CHAPTER 1 DEVELOPMENT OF FINANCIAL REPORTING FRAMEWORK & STANDARD-SETTING BODIES

Definition of Accounting

The Accounting Standards Council provides the following definition:

Accounting is a service activity.

The accounting function is to provide quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making economic decision.

The Committee on accounting Terminology of the American Institute of Certified Public Accountants
defines accounting as follows:

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 at least of a financial character and interpreting the
results thereof.

The American Accounting Association in its Statement of Basic Accounting Theory defines accounting as
follows:

Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.

Important points

The following important points made in the definition of accounting should be noted:

1. Accounting is about quantitative information.

2. The information is likely to be financial in nature.
3. The information should be useful in decision making.

The definition that has stood the test of time is the definition given by the American Accounting
Association.

This definition states that the very purpose of accounting is to provide quantitative information to be
useful in making an economic decision.

The definition also states that accounting has a number of components, namely:

a. Identifying as the analytical component.

b. Measuring as the technical component.
c. Communicating as the formal component.

Identifying

This accounting process is the recognition or nonrecognition of business activities as “accountable”

events.

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Not all business activities are accountable.

For example, the hiring of employees, the death of the entity president and the entering into a contract
are all business activities but such events are not accountable because they cannot be quantified or
expressed in terms of a unit of measure.

An event is accountable or quantifiable when it has an effect on assets, liabilities and equity.

In other words, the subject matter of accounting is economic activity or the measurement of economic
resources and economic obligations.

Only economic activities are emphasized and recognized in accounting.

Sociological and psychological matters are beyond the province of accounting.

External and internal transactions

Economic activities of an entity are referred to as transactions which may be classified as external and
internal.

External transactions or exchange transactions are those economic events involving one entity and
another entity.

Examples of external transactions are:

a. Purchase of goods from a supplier
b. Borrowing money from a bank
c. Sale of goods to a customer
d. Payment of salaries to employees
e. Payment of taxes to the government

Internal transactions are economic events involving the entity only.

Internal transactions are the economic activities that take place entirely within the entity.

Production and casualty loss are examples of internal transactions.

Production is the process by which resources are transformed into products.

Casualty is any sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily
termed as an act of God.

Measuring

This accounting process is the assigning of peso amounts to the accountable economic transactions and
events.

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If accounting information is to be useful, it must be expressed in terms of a common financial
denominator.

Financial statements without monetary amounts would be largely unintelligible or incomprehensible.

The Philippines peso is the unit of measuring accountable economic transactions.

The measurement bases are historical cost and current value.

Historical cost is the most common measure of financial transactions.

Current value includes fair value, value in use, fulfillment value and current cost.

Communicating

Communicating is the process of preparing and distributing accounting reports to potential users of
accounting information.

Identifying and measuring are pointless if the information contained in the accounting records cannot
be communicated in some form to potential users.

Actually, the communicating process is the reason why accounting has been called the “universal
language of business”.

Implicit in the communication process are the recording, classifying and summarizing aspects of
accounting.

Recording or journalizing is the process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.

Classifying is the sorting or grouping of similar and interrelated economic transactions into their
respective classes.

Classifying is accomplished by posting to the ledger.

The ledger is a group of accounts which are systematically categorized into asset accounts, liability
accounts, equity accounts, revenue accounts and expense accounts.

Summarizing is the preparation of financial statements which include the statement of financial
position, income statement, statement of comprehensive income, statement of changes in equity and
statement of cash flows.

Accounting as an information system

Accounting is an information system that measures business activities, processes information into
reports and communicates the reports to decision makers.

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A key product of this information system is a set of financial statements – the documents that report
financial information about an entity to decision makers.

Financial reports tell us how well an entity is performing in terms of profit and loss and where it stands
in financial terms.

Overall objective of accounting

The overall objective of accounting is to provide quantitative financial information about a business that
is useful to statement users particularly owners and creditors in making economic decisions.

