Size of an item
• Nature of the item

Elements of Financial Statement

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expense

4 main recognition principle

1. Asset recognition principle
1. inflow of future economic benefits is PROBABLE
2. Cost of asset can be measured RELIABLY
2. Liability recognition principle
1. outflow of future economic benefits is PROBABLE
2. amount of obligation can be measured RELIABLY
3. Income recognition principle-point of sale
1. inflow of future economic benefits is PROBABLE as a RESULT OF INCREASE IN ASSET or DECREASE IN LIABILITY
2. economic benefits can be measure RELIABLY
• Revenue-ordinary course of business
• Gains-extraordinary course of business 
4. Expense recognition principle
1. outflow of future economic benefits is PROBABLE as a RESULT OF DECREASE IN ASSET or INCREASE IN LIABILITY
2. decrease in economic benefits can be measure reliably
• expense-ordinary course of business
• losses-extraordinary course of business

Exception to "point of sale" income recognition

• installment method-point of collection
• cost of recovery method-point of collection except collection are applied to cost first
• cash method-revenue is recognized when received
• percentage of completion-stage of completion
• production method-point of production

 Matching principle

• Cause and effect association-expense is recognized when revenue is recognized, "strict matching concept"
• Systematic and rational allocation-some cost are expensed by simply allocating them over the periods
• Immediate recognition-cost incurred are expensed outright

Measurement-process of determining monetary amount

• Historical cost-fair value at the time of acquisition
• Current cost-amount that would have to be paid if acquired currently
• Realizable value-amount could have been paid if disposed currently
• Present value-discounted value of future net cash inflow

Accounting framework part 2

Underlying assumptions (MAGAT):

• ·         Fundamental or basic notions of accounting process.

1.       Accrual-incomes or expenses are recognized when earned regardless of when received or paid.

2.       Going concern/continuity-accounting entity is viewed as continuing in operations indefinitely.

3.       Accounting entity-transactions of the accounting entity are separate from those of the owner.

4.       Time period-the indefinite life of the accounting entity are subdivided into accounting periods that is usually 12 months.

a.       Calendar year- 12 month period that ends in December 31

b.      Fiscal/natural year-12 month period that ends in any month when the business entity is at its lowest season.

5.       Monetary unit-

a.       Quanitfiability-accounting elements should be stated in common denomination (which is peso in the Philippines)

b.      Stability-some accounting elements should be stated at current purchasing power (specifically if you are using revaluation model).

Conceptual framework

• ·         Summary of term and concept that is being used in preparation of FS.

• ·         Theoretical foundation of accounting standards.

• ·         Conceptual framework is more technical than underlying assumptions.

·         Basic purpose:

o   Assist FRSC in developing accounting standards that is the basis of Philippine GAAP.

o   Assist FS preparers in applying accounting standards.

o   Assist FRSC in reviewing and adopting IFRS.

o   Assist users in interpreting information contained in a FS.

o   Assist auditors in forming opinion that FS conforms to GAAP.

• ·         Conceptual framework IS NOT ACCOUNTING STANDARDS, therefore, PFRS PREVAILS over conceptual framework.

·         Scope of Conceptual framework:

o   Objectives of FS-provide information about FINANCIAL POSITION, FINANCIAL PERFORMANCE and CASH FLOWS of an entity that is useful in making economic decisions.

§  Financial position-assets, liabilities and equities of an entity

·         Economic resources

·         Liquidity

·         Solvency

·         Financial structure

·         Capacity for adaptation-financial flexibility

§  Financial performance-revenue, expense and net income or loss of an entity. It is the result of the operation.

§  Cash flows

·         Operating activities

·         Investing activities

·         Financing activities

§  Accounting concepts

·         Entity theory

o   Asset=liabilities+capital

·         Proprietary theory

o   Asset-libilities=Capital

·         Residual Equity theory

o   Asset-liability-preference share=ordinary share

·         Fund theory

o   Fund=cash inflow-cash outflow

Chapter 1 - Framework of Accounting

• Definition
• Accounting Standards Council-Accounting is a service activity. Its primary function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision.
• American Institute of Certified Public Accountants-Accounting is the art of RECORDING, CLASSIFYING and SUMMARIZING in a significant manner and in terms of money, transactions and events which are in part of at least of a financial character and interpreting the results thereof.
• American Accounting Association-Accounting is the process of IDENTIFYING, MEASURING and COMMUNICATING economic information to permit informed judgment and decision by users of information.

Components

1. Identifying-analytical component
• Recognition or Nonrecognition
• Transactions
• Internal
• External
2. Measuring-technical component
• Common denominator-PESO AMOUNT
• Historical cost
• Current replacement cost
• Current selling price or realizable value
• Present or discounted value
3. Communicating-formal component
• Recording-journalizing
• Classifying-posting to ledger/grouping of account
• ledger-group of accounts
• Summarizing-financial statements

Accountancy Profession

• Republic Act No. 9298-"Philippine Accountancy Act of 2004" 
• Law regulating the practice of accountancy in the Philippines.
• Board of Accountancy-authorized by law to promulgate laws in RA 9298.

Generally Accepted Accounting Principles (GAAP)

• Accounting rules, procedures and practices.
• "Norms" in accounting
• Conventional-"traditions in accounting accepted as correct"

 Accounting Standards Council (ASC)

• Created in 1981
• Created by Philippine Institute of Certified Public Accountants (PICPA)
• ESTABLISH and IMPROVE ACCOUNTING STANDARDS
• Two accounting standards:
• Philippine Accounting Standards
• Philippine Financial Reporting Standards

Financial Reporting Standards Council

• NEW standards setting body 
•  Created by PRC
• Assist BOA in implementing RA 9298.
• Composed of 15 members
• 1 chairman-senior accountant
• 1 BOA representative
• 1 SEC Representative
• 1 BSP representative
• 1 BIR Representative
• 1 COA Representative
• 1 major organization representative
• 2 ACPAP representative
• 2 ACPACI representative
• 2 ACPAE representative
• 2 ACPAG representative
• Each have three years term renewable