Intermediate Accounting 1

Accounting is an information system designed to identify, collect, measure,

and communicate economic information about a business entity (firm) to those
having an interest in the financial affairs of the entity.

Users of financial information

Primary Users Other Users

 Existing investors  Employees
 Potential investors  Customers
 Lenders  Government and their
 Other creditors agencies
 Public

Financial Statements: An Overview

Financial Accounting
 is the information accumulation, processing and communication system
designed to satisfy the investment and credit decision-making information needs
of external users.

Financial Statements
 are the principal output of a financial accounting and the means by which a
company communicates its financial information to those outside the organization.

International Accounting Standards Board

 an independent group of experts with an appropriate mix of recent practical
experience in setting accounting standards, in preparing, auditing, or using
financial reports, and in accounting education.
 Was founded on April 1, 2001, as the successor to the International Accounting
Standards Committee (IASC).
 Responsible for developing International Financial Accounting Standards
(IFRSs) and promoting the use and application of these standards.
 Effective from December 1, 2016, IASB normally has 14 board members, of
whom one is appointed as Chair and one as a Vice-chair.
 Initial term of 5 years, renewable for 3-5 years, term may not exceed 10 years.
 To ensure broad international diversity, the constitution requires:
 4 members from the Asia /Oceania region
 4 from Europe
 4 from the Americas
 1 from Africa;
 1 from any area, subject to maintaining overall geographical balance.

International Financial Reporting Standard (IFRS) Foundation

 The IFRS Foundation’s predecessor was called the International Accounting
Standards Foundation (IASF) which was formed on February 6, 2001.
 The foundation changed its name to the IFRS Foundation on July 1, 2010.
 It is an independent not-for-profit organization and the primary objective is to
develop in the public interest, a single set of high quality, understandable,
enforceable and globally-accepted International Financial Reporting Standards
based on clearly articulated principles.
 IFRS Standards are set by the IFRS Foundation’s standard-setting body, the
International Accounting Standards Board (IASB).

The International Financial Reporting Interpretation Committee (IFRIC)

 Assists the IASB by providing guidance on the application and interpretation of
IFRS.
 Before December 2001, the Standing Interpretations Committee (SIC) was the
IASB’s interpretative body.
 Specified duties:
 To interpret the application of IASs and IFRSs, to provide timely guidance
on financial reporting issues not specifically addressed in IASs and IFRSs,
and to undertake other tasks at the request of the IASB;
 To carry out these duties with regard to the IASB;s objective of working
actively with national standard setters to bring about convergence of national
accounting standards;
 Publish, after clearance by the IASB, draft Interpretations for public
comment and consider comments made within a reasonable period before
finalizing an Interpretation;
 Report to the IASB and obtain its approval for final Interpretation.
 The Interpretation Committee comprise of 14 voting members, appointed by the
Trustees of the IFRS Foundation.
The Financial Reporting Standards Council (FRSC)
 The Professional Regulation Commission established the FRSC under the
Implementing Rules and Regulations of the Philippine Accountancy Act of 2004
to assist the Board of Accountancy in carrying out its power and function to
promulgate accounting standards in the Philippines.
 The FRSC is the successor of the Accounting Standards Council (ASC). It was
created in November 1981 by the PICPA to establish generally accepted
accounting principles in the Philippines.
 FRSC is composed of 15 members with a Chairman who had been or presently a
senior accounting practitioner in any of the scope of accounting practice and 14
representatives from the following
 BSP 1 ( Bangko Sentral ng Pilipinas )
 BOA 1 ( Board of Accountancy )
 BIR 1 ( Bureau of Internal Revenue )
 COA 1 ( Commission on Audit )
 FINEX 1 ( Financial Executives Institute of the Philippines )
 SEC 1 ( Securities and Exchange Commission )
 ACPAPP 2 ( Association of Certified Public Accountants in Public Practice )
 ACPACI 2 ( Association of Certified Public Accountants in Commerce and
Industry )
 GACPA 2 ( Government Association of Certified Public Accountants )
 NACPAE 2 ( National Association of CPA’s in Education )

The Financial Reporting Standards Council (FRSC)

 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 they are adopted as PFRSs.
 The FRSC similarly monitors issuance's of the IFRIC of the IASB, which it
adopts as Philippine Interpretations— IFRIC. PFRSs and Philippine
Interpretations—IFRIC approved for adoption are submitted to the BOA and
PRC for approval.

