MODULE 1 FINANCIAL REPORTING AND ACCOUNTING STANDARDS

OVERVIEW:
PAS 1 prescribes the basis for presentation of general purpose financial statements, to ensure
comparability both with the entity's financial statements of previous periods and with the
financial statements of other entities. PAS 1 sets out the overall framework and responsibilities
for the presentation of financial statements, guidelines for their structure and minimum
requirements for the content of the financial statements.

LEARNING OBJECTIVES:
1. Define accounting and state its basic objective.
2. Explain the basic concept applied in accounting
3. Explain the importance of a uniform set of financial reporting standards.

LEARNING ACTIVITIES:

Financial Statements and Financial Reporting

Characteristics of accounting are:

 the identification, measurement, and communication of financial
information about
 economic entities to
 interested parties.

Objective: Provide financial information about the reporting entity that is useful to
 present and potential equity investors,
 lenders, and
 other creditors
in making decisions in their capacity as capital providers.

General-Purpose Financial Statements

 Provide financial reporting information to a wide variety of users.
 Provide the most useful information possible at the least cost.

Capital Providers (Investors)

 Investors are the primary user group.

Entity Perspective
Companies viewed as separate and distinct from their owners.

Decision-Usefulness
Investors are interested in assessing the company’s
1. ability to generate net cash inflows and
2. management’s ability to protect and enhance the capital providers’ investments.

Standard setting bodies and other relevant organizations:

1. Financial Reporting Standard Council(FRSC) – is the official accounting standard
setting body in the Philippines created under the Philippine Accountancy Act of 2004
(R.A. 9298).
 2. Philippine Interpretation Committee (PIC) – a committee formed by the Accounting
Standard Council (ASC) with the role of reviewing the interpretations of the International
Financial Reporting Interpretation 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.

4. Securities and Exchange Commission (SEC) – is the government agency tasked in

regulating corporation and partnership, capital and investment markets, and the
investing public. Some SEC rulings affect the accounting requirements of entities and
the adoption and application of the accounting policies

5. Bureau of Internal Revenue (BIR) – administers the provisions of the National Internal
Revenue Code. These provisions influence the choice of accounting methods and
procedures.

6. Bangko Sentral ng Pilipinas (BSP) – influences the selection and application of

accounting policies by banks and other financial institutions.

7. Cooperative Development Authority (CDA) – influences the selection and application of

accounting policies by cooperatives.

The accounting policies prescribed by a regulatory body (e.g. BSP, CDA) are sometimes
referred to as regulatory accounting principles.

Two Major Organizations:

1. International Accounting Standards Board (IASB)
 Issues International Financial Reporting Standards (IFRS).
 Standards used on most foreign exchanges.
 IFRS used in over 115 countries.
2. Financial Accounting Standards Board (FASB)
 Issues Statements of Financial Accounting Standards (SFAS).
 Required for all U.S.-based companies.

DUE PROCESS IN SETTING STANDARDS

The IFRS are developed through an international due process that involves accountants and
other various interested individuals and organizations from around the world.

Due process has the following steps:

1. The staff identifies and reviews 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 the national standard setters;
3. Consulting the Trustees and Advisory Council about the advisability of adding the
topic to the ISB’s agenda;
4. Formation of an advisory group to give advice to the IASB on the project;
5. Publishing a discussion document for public comment;
6. Publishing an exposure draft for public comment;
 7. Publishing with an exposure drafta basis for conclusions and the alternative
views of any IASB member who opposes publication;
8. Consideration of all comments received;
9. Holding a public hearing and conducting field test, 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.

Once established, financial reporting standards are continually reviewed, revised or

superseded. Changes to reporting standards are primarily made in response to users’ needs,
in order to continually provide useful information.

Legal, political, business and social environments also influence changes in reporting
standards. Regulatory bodies, lobbyist, laws and regulations, and changes in economic
environments affect the choice of accounting treatment provided under the reporting
standards.

