Chapter 2: Accounting Concepts and Principles - FAR

Accounting concepts and principles (assumptions or postulates)

Set of logical ideas and procedures that guide the accountant in recording and communicating economic information. It also provides reasonable assurance that information communicated to users is prepared in a proper way.

PFRS Accounting Standards

Conceptual Framework for Financial Reporting

General acceptance in the profession due to long-time use

Numerous concepts and principles used in accounting are sourced from?

Separate entity concept

Historical cost concept

Going concern assumption

Matching (association of cause and effect)

Accrual basis of accounting

Prudence (conservatism)

Time Period (periodicity, accounting period, or reporting period concept)

Stable monetary unit

Materiality concept

Cost benefit (cost constraint)

Full disclosure principle

Consistency concept

Most common accounting concepts and principles:

Separate entity concept

The business is viewed as a separate person, distinct from its owner(s). Only the transactions of the business are recorded in the books of accounts. The personal transactions of the business owner(s) are not recorded.

Historical cost concept (cost principle)

Assets are initially recorded at their acquisition cost

Going concern assumption

The business is assumed to continue to exist for an indefinite period of time

Liquidating concern

It is the opposite of going concern and it is the case if the business intends to end its operations. Measured at net selling price rather than at historical cost

Matching (Association of cause and effect)

Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized

Accrual basis of accounting

Economic events are recorded in the period in which they occur rather than at the point in time when they affect cash

Prudence (Conservatism)

The accountant observes some degree of caution when exercising judgements needed in making accounting estimates under conditions of uncertainty. This is necessary so that assets or income are not overstated and liabilities or expenses are not understated

Time Period (Periodicity, Accounting period, or Reporting period concept)

The life of the business is divided into series of reporting periods.

Reporting or Accounting Period

The life of the business is divided into series of equal short periods

12 months

Reporting period duration is usually?

Calendar year period

Starts on January 1 and ends on December 31 of the same year

Fiscal year period

Also covers 12 months but starts on a date other than January 1

Interim period

An accounting period that is shorter than 12 months. It can be month, quarter, or a semiannual period

Stable monetary unit

Assets, liabilities, equity, income, and expenses are stated in terms of a common unit of measure, which is peso in the Philippines

Materiality concept

It guides the accountant when applying accounting principles

Material items

Accounting principles are applicable only to?

Material

If its omission or misstatement could influence economic decisions

Materiality

It is a matter of professional judgement and is based on the size and nature of an item being judged

Cost-benefit (Cost constraint)

The costs of processing and communicating information should not exceed the benefits to be derived from the information’s use

Full Disclosure principle

It is related to both the concepts of materiality and cost-benefit

Consistency concept

Requires a business to apply accounting policies consistently, from one period to another

Explicit or implicit

Accounting concepts and principles are either?

Explicit concepts and principles

Those that are specifically mentioned in the Conceptual framework for financial reporting and in the PFRS Accounting Standards

Implicit concepts and principles

Those that are not specifically mentioned in the foregoing but are customarily used because of their general and longtime acceptance within the accountancy profession

PFRS Accounting Standards

The term ‘standards’ is frequently used specifically refers to?

Generally accepted accounting principles (GAAP)

Accounting standards were referred to?

Philippine Financial Reporting Standard (PFRS)

Standards that are adopted by Financial and Sustainability Reporting Standards Council (FSRSC)

Financial and Sustainability Reporting Standards Council (FSRSC)

The official accounting standard-setting body in the Philippines

International Financial Reporting Standards (IFRS)

Financial and Sustainability Reporting Standards Council (FSRSC) is from?

IFRS Accounting Standards

IFRS for SMEs Accounting Standard

IFRS Sustainability Disclosure Standards

The IFRSs consist of the following:

International Financial Reporting Standards

International Accounting Standards

IFRIC and SIC Interpretations

IFRS Accounting Standards consist of?

International Accounting Standards Board (IASB)

The IFRS Accounting Standards and the IFRS for SMEs are issued by?

International Sustainability Standards Board (ISSB)

The IFRS Sustainability Disclosure Standards are issued by?

IFRS

The PFRSs are patterned from?

Philippine Financial Reporting Standards

Philippine Accounting Standards

PIC Interpretations

PFRS Accounting Standards consist of the following:

Securities and Exchange Commission (SEC)

Tasked with regulating corporations, including partnerships. It requires corporations and partnerships to file audited financial statements

Bureau of Internal Revenue (BIR)

Tasked in collecting national taxes and administering the provisions of the Tax Code

Bangko Sentral ng Pilipinas (BSP)

Tasked in regulating banks and other entities performing banking functions

Cooperative Development Authority (CDA)

Tasked in regulating cooperatives. It influences the selection and application of accounting policies by cooperatives

Conceptual Framework for Financial Reporting

Prescribes accounting concepts that are relevant to the preparation of financial statements

Conceptual Framework

It is not a standard but it serves as a general frame of reference in developing or applying the standards

FSRSC’s Conceptual Framework

Adopted from the IASB’s Conceptual Framework

Qualitative Characteristics

Traits that determine whether an item of information is useful to users

Fundamental qualitative characteristics

Enhancing qualitative characteristics

The qualitative characteristics are broadly classified into two:

Fundamental qualitative characteristics

These are the characteristics that make information useful to users

Relevance

Faithful representation

Fundamental characteristics are consists of?

Comparability

Verifiability

Timeliness

Understandability

Enhancing qualitative characteristics are consist of?

Relevance

Information that it can affect the decisions of users

Predictive value

Confirmatory or Feedback value

Materiality

Relevant information has the following aspects:

Predictive value

Information has a predictive value if it can help users to make predictions about future outcomes

Confirmatory value or feedback value

It is related to the predictive value. It can help users confirm their past predictions

Materiality

It is an entity-specific aspect of relevance, meaning it depends on the facts and circumstances surrounding a specific entity

Faithful representation

Represented if it is factual, meaning it represents the actual effects of events that have taken place

Completeness

Neutrality

Free from error

Faithfully represented information has the following aspects:

Completeness

All information necessary for users to have a complete understanding of the financial statements is provided

Neutrality

Information is selected or presented without bias. Information is not manipulated to increase its favorability or decrease its unfavorability

Free from error

The information is not materially misstated. No errors in the description and in the process

Comparability

It can help users identify similarities and differences between different sets of information.

Verifiability

If different users could reach a general agreement as to what the information intends to represent

Understandability

It is presented in a clear and concise manner. Users are expected to have a reasonable knowledge of business activities and a willingness to analyze the information diligently