eof Accounting, Overview of Accounting (Gearning Objectives Define accounting and state its basic purpose. 1. Explain the basic concepts applied in accounting, 2 +. State the branches of accounting and the sectors in the practice of accountancy. 4, Explain the importance of a uniform set of financial reporting standards. | | Definition of Accounting “Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.” - (American “Association of Accotntants) Three important activities included in the definition of accounting 1. Identifying 2. Measuring 3. Communicating Identifying Identifying is the process of analyzing events and transactions to determine whether or not they will be recognized. ry Recognition refers to the process of including the effects of an accountable event in the statement of financial position or the statement of comprehensive income through a journal entry. Only accountable events are recognized (i.e., journalized). An accountable event is one that affects the assets, liabilities, equity, income or expenses of an entity. It is also known as economic activity, which is the subject matter of accounting. Only economicand recognized in accoung, al matters are not recognized, B. nol recognized but Cie only in the jevance. Dison only in the notes is not an application of the recognition. Process, 4 hat has an accounting relevance may : are emphasized Sociological and psychologic. Non-accountable events are notes, if they have accounting re ivities non-accountable event t recorded through a memorandum entry Types of events or transactions 1. External events ~ are events that involve an entity and anothe, external party. Types of External events i, Exchange (reciprocal iransfer) - an event wherein there is g reciprocal giving and receiving of economic resources op discharging of economic obligations between an entity and an external party. Examples: sale, purchase, payment of liabilities, receipt of notes receivable in exchange for accounts receivable, and the like. ii. Non-reciprocal transfer — is a “one way” transaction in that the party giving something does not receive anything in return while the party receiving does not give anything in exchange. Examples: donations, gifts or _ charitable contributions, payment of taxes, imposition of fines, theft, provision of capital by owners , distributions to owners ', and the like. - FASB Accounting Standards Codification (ASC) BIS iii, External event other than transfer - an event that involves changes in the economic resources or obligations of an entity caused by an external party or external source but does not involve transfers of resources or obligations.of Account Examples: changes in fair values obsolescence, technological changes, var like. and price levels, ndalism, and the 2. Internal events — are events that do jot involve an external party. Types of Internal events i, Production — the process by which resources are transformed into finished goods. Examples: conversion of raw materials into finished products, Production of farm products, and the like. ii, Casualty — an unanticipated loss from disasters or other similar events. Examples: loss from fire, flood, and other catastrophes. Measuring Measuring involves assigning numbers, normally in monetary terms, to the economic transactions and events. : Several measurement bases are used in accounting which include, but not limited to, historical cost, fair value, present value, realizable value, current cost, and sometimes inflation- adjusted costs. The most commonly used is historical cost. This is usually combined with the other measurement _ bases. Accordingly, financial statements are said to be prepared using a mixture of costs and values. Costs include historical cost and current cost while values include the other measurement bases. Valuation by fact or opinion The use of estimates is essential in providing relevant information Thus, financial statements are said to be a mixture of fact and opinion, When measurement is affected by estimates, the items measured are said to be valued by opinion. Examples: a. Estimates of uncollectible amounts of receivables.b. Depreciation and amortization expenses, which are affect, by estimates of useful life and residual value. td ©. Estimated liabilities, such as provisions. d. Retained earnings, which is affected by various estimates of income and expenses When measurement is unaffected by estimates, the item, measured are said to be valued by fact. Examples: a. Ordinary share capital valued at par value b. Land stated at acquisition cost c. Cash measured at face amount Communicating Communicating is the process of transforming economic data into useful accounting information, such as financial statements and other accounting reports, for dissemination to users. It also involves interpreting the significance of the processed information. ‘The communicating process of accounting involves three aspec 1. Recording ~ refers to the process of systematically committing into writing the identified and measured accountable events in the journal through journal entries. 2. Classifying - involves the grouping of similar and interrelated items into their respective classes through postings in the ledger. 