The Philippine Interpretation Committee (PIC)

 The FRSC formed the PIC I August 2006 to assist the FRSC in establishing and
improving financial reporting standards in the Philippines.
 The role of PIC is principally to issue implementation guidance on PFRSs.
 The PIC members are appointed by the FRSC and include accountants in public
practice, the academe and regulatory bodies and users of financial statements.
 The PIC replaced the Interpretation Committee by the ASC in 2000.
The Professional Regulatory Board of Accountancy (PRBOA)

 Composition:
 a Chairman and 6 members appointed by the President
 The Board shall elect a vice-chairman from among each member for a term
of one year

 Qualifications:
 Natural resident citizen
 CPA with at least 10 years relevant experience
 Good moral
 No pecuniary interest in any school

 Term of Office:
 Three years
 Any vacancy shall be filled up for the unexpired portion of the term only;
 No person who has served two (2) successive complete terms shall be
eligible for reappointment until the lapse of 1 year.
 Appointment to fill up an expired term is not t be considered as a complete
term.

 Powers and Functions of the Board:

 To prescribe and adopt the rules and regulations necessary for carrying the
provisions of Philippine Accountancy Act of 2004.
 To supervise the registration, licensure and practice of accountancy in the
Philippines;
 To issue, suspend, revoke, reinstate the Certificate of Registration for the
practice of the accountancy profession;
 To adopt an official seal;
 To prescribe and/or adopt a Code of Ethics for the practice of accountancy
 To conduct an oversight into the quality of audits of financial statements
through a review of the quality control measures instituted by the auditors;
 To prepare the syllabi for the licensure examination subjects, administer the
conduct of the Licensure Exam for CPAs (LECPA) and administer, correct
and release the result of the licensure examinations.
 To ensure the coordination with the Commission on Higher Education or
other authorized government offices;
 To exercise such other powers as may be provided by law.
The Philippine Institute of Certified Public Accountants (PICPA)
 Section30 of RA9298 states that all registered CPA’s shall be united and
integrated through their membership in a one only registered and accredited
national professional organization of registered and licensed CPAs.
 Founded in 1929, the PICPA is the accredited professional organization (APO)
of CPAs by the PRC.
 The group set forth the ff. objectives:
 To promote and maintain high professional and ethical standards among
accountants;
 To advance the science of accounting;
 To develop and improve accountancy education
 To encourage cordial relations among accountants
 To protect the Certificate of CPA granted by the Republic of the Philippines.
 The following are the four sectors of the accountancy profession:
 Commerce & industry
 Public Practice
 Government
 Education/Academe
 The following are the four geographical groupings:
 Luzon
 Visayas
 Mindanao
 National Capital Region

Accreditation to Practice Public Accountancy

 CPA’s, firms and partnerships of CPA’s engaged in the practice of public

accountancy shall register with the PRC and the Board such registration to be
renewed every three years.
 Single practitioners and partnerships for the practice of public accountancy shall
be registered certified public accountants in the Philippines.
 A certificate shall be issued to CPAS’s in public practice only upon showing,
that such registrant has acquired a minimum 3 years of meaningful experience in
any areas of public practice including taxation.
THE CONCEPTUAL FRAMEWORK
 Sets out the fundamental concepts for financial reporting that guide the IASB in
developing IFRS Standards;
 Helps to ensure that the Standards are conceptually consistent and that similar
transactions are treated the same way, so as to provide useful information;
 Assists companies in developing accounting policies when no IFRS Standard
applies to a particular transaction, and more broadly, helps stakeholders to
understand and interpret the Standards;
 Does not override any specific IFRS. Should the IASB decide to issue a new or
revised pronouncement that is in conflict with the framework, the IASB will
highlight the fact and explain the reasons for the departure in the basis for
conclusions.

SCOPE OF FRAMEWORK
1. Overall Objective of Financial Reporting
To provide financial information about the reporting entity that is useful to
target users in making decisions about providing resources to the entity.

Specific objectives of Financial reporting

a. To provide information useful in making decisions about providing resources to
the entity.
b. To provide information useful in assessing the prospects of future net cash flows
to the entity.
c. To provide information about entity resources, claims and changes in resources
and claims.

Financial Position
Information about the entity’s economic resources and the claims of a
reporting entity at a particular moment in time.

Financial Performance
The level of income earned by the entity through the efficient and effective
use of its resources.

Accrual Accounting
Accrual Accounting depicts the effects of transactions and other events and
circumstances on an entity’s economic resources and claims in the periods in which
those effects occur even if the resulting cash receipts and payments occur in a
different period.
2. Qualitative Characteristics
Fundamental QC Enhancing QC
 Relevance  Comparability
 Faithful Representation  Understandability
 Verifiable
 Timeliness

Relevance - capacity of the information to influence a decision.

Ingredients;
 Predictive value - can be used to predict future outcome.
 Feedback (Confirmatory) value - can be used to confirm or correct earlier
expectations.