An accountant’s primary task is to supply financial information so that the statement users could make
informed judgment and better decision.

The essence of accounting is decision-usefulness.

Investors and other users are interested in financial accounting information necessary in making
important and significant economic decisions.

THE ACCOUNTANCY PROFESSION

At present, Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines.

This law is known as the “Philippine Accountancy Act of 2004”.

Accountancy has developed as a profession attaining a status equivalent to that of law and medicine.

In the Philippines, in order to qualify to practice the accountancy profession, a person must finish a
degree in Bachelor of Science in Accountancy and pass a very difficult government examination given by
the Board of Accountancy.

The Board of Accountancy is the body authorized by law to promulgate rules and regulations affecting
the practice of the accountancy profession in the Philippines.

The Board of Accountancy is responsible for preparing and grading the Philippine CPA examination.

This computer-based examination is offered twice a year, one in May and another one in October, in
authorized centers around the country.

Limitation of the practice of public accountancy

Single practitioners and partnerships for the practice of public accountancy shall be registered certified
public accountants in the Philippines.

A certificate of accreditation shall be issued to certified public accountants in public practice only upon
showing in accordance with rules and regulations promulgated by the Board of Accountancy and
approved by the Professional Regulation Commission that such registrant has acquired a minimum of
three years of meaningful experience in any of the areas of public practice including taxation.

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The Securities and Exchange Commission shall not register any corporation organized for the practice of
public accountancy.

Accreditation to practice public accountancy

Certified public accountants, firms and partnerships of certified public accountants, including partners
and staff members thereof, are required to register with the Board of Accountancy and Professional
Regulation Commission for the practice of public accountancy.

The Professional Regulation Commission upon favorable recommendation of the Board of Accountancy
shall issue the Certificate of Registration to practice public accountancy which shall be valid for 3 years
and renewable every 3 years upon payment of required fees.

Certified Public Accountants generally practice their profession in three main areas, namely:

a. Public accounting
b. Private accounting
c. Government accounting

PUBLIC ACCOUNTING

The field of public accounting or public accountancy is composed of individual practitioners, small
accounting firms and large multinational organizations that render independent and expert financial
services to the public.

Public accountants usually offer three kinds of services, namely auditing, taxation and management
advisory services.

Auditing

Auditing has traditionally been the primary service offered by most public accounting practitioners.

Auditing or external auditing is the examination of financial statements by independent certified public
accountant for the purpose of expressing an opinion as to the fairness with which the financial
statements are prepared.

Actually, external auditing is the attest function of independent CPAs.

The Bureau of Internal Revenue requires audited financial statements to accompany the filing of annual
income tax return.

Banks and other lending institutions frequently require an audit by an independent CPA before granting
a loan to the borrower.

Creditors and prospective investors place considerable reliance on audited financial statements on
making economic decision.

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Taxation

Taxation service includes the preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors.

The CPA not infrequently represents the client in tax investigations.

To offer this service effectively and efficiently, the public accountant must be thoroughly familiar with
the tax laws and regulations and updated with changes in taxation law and court cases concerned with
interpreting tax laws.

Management advisory services

Management advisory services have become increasingly important in recent years although audit and
tax services and undoubtedly the mainstay of public accountants.

The term management advisory services has no precise coverage but is used generally to refer to
services to clients on matters of accounting, finance, business policies, organization procedures, product
costs, distribution and many other phases of business conduct and operations.

Specifically, management advisory services include:

a. Advice on installation of computer system

b. Quality control
c. Installation and modification of accounting system
d. Budgeting
e. Forward planning and forecasting
f. Design and modification of retirement plans
g. Advice on mergers and consolidations

PRIVATE ACCOUNTING

Many Certified Public Accountants are employed in business entities in various capacity as accounting
staff, chief accountant, internal auditor and controller.

The highest accounting officer in an entity is known as the controller.

The major objective of the private accountant is to assist management in planning and controlling the
entity’s operations.