3. Summarizing — putting together or expressing in condensed form the recorded and classified transactions and events. This includes the preparation of financial statements and other accounting reports. Interpreting the processed information involves the computation of financial statement ratios, Some regulatory bodies such as the Bangko Sentral ng Pilipinas (BSP), require certa" financial ratios to be disclosed in the notes to financial statemen>“on Qevrvivie of Acc Basic purpose of accounting The basic purpose of accounting is to provide information that is useful in making economic decisi ons. Various sources of information are used when making economic deci ions and the financial statements are only one of those sources. Other sources may include current events, industry publications, internet resources, professional advices, expert systems, etc. “Economic entities use accounting to record economic activities, process daia, and disseminate information intended to be useful in making economic decisions. An economic entity is a separately identifiable combination of persons and property that uses or controls economic resources to achieve certain goals or objectives. An economic entity may either be a: a, Not-for-profit entity —- one that. carries out some. socially desirable needs of the community or its members and whose activities are not directed towards making profit; or b. Business entity ~ one that operates primarily for profit. Economic activities are activities that affect the economic resources (assets) and obligations (liabilities), and consequently, the equity of an economic entity. Economic activities include: 1. Production - the process of converting economic resources into outputs of goods and services that are intended to have greater utility than the required inputs. 2. Exchange - the process of trading resources or obligations for other resources or obligations. 3. Consumption - the process of using the final output of the production process. 4. Income distribution - the process of allocating rights to the use of output among individuals and groups in society. Savings - the process of setting aside rights to present consumption in exchange for rights to future consumption. 6. Investment - the process of using current inputs to increase the stock of resources available for output as opposed to immediately consumable output.ation provided by accounting Types of inform: expressed 1. Quantitative information — infor ‘mation Mune, quantities, or units. Qualitative information - information expressed ii yoy, ; a ils form. Qualitative information Is found in the nN descriptive hoe to financial statements as well as on the face of the oy,” financial statements. 3. Financial information - information expressed int non, Financial information is also quantitative information becaus, monetary amounts are normally expressed in numbers, Types of accounting information classified as to users’ neeg, 1. General purpose accounting information - designed to meg the conimon needs of most statement users. This information i. provided under financial accounting. General purpose information is governed by generally accepted accounting principles (GAAP) represented by the Philippine Financia Reporting Standards (PFRSs). 2. Special purpose accounting information - designed to meet the specific needs of particular statement users. This information is provided by other types of accounting other than financial accounting, e.g,, managerial accounting, tax basis accounting, Sources of information in financial statements Information in the financial statements is not obtained exclusively from the entity’s accounting records. Some are obtained from| external sources. For example, fair value measurements resolutions of uncertainties, future lease payments, and] contractual commitments are only a few of the information| presented in the financial statements that are derived from external sources. Accounting as science and art 1. Asa social science, accounting is a body of knowledge which hes been systematically gathered, classified and organized.w of Acconiting eens eee - 2. Asa practical art, accounting requires the use of creative skills and judgment. Accounting as an information system Accounting identifies and measures economic activities, processes information into financial reports, and communicates these reports to decision makers, Accounting as a language of business Accounting is often referred to as a “language of business” because it is fundamental to the communication of financial information. Creative and Critical thinking in accounting The practice of accountancy requires the exercise of creative and critical thinking. a. Creative thinking involves the use of imagination and insight to solve problems by finding new relationships (ideas) among items of information. It is most important in identifying alternative solutions. b. Critical thinking involves the logical analysis of issues, using inductive or deductive reasoning to test new relationships to determine their effectiveness. It is most important in evaluating alternative solutions. Creative skills and judgment are exercised in problem solving. The following are the steps in problem solving: 1. Recognizing a problem 2. Identifying alternative solutions 3. Evaluating the alternatives 4. Selecting a solution from among, the alternatives 5. Implementing the solution Accounting Concepts Accounting concepts refer to the principles upon which the process of accounting is based. The term “accounting concepts” is used interchangeably with the following terms:Framework and the Philippine Financial Reporting Standards (PERSs), sumplions (Accounting postulates) — ae Accounting asst principles and basic Notions ti concepts or Pp Cele ie mn of the accounting process. vide the foundatic eae le ry ~ is logical reasoning in : fet a set counting theo oneral fra | Accor o ciples that (i) provide a general fame : Teference road principles evalua broad ps accounting, practice can be evaluated and (ii) Buide by w a sment of new practices and procedures, It is th, the devel ee of concepts and related principles that plain acd guide the accountant’s action in identifying, measurn and g in . 