Faithful Representation means that actual effect of transactions shall be properly

accounted for and reported in the FS.
Ingredients;
 Completeness – adequate or full disclosure of all necessary information.
 Neutrality – fairness and freedom from bias
 Free from Error – no inaccuracies and omissions

Qualitative Characteristics that Enhances Usefulness of Information

 Comparability – information can be compared with similar information about
other entities and with similar information about the same entity for another
period or date.
 Verifiability – It means that different knowledgeable and independent observers
could reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.
 Timeliness – means information is available to decision-makers in time to be
capable of influencing their decisions.
 Understandability – classifying, characterizing and presenting information
clearly and concisely makes it understandable.

Constraints
Affects all items in the FS

Materiality – an item is material if its omission or misstatement could influence

economic decisions
Cost-benefit – the cost of processing information should not exceed the benefits to
be derived from it

3. Financial Statements and the Reporting Entity

Financial statements
 A particular form of financial reports that provide information about the
reporting entity’s assets, liabilities, equity, income and expenses.
Types of FS
 Consolidated – parent and subsidiaries
 Unconsolidated – parent only
 Combined financial statements – two or more not all linked by a parent-
subsidiary relationship

Complete Set of Financial Statements

 Statement of Financial Position
 Statement of Profit or Loss and Other Comprehensive Income
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes to Financial Statements

Assets = Liabilities + Equity

Income - expenses = net profit / loss

4: Elements of Financial Statements

 Assets - Present economic resources controlled by an entity as a result of past
event
 Liabilities - Present obligations of an entity to transfer an economic resource
 Equity - Residual interest in the assets of an entity after deducting all its
liabilities
 Income - Increases in economic benefits during the accounting period other than
contribution from equity participants
 Expenses - Decreases in economic benefits during the accounting period other
than distribution to equity participants.
5. Recognition and Derecognition
Recognition
 The process of capturing for inclusion in the financial statement an item that
meets the definition of an asset, liability, equity, income or expense.

Derecognition
Derecognition normally occurs:
 For an asset when the entity losses control of all or part of the recognized asset.
 For a liability when an entity no longer has a present obligation for all or part of
the recognized liability.

6: Measurement of Elements
 Historical cost

 Current value

 Fair value

 Value in use

 Current cost

7: Presentation and Disclosure

 This chapter states that presentation and disclosure are communication tools. It
requires:
 Focusing on presentation and disclosure objectives and principles rather than
focusing on rules;
 Classifying information in a manner that grouped similar items and separates
dissimilar items; and
 Aggregating information in such a way that it is not obscured either by
unnecessary detail or excessive aggregation.

8. Concept of Capital & Capital Maintenance

Financial Concept of Capital
 Adopted by most entities
 Capital is synonymous with the net assets or equity of the entity.
 Adopted if the users of FS are primarily concerned with the maintenance of
nominal invested capital or the purchasing power of invested capital
Physical Concept of Capital
 Capital is regarded as the productive capacity of the entity based on, for
example, units of output per day.
 If the main concern of users is with the operating capability of the entity, a
physical capital should be used.

Financial capital maintenance concept

 A profit is earned only if the financial (or money) amount of the net assets at the
end of the period exceeds that at the beginning of the period, after excluding any
distributions to, and contributions from owners during the period.
 It can be measured in either nominal monetary units or units of constant
purchasing power.

Physical Capital Maintenance

 A profit is earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to achieve that
capacity) at the end of the period exceeds the capacity at the beginning of the
period, after excluding any distributions to, and contributions from owners
during the period.

The Accounting Cycle

Identification;
1. A summary of the terms and concepts that underlie the preparation and
presentation of financial statements for external users. Conceptual Framework
2. The process of determining the monetary amounts at which the elements of the
financial statements are to be recognized. Measurement
3. Under the new conceptual framework, the process of reporting an item in the
financial statements of an enterprise. Recognition
4. Information must reflect the transactions and events that purports to represent.
Faithful representation
5. This concept allows the entity’s life to be subdivided into equal time periods for
reporting purposes. Periodicity concept
6. Information about the entity’s economic resources and the claims against the
reporting entity at a particular moment in time. Financial position
7. No requirement to restate financial statements for effect of inflation. Stable
monetary unit
8. Financial information can help users in forecasting outcome of events.
Predictive value
9. It is assumed that the operations of the business enterprise will continue to exist
in the foreseeable future. Going concern
10.The effects of transactions are recognized when they occur and not as cash is
received or paid. Accrual basis
11.As a general rule, accounting measurement and recordings should exclude
personal transactions of the owners. Entity concept
12.Confirmatory roles of financial information. Feedback value
13.Information must be free from bias. Neutrality
14.All recorded business transactions must be supported by appropriate evidences.
Verifiability