THE ENVIRONMENT OF FINANCIAL ACCOUNTING AND REPORTING IASB

International Accounting Standard Board

The International Standard-Setting body is committed to narrowing these difference by seeking
to harmonize regulations, accounting standards and relating to the preparation and presentation
of financial statements.

FINANCIAL REPORTING
The objective of general purpose financial reporting is to provide financial information that is
useful to users in making decisions relating to providing resources to the entity.

1. Users decision involve decisions about

• Buying, selling or holding equity or debt instruments.
• Providing or settling loans and other forms of credit
• Voting, or otherwise influencing management’s actions

2. To make these decisions, users assess

• Prospects for future net cash to the entity
• Management’s stewardship of the entity’s economic resources.

3. To make both these assessments, users need information about both

• The entity’s economic resources, claims against the entity and changes in those resources and
claims.
• How efficiently and effectively management has discharged its responsibilities to use the
entity’s economic resources.

ACCOUNTING INFORMATION USERS AND THEIR NEEDS

A. EXTERNAL DECISION MAKERS
1. Investors
2. Employees
3. Lenders
4. Suppliers and other trade creditors
5. Customers
6. Governments and their agencies
7. Public
B. INTERNAL DECISION MAKERS

DEVELOPMENT AND SOURCES OF FINANCIAL REPORTING STANDARDS

● Accounting is a product of its environment; that is, it is shaped by, reflects, and reinforces
particular characteristics unique to its national environment.
● Corporate accounting and information disclosure practices are influenced by a variety of
economic, social and even political factors.
● Because business is increasingly conducted across national borders, companies must be able
to use their financial statements to communicate with external users all over the world.
● As a result, divergent national accounting practices are now converging to an overall global
standard.
● Because business is increasingly conducted across national borders, companies must be able
to use their financial statements to communicate with external users all over the world.
● As a result, divergent national accounting practices are now converging to an overall global
standard.
● To make the best investment decision, financial information must be comparable.
● Thus, investors and creditors are demanding that similar accounting methods be used around
the world so that investment options can be compared.
● IASB was formed in 1973 to develop worldwide accounting standards in attempt to harmonize
conflicting standards.
● For non-U.S companies that have listed their shares on U.S stock exchanges, the SEC accepts
financial statements prepared using IASB standards.

What would happen the first time the country experienced substantial and persistent
inflation?

IMPLICATION OFF DIFFERENCES IN ACCOUNTING AMONG NATIONS

The most important reason for understanding different national accounting systems lies in the
increasingly internationalized world of business in which people buy and sell, invest and disinvest,
from one country to another.

When the foreign country offers a balance sheet and income statement for analysis, several
things become immediately evident.

National accounting standards made sense when companies raised money, and investors and
lenders looked for investment opportunities, in their home country.

CALLS FOR GLOBAL HARMONIZATION OF ACCOUNTING STANDARDS

The IASB’s objective is to raise the quality and consistency of financial reporting and to have a
platform of high quality and improved standards.

ACCOUNTING STANDARDS SETTING IN THE PHILIPPINES

Prior to 1981, the Philippine Institute of Certified Public Accountants ( PICPA ) designated the
Committee of Accounting Principles, to provide guidelines in the adoption of generally accepted
accounting principles ( GAAP ) in the Philippines.

In 1981, the Philippine Institute of Certified Public Accountants ( PICPA ) created the Accounting
Standards Council ( ASC ) to formalize the accounting standard-setting function in the Philippines.

• Its main function was to establish and improve accounting standards that would be
generally accepted in the Philippines.
 • The approved statements of the ASC were called, ”Statement of Financial Accounting
Standards ( SFAS ) which were still principally based on accounting standards issued by
the US-based Financial Accounting Standards Board ( FASB ).
• Between 1997 and 2004, the Philippines started adopting the International Financial
Accounting Committee ( IASC ).
• The IASC was reorganized in 2001 and is now known as the International Accounting
Standards Board ( IASB ).
• The decision to move totally to International Accounting Standards was prompted by the
a. Support of the Philippine Regulatory Agencies such as the Board of Accountancy,
Securities and Exchange Commission, Bangko Sentral ng Pilipinas and the Philippine
Institute of CPAs ( PICPA ).
b. Increasing internationalization of business which heightened the interest in a common
language for financial reporting.
c. Increasing recognition of International Accounting Standards by the World Bank, Asian
Development Bank and World Trade Organization.