4 i ean accounting, information. es theo prises the Conceptual Framework and the Philippine comprises Financial Reporting Standards (PFRSs). 3 hag Most accounting concepts are derived from the Conceptua] However, some accounting concepts are implicit, meaning they are not expressly stated in the Framework or PFRSs but are generally accepted because of their long-time use in the profession. Examples of accounting concepts: L Double-entry system ~ each accountable event is recorded in ttvo parts — debit and credit, Going concern assumption — the e1 its operations for an indefinite entity does not expect to end it future. ntity is assumed to carry on Period of time. Meaning, the S operations in the foreseeable The measurement basis involving mixture values is appropriate only when the If the entity is a measurement of costs and entity is a going concern, liquidating concern, the appropriate t basis is realizable value, ie, estimated selling Price less estimated costs to sell for ass ets and expected settlement amount for liabilities,Gevrview of Accounting 9 3. Separate entity (Accounting entity J Business entity conceptt Entity concept) ~ the entity is viewed separately from its owners. Accordingly, the personal transactions of the owners among themselves or with other entities are not recorded in the entity's accounting, records, ‘This concept defines the area of interest of the accountant. 4. Stable monetary unit (Monetary unit a impliow) a, Assets, liabilities, equity, income and expenses are stated in terms of a common unit* of measure, which is the peso in the Philippines; and b. The purchasing power of the peso is regarded as stable or constant and that its instability is insignificant and therefore ignored. “To be useful, accounting information should be siated in a common denominator. For example, amounts in foreign currencies should be translated into pesos. Time Period (Periodicity! Accounting period) — the life of the entity is divided into. series of reporting periods. An accounting period is usually 12 months and may either be a calendar year or a fiscal year period. A calendar year period starts on January 1 and ends on December 31 of that same year. A fiscal year period also covers 12 months but starts on a date other than January 1 Materiality concept ~ information is material if its omission or misstatement could influence economic decisions. Materiality is a matter of professional judgment and is based on the size and nature of the item being, judged. Cost-benefit (Cost constrainif Reasonable asstirance) ~ the cost of Processing, and communicating information should not exceed the benefits to be derived from it.g - the cffects of transactions ang s. Acernal Basis of accountins ther events are recognized when they oceur (and not as cas, and they are financial statements of the periods : corded in the ace ived or paid) recorde accounting iy rece) ported in the records and ef to which they relate. Under accrua income is recognized when earned is collected and expenses are sh is paid. | basis, rather than) when cash rather than when ca: recognized when incurTe J cost concept (Cost principle) — the value of an asset is determined on the basis of acquisition cost. This concept is not always maintained. Some PFRSs require the departure from this concept, such as when inventories are measured at net realizable value (NRV) rather than at cost when applying the “lower of cost and NRV” measurement y Historica 10, Concept of Articulation ~ all of the components of a complete set of financial statements are interrelated. The preparation of a worksheet (and the eventual completion of the financial statements) recognizes that the financial statements are interrelated and interact with each other. Accordingly, when users use the financial statements in making decisions, they need to use each financial statement in fundamentally conjunction with the other financial statements. For example, when evaluating an entity’s ability to generate future cash flows, all the financial statements should be used and not only the statement of cash flows. - Receivables and payables in the statement of financial josition provide information on expected cash receipts and sh disbursements in future periods : ‘ - Income and expenses in the statement of profit or loss and otliey coniprehensive income provide information if the He obi hh entity’s ability to generate cash flows from its operati s jons.Overview of Accoun - Information on ted and unissued shares in th of changes in equity provide: of equity financing, he statement S information on the availability - Information on_ historical changes in cash and cash equivalents in the statement Of cash flows helps users assess future sources and uses of funds, + The notes to financial st, atements