Development of Financial Reporting Framework and Standard-Setting Bodies

Learning Objectives

• State the basic purpose, authoritative status, and scope of the Conceptual Framework.

• State the objective of financial reporting.

• Identify the primary users of financial statements.

• Explain briefly the qualitative characteristics of useful information and how they are applied in financial
reporting.

• Define the elements of financial statements and state their recognition

criteria.

Conceptual Framework for Financial Reporting

Definition

• The Conceptual Framework sets out the concepts that underlie the preparation and presentation of
financial statements for external users.

Authoritative Status and Applicability

• The Conceptual Framework is not a PFRS. When there is a conflict between the Conceptual Framework
and a PFRS, the PFRS will prevail.

• In the absence of a standard, management shall consider the Conceptual Framework in making its
judgment in developing and applying an accounting policy that results in information that is relevant and
reliable.

• The Conceptual Framework is concerned with general-purpose financial statements.

Accounting and Financial Reporting

Accounting

- The process of consolidating financial information to make it clear and understandable for all
stakeholders and shareholders.

Purpose

- The main goal is to record and report a company’s financial transactions, financial performance, and
cash flows.

Importance of Accounting

1. Keeps a record of business transactions

2. Facilitates decision-making for management

3. Communicate results

4. Meets legal requirements

Financial reporting

- Financial reporting is an accounting process that communicates financial data to external and
internal stakeholders, such as shareholders, lenders, and senior company management.

Importance of Financial Reporting

 - Financial reporting and its components tell a story about a company's financial health. The
information in the financial reporting packages must conform to the Generally Accepted
Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS);
- • this conformity provides reliability and consistency.

Financial Reporting is vital for the following four purposes

1. Raising capital.
- A company's financial story is especially important when the company is looking to raise capital,
whether through public markets, private investments, or loans. Outside parties use financial
reports to assess creditworthiness and the strength of the company's operations
2. Reassurance.
- While most financial reporting is retrospective, investors, partners, and even
customers/suppliers can also use it to form predictive opinions regarding future performance
and viability. For example, suppliers might use a company's financial reporting to determine
whether to start doing business together, based on the trajectory of the company's sales.
3. Financial analysis.
- Financial reporting is also indispensable to internal management, serving as a foundation for
analyzing operations, measuring KPIs or even calculating compensation for employees.
4. Compliance and law.
- Financial reporting is also important because it satisfies compliance requirements and laws.
Most companies have at least one stakeholder whose continuing involvement requires periodic
financial reporting. For public companies, that could be the SEC. Private companies might have a
loan that requires periodic reporting of certain debt covenants. Beyond that, financial reporting
is legally required by the Internal Revenue Service (IRS) ---- every US Business “Universal
Stakeholder”.

General Purpose Financial Reporting Objective

- The objective of general-purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders, and other creditors in
making decisions about providing resources to the entity. A secondary objective of financial
statements is to show the results of the stewardship of management.
- The objective of general-purpose financial reporting forms the foundation of the Conceptual
Framework. Other aspects of the Conceptual Framework flow logically from the objective

General Purpose Financial Reporting Users and Their Needs

• Primary users - those to whom general-purpose financial reports are directed:

a. Existing and potential investors

b. Lenders and other creditors.

 Only the common needs of primary users are met by the financial statements.

Accounting Branches

The main branches of accounting are:

1. Financial accounting: recording and clarifying business transactions and preparing financial
statements.

2. Cost accounting: tracking and analyzing the costs of production and operations.

3. Management accounting: providing information to a company's internal structure for decision-making

and planning.

4. Tax accounting: preparing and filing tax returns and complying with tax laws.

5. Auditing: examining and verifying the accuracy and reliability of financial records.
Need For International Accounting Standards

• To ensure uniformity in financial statements across firms so that investors can understand them
easily and clearly and can take appropriate decisions about the investment.
• Accounting reports will significantly lose credibility if a company reports different profit amount
in different counties for a given transactions.
• To enable anyone to explore career opportunities in accounting in any part of the world.
• To improve the transparency and comparability of financial reporting in all countries.
• To ensure that organizations report their assets and transactions in an understandable way.
• To provide a uniform method of reporting for all institutions.

International Accounting Standards Committee (IASC)

The following international bodies publicly urged accountants to adopt a single set of global accounting
standards.

• World Bank
• International Monetary Fund
• International Organization of Securities Commission
• Organization of Economic Cooperation Development

 Formed in 1973 to develop global accounting standards

 Issued 41 International Accounting Standards (IASS)

International Accounting Standards Board (IASB)

• Replaced the IASC in 2001

• The IASB's main objective is to develop a single set of high-quality, understandable, and
enforceable global accounting standards to and other users make economic decisions.

 It has revised many IASS and has issued new standards of its own, called International Financial
Reporting Standards (IFRS)
 IASB has no authority to require compliance with its accounting standards.