THE FUTURE OF IFRS

A significant milestone towards achieving the goal of having one set of global standards was
reached in October 2002 when the FASB and the IASB 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 IFRS by agreeing to used their best efforts to:
a. Make their existing financial reporting standards fully compatible as soon as practicable,
minimized differences, and
b. Coordinate their future work programs to ensure that once achieved, compatibility is
maintained.

Since the Norwalk Agreement, the IASB and FASB have been working together with the
common goal of producing a single set of global accounting standards.

MODULE # 1 Post-test
FINANCIAL REPORTING AND ACCOUNTING STANDARDS
Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Financial accounting is concerned with

a. General- purpose reports on financial position and financial performance.
b. Specialized reports for inventory management and control.
c. Specialized reports for income tax computation and recognition.
d. General- purpose reports on changes in stock prices and future estimates of market
position.
2. The primary focus of financial accounting has been on meeting the needs of which of the following
groups?
a. Managers of an entity
b. Present and potential creditors of an entity
c. National and local taxing authorities
d. Independent auditors
3. It is a “global phenomenon” intended to bring about transparency and a higher degree of comparability in
financial reporting, both of which will benefit the investors and are essential to achieve the goal of one
uniform and globally accepted financial reporting standards.
a. IFRS
b. Borderless accounting
c. World trade
d. Information technology
4. Accounting is a service activity and its function is to provide quantitative information, primarily financial
in nature, about economic entities, that is intended to be useful in making economic decision. This
accounting definition is given by

a. Financial Reporting Standards Council

b. AICPA Committee on Accounting Terminology
c. American Accounting Association
d. Board of Accountancy
5. Once an accounting standard has been established
a. The standard is continually reviewed to see if modification is necessary.
b. The standard is not reviewed unless the SEC makes a compliant.
c. The task of reviewing the standard to see if modification is necessary is given to the
PICPA.
d. The principle of consistency requires that no revisions ever be made to the standard.
6. The process of establishing financial accounting standards
a. Is a democratic process in that a majority of practicing accountants must agree with a
standard before it becomes implemented.
b. Is a legislative process based on rules promulgated by government agencies.
c. Is based solely on economic analysis of the effects each standard will have if it is
implemented.
d. Is a social process which incorporates political actions of various interested users groups
as well as professional research and logic.
7. Which accounting process is the recognition or non-recognition of business activities as accountable
events?

a. Identifying
b. Measuring
c. Recording
d. Communicating
8. It is the body authorized by law to promulgate rules and regulations affecting the practice of the
accountancy professions in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountant
c. Securities and Exchange Commission
d. Financial Reporting Standards Council
9. The basic purpose of accounting is
 a. To provide the information that the managers of an economic entity need to control its
operation.
b. To provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making
rational economic decision.
10. Financial accounting can be broadly defined as the area of accounting that prepares
a. General purpose financial statements to be used by parties internal to the entity only.
b. Financial statements to be used by investors only.
c. General purpose financial statements to be used by parties both internal and external to the
entity.
d. Financial statements to be used primarily by management.
11. The purpose of the International Financial Reporting Standards is to
a. Issue enforceable standards which regulate the financial accounting and reporting of
multinational entities.
b. Develop a uniform currency in which the financial transactions of entities throughout the
world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.
12. The International Accounting Standards Board was formed to
a. Enforce IFRS in foreign countries
b. Develop worldwide accounting standards
c. Establish accounting standards for multinational entities
d. Develop accounting standards for countries that do not have their own standard-setting
bodies
13. What is the law regulating the practice of accountancy in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
14. It is the accounting standard setting body created by PRC upon recommendations of the Board of
Accountancy to assist the Board of Accountancy in carrying out its powers and functions under R.A. No.
9298
a. Accounting Standards Council
b. Auditing and Assurance Standard Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standard Council
15. The “communicating” process of accounting includes all of the following, except
a. Recording
b. Classifying
c. Summarizing
d. Interpreting