provides information on the quality of earnings, 8, whether incom are realized or unrealized or whethe: non-recurring ¢ oF expenses they are recurring or ll. Full disclosure principle — this principle recognizes that the nature and amount of information included in the financial statements reflect a series of judgmental trade-offs. The trade- offs strive for: a. sufficient detail to disclose matters that make a difference to users, yet b. sufficient condensation to make the information understandable, keeping in mind the costs of pre and using it. paring, 2. Consistency concept — the financial statements are prepared on the basis of accounting principles that are applied consistently from one period to the next. Changes in accounting policies are made only when required or permitted by the PFRSs or when the change results to more relevant and reliable information. Changes in accounting, policies are disclosed in the notes. 13, Matching (Association of cause and effect) Osis are recognized as expenses when the related revenue is recognized. \4. Entity theory ~ the accounting, objective is geared towards Proper income determination. Proper matching of costs saint revenues is the ultimate end. This theory emphasizes thes exemplified by the equation “4... Sets nent and i yaie state inet ss + Capital.” Liabilitic 13, Proprietary theory ~ the accounting objective is any towards the proper valuation of assets. This theory emphasin. the balance shect and is exemplified by 4. ’ the importance equation “Assets ~ Liabilities = Capital. _ this theory is applicable when there ied, ie, ordinary and preferred The equation is “Assets - Liabilities ~ Preferred Shareholders: Equity = Ordinary Shareholders’ Equity.” This theory is applied computation of book value per share and return on 16. Residual equity theory are two classes of shares issu in the equity. 17, Fund theory ~ the accounting objective is neither proper income determination nor proper valuation of assets but the custody and administration of funds. The objective is directed towards cash flows, exemplified by the formula “cash inflows minus cash outflows equals fund.” This concept is used in government accounting and fiduciary accounting, 18. Realization — the process of converting non-cash assets into cash or claims for cash. It is also the concept that deals with revenue recognition. For example, realization occurs when goods are sold for cash or in exchange for accounts receivable or notes receivable. The goods are non-cash assets and_ they of the receivables, claims for are ash or, in the c converted into cash. 19. Prudence (Conservatism) — is the use of caution when making aie under conditions of uncertainty, such that assets ot ete no ae and liabilities or expenses are not - In other words, when exercising prudence, the one which has the least effect on equity is cho 5 josen.ator Accounting 7 However, the exercise of prudence does not allow the deliberate understatement of assets or overstatement. of Jiabilities in order to create hidden reserves because the financial statements would not be faithfully represented, An example of a hidden reserve is the “cookie jar reserve.” It is a form of fraudulent reporting wherein during periods of high profits, liabilities are overstated through excessive provisions of expenses or non-recognition of income. In subsequent periods, when the entity's — financial performance is poor, the “cookie jar reserve” is reversed to income in order to report high profits. Management engages in such fraud because of various reasons, which may include smoothing earnings in order to secure bonuses over time, defer profits to the periods when they are evaluated for promotion or for election as members of the board of directors, or to show profits when other entities belonging to the same industry show declining financial performance Expense recognition principles 20. Matching concept (Direct asso ion of costs and revenues) — costs that are directly related to the earning of revenue are recognized as ex penses in the same period the related revenue is recognized For example, the cost of inventory is initially recognized as asset and recognized as expense (Le, cost of sales) when the inventory is sold. Other examples include fireight-out and sales commissions; these are expensed in the period the related sales are recognized Systematic and rational allocation — costs that are not directly related to the earning of revenue are initially recognized as assets and recognized as expenses over the periods their economic benefits are consumed, using some method of allocation. For example, the cost of equipment is initially Fecognized as asset and subsequently recognized as14 se over the periods the equipment j, : is clude amortization, expensing oF prep S Use f a vintterest metltad of allocation. Viney, aepreciation expen Other examples in and effectic 32. Immediate recognition ~ costs that do not meet the do, Pa fin ases to meet the definition of an ag, Mitigy Set a SES ang of an asset, or ce expensed immediately. Examples include casualty fos impairment losses. Common branches of accounting 1, Financial accounting ~ is the branch of accounting that fear on general purpose financial statements. = >» General purpose financial statements are those statements that cater to the common needs of external users, primarily the potential and existing investors, and lenders and