• In 2004, the Accounting Standard Council ( ASC ) was replaced by the Financial Reporting
Standards Council ( FRSC ).
• The FRSC is now the accounting standard setting body in the Philippines created by the
Professional Regulation Commission upon the recommendation of the Board of
Accountancy ( BOA ) to assist BOA in carrying out its powers and functions provided under
RA No. 9298, known as the Philippine Accountancy Act of 2004.

SOURCES OF ACCOUNTING STANDARDS

• IASB International Accounting Standards Board

The accounting standards produced by the IASB are referred to as International Financial
Reporting Standards (IFRS) and International Accounting Standards (IASs).
IFRIC- International Financial Reporting Interpretations Committee
- it provide technical assistance and support to the IASB in the implementation of the
standards.

● Financial Reporting Standards Council (FRSC) - It is composed of 15 members with a

Chairman, who had been or presently a senior accounting practitioner in any scope of
accounting practice and 14 representative from the ff:
a) BOA 1
b) SEC 1
c) BSP 1
d) BIR 1
e) A major organization composed of preparers and users of financial statements 1
f) COA 1
g) Accredited National Professional Organization of CPAs
 ○ Public Practice 2
○ Commerce and Industry 2
○ Academe/Education 2
○ Government 2

OTHER ORGANIZATION INFLUENCING FINANCIAL AND REPORTING ACCOUNTING STANDARDS

● SEC
● PICPA ( Philippine Institute of Certified Public Accountants )
● Other professional associations
● BIR

LIQUIDITY AND SOLVENCY

• Liquidity refers to the availability of cash in the “ near future after taking account of
financial commitments over this period.
• Solvency refers to the availability of cash over the longer term to meet financial
commitments as they fall due.

OPERATING CAPABILTY
Operating capability refers to the ability of a company to maintain a given physical level of
operations. This level of operations may be indicated by the quantity of goods or services
(e.g., inventory) of a specified quality produced in a given period or by the physical capacity
of the fixed assets (e.g., property, plant, and equipment)

FUNDAMENTAL QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

1. RELEVANCE
2. FAITHFUL REPRESENTATION

FUNDAMENTAL QUALITY: RELEVANCE

● Relevant financial information is capable of making a difference in the decisions made by
users.
● Financial information is capable of making a difference in decisions if it has
○ Predictive value
○ Confirmatory value
● Materiality: Its Relationship to Relevance
- a practical boundary or constraint to achieving desired qualitative characteristics of
relevance on the type of information provided is materiality.

FUNDAMENTAL QUALITY: FAITHFUL REPRESENTATION

● FAITHFUL REPRESENTATION “ – means that the numbers and descriptions match what
really existed or happened.

➢ completeness- all information necessary for a user to understand economic activity or a

phenomenon must be depicted, including all necessary descriptions and explanations.
 ➢ neutrality “- means that an enterprise cannot select information to favor one set of
interested parties over another.
➢ free from errors- when an information item is free from error, it will be a more accurate
(faithful) representation of a financial item.
➢ measurement uncertainty “ - does not prevent information from being useful.