Private accounting includes maintaining the records, producing the financial reports, preparing the
budgets and controlling and allocating the resources of the entity.

The private accountant has also the responsibility for the determination of the various taxes the entity is
obliged to pay.

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GOVERNMENT ACCOUNTING

Government accounting encompasses the process of analyzing, classifying, summarizing and

communicating all transactions involving the receipt and disposition of government funds and property
and interpreting the results thereof.

The focus of government accounting is the custody and administration of public funds.

Many Certified Public Accountants are employed in many branches of the government, more
particularly:
a. Bureau of Internal Revenue
b. Commission on Audit
c. Department of Budget and Management
d. Securities and Exchange Commission
e. Bangko Sentral ng Pilipinas

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

Republic Act No. 10912 is the law mandating and strengthening the continuing professional
development program for all regulated professions, including the accountancy profession.

All certified public accountants shall abide by the requirements, rules and regulations on continuing
professional development to be promulgated by the Board of Accountancy, subject to the approval of
the Professional Regulation Commission, in coordination with the accredited national professional
organization of certified public accountants or any duly accredited educational institutions.

Continuing professional development refers to the inculcation and acquisition of advanced knowledge,
skill, proficiency, and ethical and moral values after the initial registration of the Certified Public
Accountants for assimilation into professional practice and lifelong learning.

Continuing professional development raises and enhances the technical skill and competence of the
Certified Public Accountant.

CPD credit units

The CPD credit units refer to the CPD credit hours required for the renewal of CPA license and
accreditation of a CPA to practice the accountancy profession every three years.

Under the new BOA resolution, all Certified Public Accountants regardless of area or sector of practice
shall be required to comply with 120 CPD units in a compliance period of three years.

Excess credit units earned shall not be carried over to the next three year period, except credit units
earned for masteral and doctoral degrees.

It is to be emphasized that the Continuing Professional Development has become mandatory for
Certified Public Accountants.

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The Continuing Professional Development is required for the renewal of CPA license and accreditation of
CPA to practice the accountancy profession.

Exemption from CPD

A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65 years.

However, this exemption applied only to the renewal of CPA license and not for the purpose of
accreditation to practice the accountancy profession.

Accounting versus Auditing

In a broad sense, accounting embraces auditing.

Auditing is one of the areas of accounting specialization.

In a limited sense, accounting is essentially constructive in nature. Accounting ceases when financial
statements are already prepared.

On the other hand, auditing is analytical. The work of an auditor begins when the work of the
accountant ends.

After the financial statements are prepared, the auditor will begin to perform the task of auditing.

The auditor examines the financial statements to ascertain whether they are in conformity with
generally accepted accounting principles.

Accounting versus bookkeeping

Bookkeeping is procedural and largely concerned with development and maintenance of accounting
records.

Bookkeeping is the “how” of accounting.

Accounting is conceptual and is concerned with the why, reason or justification for any action adopted.

Bookkeeping is a procedural element of accounting as arithmetic is the procedural element of

mathematics.

Financial accounting versus managerial accounting

Financial accounting is primarily concerned with the recording of business transactions and the eventual
preparation of financial statements.

Financial accounting focuses on general purpose reports known as financial statements intended for
internal and external users.

Financial accounting is the area of accounting that emphasizes reporting to creditors and investors.

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Managerial accounting is the accumulation and preparation of financial reports for internal users only.

In other words, managerial accounting is the area of accounting that emphasizes developing accounting
information for use within an entity.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Accounting has evolved through time changing with the needs of the society. As new types of
transactions occur in trade and commerce, accountants develop rules and procedures for recording
them.

These accounting rules, procedures and practices came to be known as generally accepted accounting
principles or simply GAAP.

The principles have developed on the basis of experience, reason, custom, usage and practical necessity.

Generally accepted accounting principles represent the rules, procedures, practice and standards
followed in the preparation and presentation of financial statements.

GAAP are like laws that must be followed in financial reporting.