other creditors. External users are those who are not involved in managing the entity. Financial accounting is governed by the Philippine Financial Reporting Standards (PFRSs). Financial accounting vs. Financial reporting The term “financial accounting” is often used interchangeably with the term “financial reporting.” Although, both financial accounting and financial reporting focus on general purpose {financial statements, the latter endeavors to promote principles that are also useful in “other financial reporting.” “Other financial reporting” comp provided outside the financial statements that interpretation of a complete set of financial statements oT improves users’ ability to make efficient economic decisions. ‘5 information ists in the Financial statements vs. Financial report > Financial siatements are the structured representati entity’s financial position and results of its operations They are the end product of the accounting process a" the means by which information gathered and processe? are periodically communicated to users jon of ancounting ew of f 15 » A financial report includes the financial statements plus other information provided outside the fin, plus y v ‘ancial statement that assists in the interpretation of a : a complete set of financial statements or improves users’ ability to make efficient economic decisions. ji Financial statements 7, Statement of financial 1. Statement of financial position position 2. Statement of profit or loss 2. Statement of profit or loss and other comprehensive and other comprehensive income income 3. Statement of changes in 3. Statement of changes in equity equity 4, Statement of cash flows 4, Statement of cash flows 5. Notes 5. Notes 6. Additional statement of 6. Additional statement of financial position financial position 7. Other information Financial reporting is the provision of financial information about an entity that is useful to external users, primarily the investors, lenders, and other creditors, in making investment and credit decisions. Primary objective of financial reporting To provide information about an entity's economic resources, claims to those resources, and changes in those resources. Secondary objective of financial reporting : To provide information useful in assessing the entity’s management stewardship (i.e., how efficiently and effectively we entity's management has discharged its responsibilities to use the entity’s economic resources).6. refers to the accumulation , : ang tion for use by internal Users i “ ment accountils Manage nication of informa An offshoot ces whic of management accounting : iy seintey #2 h includes services to chien of accounting, finance, business — policig, product costs, distribution, ang -onduct and operations comm management. management ae matters anization procedures, es of business ¢ on org many other phas the systematic recording and analysis «| and overhead incident t Cost accounting — the costs of materials, labor, production. Auditing ~ is the process of evaluating the correspondence of certain assertions with established criteria and expressing an opinion thereon. Tax accounting ~ the preparation of tax returns and rendering of tax advice, such as the determination of the tax consequences of certain proposed business endeavors. Government accounting - refers to the accounting for the government and its instrumentalities, placing emphasis on the custody of public funds, the purposes for which those funds are committed, and the responsibility and accountability of the individuals entrusted with those funds. Fiduciary accounting ~ refers to the handling of accounts managed by a person entrusted with the custody and management of property for the benefit of another. Estate accounting ~ refers to the handling of accounts for fiduciaries who wind up the affairs of a deceased pers a erson. Social accounting (social and environment, al responsibility reportir m a sponsibility reporting) — the Process of communicating i: 0 cating the social and envi @ ft > environmental effects of ity’ actions to the society. idl ‘al accounting or —— ———10. Institutional accounting ~ the accounting for non-profit entities other than the government, 11. Accounting systems ~ the install ation of accounting procedures for the accumul. lation of financial data and designing. of accounting forms to be used in data gathering. 12, Accounting research — pertains to the careful economic events and other y; impact on decisions. Accounting research includes a broad range of topics, which may be related to one or more of the other branches of accounting, the economy as a whole, or the market environment. analysis of ‘ariables to understand their Bookkeeping and Accounting Bookkeeping refers to the process of recording the accounts or transactions of an entity. Bookkeeping normally ends with the Preparation of the trial balance. Unlike accounting, bookkeeping does not require the interpretation of the significance of the processed information. Accountancy Accountancy refers to the Profession or practice of accounting. The practice of accounting can be broadly classified into two - (1) _ Public practice and (2) Private practice. Public practice does not involve an employer-employee relationship while private practice ves an. employer-employee - relationship, meaning the emp ianand Industry ~ refers to employment y in 2, Practice in Commerce ¢ position