FRSC Framework for Financial Statements: Purpose, Scope, and Qualitative Characteristics, Assignments of Cost Accounting

Download FRSC Framework for Financial Statements: Purpose, Scope, and Qualitative Characteristics and more Assignments Cost Accounting in PDF only on Docsity! PAGE 1 FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS PURPOSE AND STATUS OF THE FRAMEWORK The FRSC Framework for the Preparation and Presentation of Financial 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 Accounting Standards or Philippine Financial Reporting Standards or Interpretations. The purpose of the framework as outlined is to: a. Assist the Financial Reporting Standards Council (FRSC) in developing accounting standards that represent generally accepted accounting principle; b. Assist the FRSC in its review and adoption of existing International Accounting Standards; c. Assist preparers of the financial statements in applying FRSC Statements of Financial Accounting Standards and in dealing with topics that have yet to form the subject of an FRSC statement; d. Assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP; e. Assist users of financial statements in interpreting information contained in the financial statements prepared in conformity with Philippine GAAP; f. Provide those who are interested in the work of the FRSC with information about its approach to the formulation of Statements of Financial Accounting Standards Scope of the Framework: Defines the objective of financial statements; Identifies the qualitative characteristics that make information in financial statements useful; and Defines the basic elements of financial statements and the concepts for recognizing and measuring them in financial statements. Concepts of capital and capital maintenance. General Purpose Financial Statements The Framework addresses general purpose financial statements including consolidated financial statements that a business enterprise prepares and presents at least annually to meet the common information needs of a wide range of users external to the enterprise. Therefore, the Framework does not necessarily apply to special purpose financial reports such as reports to tax authorities, reports to governmental regulatory authorities, prospectuses prepared in connection with securities offerings, and reports prepared in connection with business combinations. Users and their Information Needs The principal classes of users of financial statements are present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the general public. All of these categories of users rely on financial statements to help them in decision making. While 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. Responsibility for Financial Statements The management of an enterprise has the primary responsibility for preparing and presenting the enterprise's financial statements. The Objective of Financial Statements The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial Position PAGE 2 The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates. The balance sheet presents this kind of information. Performance Performance is the ability of an enterprise to eam a profit on the resources that have been invested in it. Information about the amounts and variability of profits helps in forecasting future cash flows from the enterprise's existing 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 income statement. Changes in Financial Position or Cash Flows Users of financial statements seek information about the investing, financing and operating activities 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 equivalents and how it uses those cash flows. The cash flow statement provides this kind of information. Underlying Assumptions (Postulates) The Framework sets out the underlying assumptions of financial statements: Accrual Basis. The effects of transactions and other events are recognized when they occur, rather than when cash or its equivalent is received or paid, and they are reported in the financial statements of the periods to which they relate. Going Concern. 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 required. The FRSC conceptual framework mentions two assumptions only. However, it is widely believed that an inherent trait of the financial statements are the basic assumptions of: « Accounting Entity. 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. * Time Period. Financial reports are to be prepared for one year or a period of twelve months. ¢ Monetary unit. There are two aspects under this assumption. First is the quantifiability of the peso, meaning that the elements of the financial statements should be stated under one unit of measure which is the Philippine Peso. Second is the stability of the peso, 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. Qualitative Characteristics of Financial Statements These characteristics are the attributes that make the information in financial statements useful to investors, creditors, and others. The Framework identifies four principal qualitative characteristics: a. Understandability b. Relevance c. Reliability d. Comparability Primary Characteristics Relevance - Information in financial statements is relevant when it influences the economic decisions of users. It 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. Ingredients of relevance: ¢ Predictive Value — Information can help users increase the likelihood of correctly predicting or forecasting the outcome of certain events. PAGE 3