The process of establishing GAAP is a political process which incorporates political actions of various
interested user groups as well as professional judgment, logic and research.

Purpose of accounting standards

The overall purpose of accounting standards is to identify proper accounting practices for the
preparation and presentation of financial statements.

Accounting standards create a common understanding between preparers and users of financial
statements particularly the measurement of assets and liabilities.

A set of high-quality accounting standards is a necessity to ensure comparability and uniformity in

financial statements based on the same financial information.

PROFESSIONAL REGULATION COMMISSION (PRC)

The PRC performs two important functions:

 conducts and administers licensure examinations to aspiring professionals; and
 regulates and supervises the practice of the professions exercised in partnership with the forty-
three (43) Professional Regulatory Boards (PRBs) in the fields of health, business, education,
social sciences, engineering and technology. The Board of Accountancy (BOA) is a leg of PRC that
regulates the accountancy profession in the Philippines.

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FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)

In the Philippines, the development of generally accepted accounting principles is formalized initially
through the creation of the Accounting Standards Council or ASC.

The Financial Reporting Standards Council or FRSC now replaces the Accounting Standards Council.

The FRSC is the accounting standard-setting body created by the Professional Regulation Commission
upon recommendation of the Board of Accountancy to assist the BOA in carrying out its powers and
functions provided under R.A. No. 9298.

The main function is to establish and improve accounting standards that will be generally accepted in
the Philippines.

The FRSC monitors the technical activities of the IASB and invites comments on exposure drafts of
proposed IFRSs as these are issued by the IASB. When finalized, these are adopted as Philippine
Financial Reporting Standards (PFRS). The FRSC similarly monitors issuances of the International
Financial Reporting Interpretations Committee (IFRIC) of the IASB, which it adopts as Philippines
Interpretations – IFRIC. PRFS and Philippine Interpretations – IFRIC approved for adoption are submitted
to BOA and PRC for approval.

The accounting standards promulgated by the Financial Reporting Standards Council constitute the
highest hierarchy of generally accepted accounting principles in the Philippines.

The approved statements of the FRSC are known as Philippine Accounting Standards or PAS and
Philippine Financial Reporting Standards or PFRS.

Composition of FRSC

The FRSC is composed of 15 members with a Chairman who had been or is presently a senior accounting
practitioner and 14 representatives from the following:

Board of Accountancy 1
Securities and Exchange Commission 1
Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Commission on Audit 1
Major organization of preparers and users of financial statements –
Financial Executives Institutes of the Philippines (FINEX) 1
Accredited national professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2
Total 14

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Philippine Interpretations Committee

The Philippine Interpretations Committee or PIC was formed by the FRSC in August 2006 and has
replaced the Interpretations Committee or IC formed by the Accounting Standards Council in May 2000.

The role of the PIC is to prepare interpretations of FRSC for approval by the FRSC and to provide timely
guidance on financial reporting issues not specifically addressed in current PFRS.

In other words, interpretations are intended to give authoritative guidance on issues that are likely to
receive divergent or unacceptable treatment because the standards do not provide specific and clearcut
rules and guidelines.

The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations
Committee or IFRIC which already has replaced the Standing Interpretations Committee or SIC.

AUDITING AND ASSURANCE STANDARDS COUNCIL (AASC)

The AASC was created by the PRC upon the recommendation of the BOA to assist the BOA in the
establishment and promulgation of auditing standards in the Philippines.

It is the stated policy of the AASC to make the International Standards and Practice Statements issued by
the International Auditing and Assurance Standards Board (IAASB) the applicable standards and practice
statements in the Philippines. In this connection, to facilitate their implementation in the Philippines,
the International Standards and Practice Statements are made Philippine-specific and are described as
“Philippine standards and practice statements”.

Each final Philippine Standard and Practice Statement, as well as interpretations, if deemed appropriate,
shall be submitted to the PRC through the BOA for approval after which the pronouncement shall be
published in the Official Gazette. After publication, the AASC pronouncement becomes operative from
the effective date stated therein.