which involves decision the private sector in a making, requirit accounting and such posi certified public accountant yy professional knowledge in the science tion requires that the holder thereos 20) must be ac Academe - employment in an aching of accounting, in Education nstitution which involves te: services, finance, business d subjects. Practice educational i auditing, management advisory and other technically relate law, taxation, 4. Practice in the Government — employment or appointment to an accounting professional group in the a government-owned and/or controlled those performing proprietary making requires professional or where civil service a position in government or in corporation, including functions, where decision knowledge in the science of accounting, eligibility as a certified public accountant is a prerequisite. Accountants practicing under numbers 2 to 4 above are considered in private practice. Accounting standards The Philippine Financial Reporting accounting Standards (PFRSs) represent the generally accepted principles (GAAP) in the Philippines. ‘The PRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise: a, Philippine Financial Reporting Standards (PERSs); b. Philippine Accounting Standards (PASs); and c. Interpretations PFRSs are accompanied by guidance to assist entities 19) applying their requirements A guidance states w hether it is aM19 integral part of the PFRSs. A guidance that is an integral part of the PFRSs is mandatory. The need for reporting standards For financial statements to be useful, they should be prepared using reporting standards that are generally acceptable. Otherwise, each entity would have to develop its own standards, If that is the case, every entity may just present any asset or income it wants and omit any liability or expense it does not want. Financial statements would not be comparable, the risk of fraudulent reporting is heightened, and economic decisions based on these financial statements would be grossly incorrect. For this reason, entities should follow a uniform set of reporting standards when preparing and presenting financial statements. ‘The term “generally acceptable” means that either: 1, the standard has been established by an authoritative accounting rule-making body, e.g., the PFRSs adopted by the ERSC; or 2. the principle has gained general acceptance due to practice over time and has been proven to be most useful, e.g., double- entry recording and other implicit concepts. The process of establishing financial accounting standards is a democratic process in that a majority of practicing accountants must agree with a standard before it becomes implemented. Hierarchy of Reporting Standards When selecting its accounting policies, an entity considers the following in descending order: 1. Philippine Financial Reporting Standards (PFRSs) 2. In the absence of a PFRS that specifically applies. to a transaction or event, management shall use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable, In making the judgment,20 ——— shail refer to, and consider the applicability ng, sources int descending order: of, the followir ; i «The requirements in PERSs dealing with similar ang 1. management related issues; b. The Conceptual Framework. v management may also consider the following: a. Pronouncements of other standard-setting bodies b. Accounting literature and accepted industry practices (PAS 87-12) (2 The term “shall” as used in the PFRSs means ‘must’ or itis required, while the term y" means it is optional or ‘may or may not’ Although the selection of appropriate accounting policies is the responsibility of the entity's management, the proper application of accounting principles is most dependent upon the professional judgment of the accountant. Accounting standard setting bodies and other relevant organizations 1, Financial Reporting Standards Council (FRSC) - is the official accounting standard setting body in the Philippines created under the Philippine Accountancy Act of 2004 (R.A. No. 9298), The FRSC is composed of fifteen (15) individuals - a chairperson who had been or presently a senior accounting practitioner in any of the scope of accounting practice and fourteen (14) representative members: Chairperson [ Fourteen representative inembers front: Board of Accountancy (BIR) Commission on Audit (COA) Securities and Exchange Commission (SEC) Bangko Sentral ng Pilipinas (BSP) Bureau of Internal Revenue (BIR) A major organization composed of preparers and users of financial statements '21 Accredited National Professional Organization of CPAs (i.e., PICPA): Public Practice 4 Commerce and Industry 2 Academe/Education 2 Government A an Total Tannen 15 (Rules and Reg ations Implementing R.A. 9298, Sec. 9A) 2. Philippine Interpretations Committee (PIC) — is a committee formed by the Accounting Standards Council (ASC), the predecessor of FRSC, with the role of reviewing the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) for approval and adoption by the FRSC. 3. Board of Accountancy (BOA) — is the professional regulatory board created under R.A. No. 9298 to supervise the registration, licensure and practice of accountancy in the Philippines. The BOA consists of a chairperson and six (6) members appointed by the President of the Philippines. The Board shall elect a vice-chairperson from among its members for a term of one (1) year. 4. Securities and Exchange Commission (SEC) - is the government agency tasked in regulating. corporations and partnerships, capital and investment markets, and the investing public. Some SEC rulings affect the accounting requirements of entities and the adoption and application of accounting policies. 