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FRAMEWORK FOR THE PREPARATION AND PRESENTATION PRESENTATION OF FINANCIAL STATEMENTS STATEMENTS PURPOSE AND STATUS OF THE FRAMEWORK The FRSC Framework for the Preparation and Presentation Presentation of Financial Financial Statements Statements describes the basic concepts by which financial statements are prepared. The Framework serves as a guide to the Board in developing accounting standards and as a guide to resolving accounting issues that are not addressed directly in Philippine ccounting Standards or Philippine Financial Reporting Standards or !nterpretations. The purpose of the framework as outlined is to" a. ssi ssist st the the Fina Financ ncia iall Repo Report rtin ing g Stan Standa dard rds s Coun Counci cill #FRS #FRSC$ C$ in deve develo lopi ping ng acco accoun unti ting ng standards that represent generally accepted accounting principle% b. ssist the FRSC in its review and adoption adoption of e&isting e&isting !nternational !nternational ccounting ccounting Standards% Standards% c. ssis ssistt prepa preparer rers s of the financi financial al statem statemen ents ts in apply applying ing FRSC FRSC State Statemen ments ts of Finan Financia ciall ccounting ccounting Standards Standards and in dealing with topics that have yet to form the sub'ect of an FRSC statement% d. ssis ssistt audit auditors ors in formin forming g an opinio opinion n as to whethe whetherr finan financia ciall state statemen ments ts confor conform m with with Philippine (P% e. ssist ssist users of financial financial statemen statements ts in interpre interpreting ting informati information on containe contained d in the financia financiall statements prepared in conformity with Philippine (P% f.
Prov Provid ide e thos those e who who are are inte intere rest sted ed in the the work work of the the FRSC FRSC with with info inform rmat atio ion n abou aboutt its its approach to the formulation of Statements of Financial ccounting Standards
Scope of the Framework )efines the o!"ect#$e of o!"ect#$e of financial statements% !denti !dentifie fies s the the %&a'#tat#$e %&a'#tat#$e character#(t#c( character#(t#c( that make informat information ion in financia financiall stateme statements nts useful% and Def#)e( the Def#)e( the basic elements of financial statements and the concepts for reco*)#+#)* and mea(&r#)* them 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 financial statem statemen ents ts that that a busin business ess ente enterpr rprise ise prepa prepares res and and presen presents ts at least least annu annuall ally y to meet meet the the commo) #)format#o) needs #)format#o) needs of a wide range of users e&ternal to the enterprise. Therefore* the Framework does not necessarily apply to special purpose financial reports such as reports to ta& authorities* reports to governmental regulatory authorities* prospectuses prepared in connection with securities offerings* and reports prepared in connection with business combinations. U(er( a), the#r I)format#o) Nee,( The princip principal al classe classes s of users users of finan financia ciall state statemen ments ts are pre(e)t pre(e)t a), pote)t#a pote)t#a'' #)$e(to #)$e(tor(. r(. emp'o/ee(. emp'o/ee(. 'e),er(. (&pp'#er( a), other tra,e cre,#tor(. cre,#tor(. c&(tomer(. c&(tomer(. *o$er)me)t( a), the#r a*e)c#e( a), the *e)era' p&!'#c . ll of these categories of users rely on financial statements to help them in ,ec#(#o) mak#)*. mak#)* . +hile financial statements cannot meet all of the information needs of these user groups* there are information needs that are common to all users* and general,purpose financial statements focus on meeting these needs. Re(po)(#!#'#t/ for F#)a)c#a' Stateme)t( The ma)a*eme)t of ma)a*eme)t of an enterprise has the pr#mar/ re(po)(#!#'#t/ re(po)(#!#'#t/ for for preparing and presenting the enterprise-s financial statements. The O!"ect#$e of F#)a)c#a' Stateme)t( The ob'ec ob'ectiv tive e of finan financia ciall state statemen ments ts is to provid provide e inform informat ation ion abou aboutt the 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 of users 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* its f#)a)c#a' (tr&ct&re. #t( '#%&#,#t/ a), (o'$e)c/. a), #t( capac#t/ to a,apt to cha)*e( #) the e)$#ro)me)t in which it operates. The !a'a)ce (heet presents this kind of information. Performa)ce Performance 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 flows from the enterprise-s e&isting resources and in forecasting potential additional cash flows from additional resources that might be invested in the enterprise. The Framework states that information 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 in assessing how well the enterprise is able to generate cash and cash e/uivalents and how it uses those cash flows. The ca(h f'ow (tateme)t provides 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(#(3 The effects of transactions and other events are recogni0ed when they occur* rather than when cash or its e/uivalent is received or paid* and they are reported in the financial statements of the periods to which they relate. -o#)* Co)cer)3 The financial statements presume that an enterprise will continue in operation indefinitely or* if that presumption is not valid* disclosure and a different basis of reporting are re/uired. The FRSC conceptual framework mentions two assumptions only. 1owever* it is widely believed that 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 employees who constitute the business. Therefore transactions of the said individuals should not be included as transactions of the business. •
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T#me Per#o,3 months.