AASC shall have 15 regular members with a term of three (3) years, renewable for another term, coming
from the following:

Chairman 1
BOA, SEC, BSP, COA 4 (1 each)
Association of CPAs in Public Practice 1
PICPA:
Public Practice 6
Commerce and Industry 1
Academe/Education 1
Government 1
Total 15

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PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (PICPA)

The PICPA is the only accredited national professional organization of CPAs in the Philippines. Its primary
functions established for the benefit and welfare of the CPAs, the advancement of their profession, and
the attainment of their professional ends.

INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE

The International Accounting Standards Committee or IASC is an independent private sector body, with
the objective of achieving uniformity in the accounting principles which are used by business and other
organizations for financial reporting around the world.

It was formed in June 1973 through an agreement made by professional accountancy bodies from
Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland,
and the United States of America. The IASC is headquartered in London, United Kingdom.

Objectives of IASC

a. To formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance and
observance.
b. To work generally for the improvement and harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements.

INTERNATIONAL ACCOUNTING STANDARDS BOARD

The International Accounting Standards Board or IASB now replaces the International Accounting
Standards Committee or IASC.

The IASB publishes standards in a series of pronouncements called International Financial Reporting
Standards or IFRS.

However, the IASB has adopted the body of standards issued by the IASC.

The pronouncements of the IASC continue to be designated as International Accounting Standards or

IAS.

The IASB standard-setting process includes in the correct order research, discussion paper, exposure
draft and accounting standard. The due process comprises six stages:

1. Setting the agenda. The IASB identifies a subject (mainly be reference to the needs of the
investors).
2. Planning the project. After considering the nature of the issues and the level of interest among
constituents, the IASB may establish a working group at this stage.
3. Developing and publishing the discussion paper.
4. Developing and publishing the exposure draft. For public comment, which is a draft version of
the intended standard.
5. Developing and publishing the standard.

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 6. After the standard is issued, the staff and the IASB members hold regular meetings with
interested parties, to help understand unanticipated issues related to the practice
implementation and potential impact of its proposals.

Move toward IFRS

In developing accounting standards that will be generally accepted in the Philippines, standards issued
by other standard-setting bodies such as the USA Financial Accounting Standards Board (FASB) and the
IASB are considered.

In the past years, most of the Philippine standards issued are based on American accounting standards.

At present, the FRSC has adopted in their entirety all International Accounting Standards an
International Financial Reporting Standards.

The move toward IFRS is essential to achieve the goal of one uniform and globally accepted financial
reporting standards.

The Philippines is fully compliant with IFRS effective January 2005, a process which was started back in
1997 in moving from USA GAAP to IFRS.

The following factors are considered in deciding to move totally to international accounting standards:

a. Support of international accounting standards by Philippine organizations, such as the Philippine

SEC, Board of Accountancy and PICPA.
b. Increasing internalization of business which has heightened interest in a common language for
financial reporting.
c. Improvement of international accounting standards or removal of free choices of accounting
treatments.
d. Increasing recognition of international accounting standards by the World Bank, Asian
Development Bank and World Trade Organization.

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REVIEW QUESTIONS

1. What is accounting?
2. When is a transaction accountable or quantifiable?
3. What is the overall objective of accounting?
4. What is R.A. No. 9298?
5. What are the three main areas in the practice of accountancy profession?
6. What are the three kinds of services offered by CPAs in the practice of public accounting?
7. What is Continuing Professional Development? Why is it important?
8. How many CPD credit units are required?
9. What is the exemption from the CPD requirements?
10. Distinguish financial accounting from managerial accounting.
11. What are generally accepted accounting principles?
12. What are the purposes of accounting standards?
13. What is Financial Reporting Standards Council and its composition?
14. What are the objectives of the IASC?
15. Why did Philippines move totally from American accounting standards to international
accounting standards?

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