5. Bureau of Internal Revenue (BIR) ~ administers the provisions of the National Internal Revenue Code. These provisions do ancial reporting. However, not always reflect the goals of fin, a accounting methods they do at times influence the choice of and procedures.a. Bangko Seutral ng Pilipinas (BSP) ~ influences the sele ication of accounting, : tion and app policies by banks and oth entities performing banking, functions: = Cooperative Development Authority (CDA) ~ influences the selection and application of accounting — policies. by cooperatives: Accounting policies prescribed by a regulatory body (eg, BSP, CDA) are sometimes referred to as regulatory accounting principles. International Accounting Standards The International Accounting Standards Board (IASB) is the standard-setting body of the IFRS Foundation with the main objectives of developing and promoting global accounting standards. The IASB was established in April 1, 2001 as part of the International Accounting Standards. Committee (TASC) Foundation. The IASC Foundation is a non-profit organization based in Delaware, USA and is the parent of the IASB, which is based in London. On July 1, 2010, the [ASC Foundation was renamed to International Financial Reporting Standards Foundation or IFRS Foundation. The standards issued by the IASB are the International Financial Reporting Standards (FRSs), composed of the following: }. International Financial Reporting Standards (IFRSs) 2. International Accounting Standards ([ASs) 3. Interpretations The IFRSs are standards issued by the IASB after it replaced its predecessor, the International Accounting Standards Committee (IASC), in April 1, 2001. The IASs are standard aed are standards issued by the IASC which were adc © adopted by the PASs are based eh “th @ PERSs andCeersiew ot Aevorting . The TASC was founded in June 1973, IU was established as a resull of an agreement by Accountancy bodies in ten national jurisdictions which constituted the original board, namely, Australia, Canada, France, . Germany, Japan, Mexico, the Netherlands, the UK, Ireland and the US. Due process The IFRSs are developed through an international due process and other various interested individuals and organizations from around the involves the following steps: |. The staff identifies and re that involves accountants world. Due process normally Views issues associated with a topic and considers the application of the Conceptual Framework to the issues; 2, Study of national accounting requirements and practice, including consultation with national standard-setters; Consulting the Trustees and the Advisory Council about the advisability of adding the topic to the IASB’s agenda; 4. Formation of an advisory group to give advice to the [ASB on the project; 5. Publishing a discussion document for public comment; 6. Publishing an exposure draft for public comment; 7. Publishing with an exposure draft a basis for conclusions and the alternative views of any IASB member who opposes publication; 8. Consideration of all comments received; Holding a public hearing and conducting field tests, if necessary; and 10. Publishing a standard “ , including (i) a basis for conclusions, explaining, among, other things, the steps in the IASB’s due process and how the IASB dealt with public comments on the exposure draft, and (ii) the dissenting opinion of any [ASB member, (Preface to IFRS.17) er than 14 members, or by 8 ©! Approved by at least 8 votes of the [ASB if there are fewer than L4 member if there are 14 members.Other relevant international 1 N organizations International Financial Reporting Interpretations Committe, (IFRIC) ~ is a committee that prepares interpretations of ho, specific issues should be accounted for under the application of IFRS where: : a. The standards do not include specific authoritative guidance; and b. There is a risk of divergent and unacceptable accounting practices. The IFRIC is composed mostly of technical partners in audit firms but also includes preparers and users. In 2002, IFRIC replaced the former Standing Interpretations Committee (SIC) which had been created by the IASC. All of the SIC Interpretations have been adopted by the IASB. IFRS Advisory Council (previously known as the Standards Advisory Council ‘SAC’) - is a group of organizations and individuals with an interest in international financial reporting. The Advisory Council's role includes advising on priorities within the IASB’s work program. The IASB is required to consult with the Advisory Council in advance of any board decisions on major projects that it wishes to add to its agenda. Members of the Advisory Council are appointed by the IFRS Foundation which also appoints members to the IASB. These members are drawn from different geographic locations and have a wide variety of backgrounds, including users, preparers, academics, auditors, analysts, regulators and professional accounting bodies. International Federation of Accountants (IFAC) — is a nor profit, non-governmental, non-political accountancy bodies that organization of represents the — worldwide accountancy profess; ‘ountancy profession. Its mission is to develop and enhancethe profession to provide services of consistently high quality in the public interest. Membership to the IFAC is open to all accountancy bodies recognized by law or consensus within their countries. 