Financial reports are to be prepared for one year or a period of twelve
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 under one 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 or constant and that instability is insignificant and therefore ignored.
4&a'#tat#$e Character#(t#c( of F#)a)c#a' Stateme)t( These characteristics are the attributes that make the #)format#o) #) f#)a)c#a' (tateme)t( &(ef&' to investors* creditors* and others. The Framework identifies four principal /ualitative characteristics" a3 !3 c3 ,3
U),er(ta),a!#'#t/ Re'e$a)ce Re'#a!#'#t/ Compara!#'#t/
Pr#mar/ Character#(t#c( Re'e$a)ce , !nformation in financial statements is relevant when it influences the economic decisions of users. !t can do that both by #a$ helping them evaluate past* present* or future events relating 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'&e 2 !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 bias and can be depended upon by users to represent events and transactions faithfully. !nformation is not reliable when it is purposely designed to influence users- decisions in a particular direction. Factor( of re'#a!#'#t/ •
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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#(m1 2 The inclusion of a degree of caution in the e&ercise of 'udgments needed in making estimates or choosing alternatives so that the outcome will have 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$a)t a), Re'#a!'e I)format#o) •
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T#me'#)e(( 6 ndue delay in reporting of information may lead to the loss of relevance even though enhancing it reliability. +hile providing information before all aspects of a transaction or other events are known may increase the relevance of information* thus impairing its reliability. 2a'a)ce !etwee) 2e)ef#t a), Co(t 7 The benefits derived from relevant and reliable information should e&ceed the cost of providing it.
Seco),ar/ Character#(t#c( U),er(ta),a!#'#t/ , !nformation should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. Compara!#'#t/ , sers must be able to compare the financial statements of an enterprise o$er t#me so that they can identify trends in its financial position and performance. sers must also be able to compare the financial statements of ,#ffere)t enterprises. )isclosure of accounting policies is essential for comparability especially when the enterprise adopts a new or changes its accounting policies. The E'eme)t( of F#)a)c#a' Stateme)t( Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are termed the elements of financial statements. The elements directly related to f#)a)c#a' po(#t#o) and their ,ef#)#t#o) accor,#)* to the framework are" A((et7 n asset is a resource controlled by the enterprise as a result of past events and from 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* the settlement of which is e&pected to result in an outflow from the enterprise of resources embodying economic benefits. E%&#t/7 4/uity is the residual interest in the assets of the enterprise after deducting all its liabilities.
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The elements directly related to performa)ce and their ,ef#)#t#o) accor,#)* to the framework are" I)come7 !ncome is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in e/uity* other than those relating to contributions from e/uity participants. E8pe)(e7 4&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 in decreases 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 item that 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 from the enterprise% and The item-s cost or value can be measured with reliability. Based on these general criteria" A) a((et is recogni0ed in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably. A '#a!#'#t/ is recogni0ed in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation 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 economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means* in effect* that recognition of income occurs simultaneously with 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 the recognition 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 financial statements are to be recogni0ed and reported. The Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements* including" H#(tor#ca' co(t C&rre)t co(t Net rea'#+a!'e 0(ett'eme)t1 $a'&e Pre(e)t $a'&e 0,#(co&)te,1 1istorical cost is the measurement basis most commonly used today* but it is usually combined with other measurement bases. The Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances. The /ualitative characteristics do provide some guidance in this matter. Co)cept( of Cap#ta' •
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F#)a)c#a' co)cept of cap#ta' , capital is synonymous with net assets of the enterprise. This is the concept of capital adopted by most enterprises. Ph/(#ca' co)cept of cap#ta' 2 capital is regarded as the productive capacity of the enterprise based on* for e&le* units of output per day.
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F#)a)c#a' cap#ta' ma#)te)a)ce 2 nder this concept* a profit is earned only if the financial #or money$ 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 any distributions to* and contributions from* owners during the period. •
Ph/(#ca' cap#ta' ma#)te)a)ce 2 nder this concept* a profit is earned only if the physical productive capacity #or operating capability$ of the enterprise #or the resources need to achieve that capacity$ at the end of the period e&ceeds the physical productive capacity at the beginning of the period* after e&cluding any distributions to* and contributions from* owners during the period.
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