Professional Documents
Culture Documents
Cfas 1
Cfas 1
(ACCO 103)
Topic 1: Development of the Financial Reporting Framework and Standard-Setting Bodies
Learning Outcomes:
❖ describe the purpose of accounting and financial reporting;
❖ identify the need for information of the users of accounting information;
❖ describe the branches of accounting;
❖ discuss the development of accounting standards and financial reporting standards;
❖ identify the organizations involved in the promulgation of the accounting standards;
❖ describe the due process of developing the international financial reporting standards; and
❖ describe the due process of developing and promulgating Philippine Financial Reporting
Standards.
Purpose of Accounting
■ To generate general purpose financial statements that provide information about economic
entities that is to be used as basis for the formulation of economic decisions.
■ Accounting is important for markets, free enterprise, and competition because it assists in
providing information that leads to capital allocation. Reliable information leads to a better, more
effective process of capital allocation, which in turn is critical to a healthier economy.
Financial Reporting
Financial reporting – the communication of the set of financial statements and other financial
information.
Purpose of financial reporting
■ To provide financial information about the reporting entity that is useful to present and
potential equity investors, lenders, and other creditors in making decisions about providing
resources to the entity, and for other stakeholders to make decisions for the entity. Since financial
reports are used for decision making then there should be a standard way of reporting.
OBJECTIVE OF FINANCIAL REPORTING
a. General-purpose financial statements provide at the least cost the most useful information
possible to a wide variety of users.
b. Equity investors and creditors are the primary user groups and have the most critical and
immediate needs for information in financial statements. Investors and creditors need this
information to assess a company’s ability to generate net cash inflows and to understand
management’s ability to protect and enhance the assets of a company.
c. The entity perspective means that the company is viewed as being separate and distinct from
its investors (both shareholders and creditors). Therefore, the assets of the company belong to the
company, not a specific creditor or shareholder. Financial reporting focused only on the needs of
the shareholder—the proprietary perspective—is not considered appropriate.
d. Decision-usefulness means that information contained in the financial statements should help
investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends
or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. For
investors to make these assessments, the financial statements and related explanations must
provide information about the company’s economic resources, the claims to those resources, and
the changes in them.
Elements to facilitate efficient capital allocation, ensure relevant information and faithful
representation comparable across borders:
a. A single set of high-quality accounting standards established by a single standard-setting
body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and practices.
e. A common approach to regulatory review and enforcement.
f. Education and training of market participants.
g. Common delivery systems (e.g., extensible Business Reporting
Language—XBRL).
h. A common approach to corporate governance and legal frameworks around the world.
Accounting Entity
■ A reporting entity is oftentimes called the accounting entity.
■ Accounting entity concept – separates the personality of the enterprise from its owners and
other stakeholders.
■ An accounting entity is capable of controlling its own economic resources and incurring
economic obligations
BRANCHES OF ACCOUNTING
■ Financial Accounting is the broadest branch of accounting focusing on the needs of external
users. Financial accountants accord importance to existing accounting standards.
■ Management Accounting, as defined by Institute of Management Accountants (IMA) is a
profession that involves partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial reporting and control to
assist management in the formulation and implementation of organization’s strategy. It serves the
information needs of the internal users.
■ Cost Accounting deals with the collection, allocation and control of the cost of producing
specific goods and services.
■ Auditing is an independent examination that ensures the fairness and reliability of the reports
that management submits to users outside the business entity.
■ Government Accounting is concerned with the identification of the sources and uses of
government funds.
■ Tax Accounting includes preparation of tax returns and the consideration of tax consequences
of proposed business transactions.
■ Accounting Education employs accountants either as researchers, professors or reviewers.
They guarantee the continued development of the profession.
What is the branch of accounting that makes financial information about an entity accessible to
external users? Financial Accounting
IFRS Foundation
■ A not-for-profit international organization responsible for developing a single set of high-
quality global accounting standards, known as IFRS Standards.
■ IFRS Foundation Mission: “Our mission is to standards that bring transparency, accountability,
and efficiency to financial markets around the world. Our work serves the public interest by
fostering trust, growth, and long-term financial stability in the global economy.”
■ IFRS Standards are now required in more than 140 jurisdictions, with many others permitting
their use
The body that authors the International Financial Reporting Standards (IFRS) is the
International Accounting Standards Board
An independent, not-for-profit private sector organization that governs the activities of
the International Accounting Standards Board is the IFRS Foundation
The Standard Setting Bodies in the Philippines Accounting Standards Council (ASC)
■ On November 18, 1981, the PICPA created the Accounting Standards Council (ASC) to
establish and improve accounting standards that will be generally accepted in the Philippines.
■ The ASC was composed of eight (8) members:
4 PICPA including the designated Chairman
1 SEC
1 CB
1 PRC
1 FINEX.
4 representatives of PICPA: Education, Public Practice, Commerce & Industry, Government
■ The accounting standards developed by the ASC were known as the Statement of Financial
Accounting Standards (SFAS).
■ The accounting standards would generally be based on the following:
– existing practices in the Philippines,
– research or studies by the Council;
– locally or internationally available literature on the topic or subject; and
– statements, recommendations, studies or standards issued by other standard-setting bodies such
as the International Accounting Standards Board (LASB) and the Financial Accounting
Standards Board (FASB).
■ In 1997 ASC decided to move fully to the International Accounting Standards (IAS)
■ 1997 to 2000 ASC developed accounting standards based on IAS (gradual transition from
SFAS to IAS and IFRS)
■ 2001 ASC adopted most of the standards developed by IASC
■ 2005 the year of full adoption of the IAS in the Philippines
The SEC in Memorandum Circular #19 Series of 2004 dated Dec 22, 2004 required the
adoption of the IAS, PAS and IFRS in the audited Financial Statements
The Standard Setting Bodies in the Philippines Financial Reporting Standards Council
(FRSC)
■ In 2006 the Financial Reporting Standards Council (FRSC) was established to replace and
takeover the functions of the ASC. (section 9(a) of the Rules and Regulations Implementing
RA9298 Philippine Accountancy Act of 2004)
■ FRSC was created by the Board of Accountancy in 2006
■ FRSC is composed of a chairman and 14 members representing BOA, SEC, BSP, BIR, COA
and a major organization composed of preparers and users of financial statements, and the
accredited national professional organization of CPAs in the Philippines (which is presently
PICPA)