4, International Organization of Securities Commissions (IOSCO) = is an international body of security commissions. The Philippine SEC is a member of IOSCO. Move to IFRSs Prior to the full adoption of the IFRSs in 2005, the accounting standards used in the Philippines were previously based on US GAAP, ie., the Statements of Financial Accounting Standards issued by the Federal Accounting Standards Board (FASB), the USS. national standard setting body. The move to IFRSs was primarily brought about by the increasing acceptance of IFRSs world-wide and_ increasing internationalization of businesses thereby increasing the need for a common financial reporting standards that minimize, if not eliminate, inconsistencies of financial reporting among nations. “A good example of inconsistent national financial reporting is that of German car manufacturer Daimler-Benz AG (prior to its merger with Chrysler). Daimler-Benz obtained a listing of its shares in the US in 1993, and in so doing needed to report under both U.S. GAAP and German GAAP. While one might expect that the profit reported would be similar (as it was exactly the same set of economic transactions being presented), this was not the case. The company reported a huge loss of $1 billion under US GAAP, while at the same time reporting a profit of $370 million under its own domestic German GAAP. This difference was simply the result of different a being used by different countries. Such significant differences undermine the usefulness of financial statements.” ower Tee hist ds ~ Cerificate counting practices Chartered Accountants in England and Wales, ‘ternational Finanetal Learning material.’)20 — The future of IFRSS : A significant milestone tow ards achieving the goal of having one set of global standards was reached in October 2002 when the FASB and the [ASB entered into a memorandum of understanding called the “Norwalk Agreement.” In this Agreement, the FASB and the IASB formalized their commitment to the convergence of U.S. GAAP and IFRSs by agreeing to use their best efforts to: a. make their existing financial reporting standards fully compatible as soon as practicable, i.c., minimize differences, and b. coordinate their future work programs to ensure that once achieved, compatibility is maintained. Since the publication of the Norwalk Agreement, the IASB and FASB have been working together with the common goal of producing a single set of global accounting standards, “In a public statement issued in January 2017, the outgoing (US) SEC Chair expressed support for the development of high-quality, globally accepted accounting standards, and suggested that the (US) SEC support further efforts by the FASB and IASB to converge their accounting standards to enhance the quality and comparability of financial reportin fsouree: httpsi//woew un /usfenfcfodireelfissueifrs-aduption-convergence.htmly Changes in reporting standards Once established, financial reporting standards are continually reviewed, revised or superseded. Changes to reporting standards are primarily made in response to users’ needs, Users’ needs for financial information change, and so must financial reporting standards in order to continually provide useful information. Legal, political, business and social environments also influence changes in reporting standards. Regulatory bodies, lobbyists, laws and regulations, and changes in economic environments affect the choice of accounting treatment provided under the reporting standards.ves the activities ¢ — activities of identi = : : entifying, om cating ying, meas x, and com municating information that is us fe ae economic decisions. seful in making nting invol Act Recognition refers to the proc ers TOCESS Stable Pp s of incorporating the effects of an accountable event in the financial stat ateme 2] journal entry. ee External events are events which involve an entity and external party. It include: aa y: judes (a) exchanges, (b) non-reciprocal transfers, and (c) external events other than transfers. Internal events are events which do not involve an external party. It includes (a) production and (b) casualties. Measuring is the accounting process of assigning numbers, : E commonly in monetary terms, to the economic transactions and events. Several measurement bases are used in preparing 8 financial statemen Financial accounting is the branch of accounting that focuses on the general purpose financial statements. General purpose financial statements are those that cater fo the common needs of a wide range of external users. External users are those who do not have the authority to demand financial reports tailored to their specific needs. ‘The four sectors in the practice of accountancy are: (a) public practice, (b) commerce and industry, (c) academe, and (4) government. The accounting standards used in the Philippines are the PFRSs, which are based on the IFRSs. The PFRSs comprise the | following: (1) PERSs, (2) PASS, and (3) Interpretations. The Financial Reporting Standards Council (FRSC) is the official | accounting standar d setting body in the Philippines. | Financial reporting, standards continuously change primarily sponse to users’