APPLYING THE FUNDAMENTAL QUALITATIVE CHARACTERISTICS

The most effective and efficient process for applying the fundamental qualitative characteristics
the following steps would be followed (subject to the effects of enhancing characteristics and the
cost constraint):
1. Identify an economic phenomenon or activity that has the potential to be useful to users of
the reporting entity's financial information;
2. Identify the type of information about the phenomenon that would be most relevant if it is
available and can be faithfully represented; and
The most effective and efficient process for applying the fundamental qualitative characteristics
the following steps would be followed (subject to the effects of enhancing characteristics and the
cost constraint):
3. Determine whether that information is available and can be faithfully represented

ENHANCING QUALITATIVE CHARACTERISTICS

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

CONCEPTUAL FRAMEWORK AND THEORITICAL STRUCTURE OF FINANCIAL ACCOUNTING AND

REPORTING PART II

REPORTING ENTITY - an entity that chooses or is required to prepare financial statements and is
not necessarily a legal entity.
Financial statements may be presented in any of the following forms:
1. Consolidated financial statements
2. Unconsolidated financial statements
3. Combined financial statements
 ECONOMIC DEVELOPMENT

WHAT DO WE MEAN BY DEVELOPMENT?

DEVELOPMENT
- achieving sustained rates of growth of income per capita to enable a nation to expand its
output at a rate faster than the growth rate of its population.

Levels and rates of growth of “real” per capita gross national income (GNI) (monetary growth of
GNI per capita minus the rate of inflation) are then used to measure the overall economic well-
being of a population—how much of real goods and services is available to the average citizen
for consumption and investment.

Development must therefore be conceived of as a multidimensional process involving major

changes in social structures, popular attitudes, and national institutions, as well as the
acceleration of economic growth, the reduction of inequality, and the eradication of poverty.

AMARTYA SEN’S “CAPABILITY” APPROACH

• The view that income and wealth are not ends in themselves but instruments for other
purposes goes back at least as far as Aristotle.
• Amartya Sen, the 1998 Nobel laureate in economics, argues that the “capability to function”
is what really matters for status as a poor or non poor person. As Sen put it, “Economic growth
cannot be sensibly treated as an end in itself.
• Development has to be more concerned with enhancing the lives we lead and the freedoms
we enjoy.”
• Sen identifies five sources of disparity between (measured) real incomes and actual
advantages:
1. personal heterogeneities, such as those connected with disability, illness, age, or gender;
2. environmental diversities, such as heating and clothing requirements in the cold, infectious
diseases in the tropics, or the impact of pollution.
3. variations in social climate, such as the prevalence of crime and violence, and social capital
4. Distribution within the family
5.Differences in relational perspective

THREE CORE VALUES OF DEVELOPMENT

Sustenance
self-esteem
Freedom
• Sustenance - The basic goodss and services, such as food, clothing, and shelter, that are
necessary to sustain an average human being at the bare minimum level of living.
• Self-esteem - The feeling of worthiness that a society en- joys when its social, political,
and economic systems and institutions promote human values such as respect, dig- nity,
integrity, and self- determination.
 • Freedom - A situation in which a society has at its disposal a variety of alternatives from
which to satisfy its wants and individuals enjoy real choices according to their
preferences.

• Sustenance The Ability to Meet Basic Needs. All people have certain basic needs without
which life would be impossible. These life-sustaining basic human needs include food, shelter,
health, and protection.

COMPARATIVE ECONOMIC DEVELOPMENT

BASIC INDICATOR OF ECONOMIC DEVELOPMENT

1. Purchasing Power Parity (PPP)
- The theory aims to determine the adjustments needed to be made in the exchange rates of
two currencies to make them at par with the purchasing power of each other. In other words,
the expenditure on a similar commodity must be same in both currencies when accounted for
exchange rate. The purchasing power of each currency is determined in the process.

2. Indicators of Health and Education

-Health and education are core capabilities, which must be assessed in order to determine the
well-being of a country's population. Note that fertility is sometimes used as an indicator, and
that it can both be a cause and consequence of under-development, while literacy (=ability to
read and write) as reported and functional literacy are sometimes known to diverge
substantially.

Shared characteristics in the developing world

1. Lower levels of living and productivity
2. Lower levels of human capital
3. Higher levels of poverty and inequality
4. High population growth
5. Greater social fractionalization
6. Large rural population coupled with rural exodus
7. Low industrialization and low levels of manufactured exports
8. Adverse geography 9. Underdeveloped markets
10.Colonial legacy