The IASB structure

- the IASC Foundation is an independent organization having two main bodies,

 the Trustees and the IASB,
 Standards Advisory Council and the International Financial Reporting Interpretations Committee

The IFRS Foundation

The International Financial Reporting Standards Foundation or the IFRS Foundation, is a not-for-profit
international organization responsible for developing a single set of high-quality global accounting
standards, known as the IFRS Standards.

Three-tier governance structure

IFRS Foundation Monitoring Board Public accountability 3

IFRS Foundation Trustees Governance 2

IASB

IFRIC Independent standard-setting 1

The IFRS Foundation Three-tier governance structure

IFRS Foundation Monitoring Board

  A group of capital market authorities responsible for setting the form and content of financial
reporting.
 World Bank
 International Monetary Fund
 International Organization of Securities Commission
 Organization of Economic Cooperation Development
 These capital market authorities are the regulators of the industries under their jurisdictions.
They come from different parts of the world to represent and carry out their own mandates
regarding investor protection, market integrity and capital formation.
 Their purpose is to provide a formal link between the Trustees and public authorities in order to
enhance the public accountability of the IFRS Foundation.

IFRS Foundation Trustees

 Responsible for the governance and oversight of the IASB, including the Constitution and due
process for the development of the accounting standards.
• Each Trustee is expected to have an understanding of and be sensitive to, international issues
relevant to the success of the IASB in its development of IFRS Standards.

International Accounting Standards Board (IASB)

• is an independent group of professionals with recent practical experience in setting accounting

standards, in financial reporting and in the accounting education.
• is a standard-setting body composed of its board members. The board members develop and
publish International Financial Reporting Standards (IFRS), a single set of high-quality,
understandable, enforceable and globally accepted accounting standards. The IFRS contains all
the accounting standards that a company must follow in preparing and presenting its financial
statements.

International Financial Reporting Interpretations Committee (IFRIC)

• is the interpretative body of the IASB, which works with the Board in supporting the application
of IFRS Standards.
• If somebody raises a question on the application of a Standard, the Committee responds to this
question with the help of the Board. The Committee also does other work at the request of the
Board.

The IFRS Foundation

The Interpretations Committee Process

Philippine Financial Reporting Standards Council.

• Established by the Professional Regulation Commission (PRC), through the IRR of RA 9298, or the
Philippine Accountancy Act of 2004. The function of the FRSC is to assist the Board of
Accountancy (BOA) in carrying out its power and function to issue accounting standards in the
Philippines.
• The FRSC carries on the decision made by the Accounting Standards Council (ASC), its
predecessor, to converge Philippine Financial Reporting Standards (PFRS) with the IFRS Standards
issued by the IASB.
• The Philippines comply with the IFRS Standards. However, adoption of these international
accounting standards in the Philippines still undergo a process.
• When the IASB releases exposure drafts of IFRS proposals, the FRSC invites local experts to
comment on these.
• When the IFRS Standard is finally published, the FRSC adopts it as a Philippine Financial
Reporting Standard (PFRS).

Philippine Interpretations Committee

• Philippines's version of the International Financial Reporting

Interpretations Committee (IFRIC)

• The IFRS Standards and issuances of the IFRIC, when finalized, are adopted by the FRSC and the PIC.

These are submitted to the BOA and PRC for approval.

• The FRSC has full discretion in developing and pursuing the technical agenda for setting accounting
standards in the Philippines. Financial support is received principally from the Philippine Institute of
Certified Public Accountants Foundation, Inc. (PICPA Foundation)

The Professional Regulatory Board of Accountancy

• is formed under the supervision and administrative control of the Professional Regulation
Commission (PRC).
• The Board is composed of a chairman and six members appointed by the President of the
Philippines. From the six members, one is elected as the Vice Chairman.
• The members of the Board were appointed from a list of recommendations by the PRC and from
a list of nominees submitted by the Philippine Institute of Certified Public Accountants (PICPA).
• The Board's overall function is to regulate the practice of accounting profession in the
Philippines.
• This mainly includes supervision of the licensure examination and the professional's registration,
review of the practices adopted by auditors, ensuring compliance of academic institutions to the
requirements prescribed by CHED in coordination with the Board, and punishment to violators of
the Accountancy Act and its rules and regulations.

The Philippine Institute of Certified Public Accountants

• the accredited national professional organization of CPAs by the PRC.

• PICPA is a registered non-stock corporation divided into geographical divisions which are
subdivided into regional divisions further subdivided into chapters which handle membership
within the chapter's area/location.

The objectives of PICPA are as follows:

o To promote and maintain high professional and ethical standards among accountants;
 o To advance the science of accounting;
o To develop and improve accountancy education;
o To encourage cordial relations among accountants, and
o To protect the Certificate of Certified Public Accountant granted by the Republic of the
Philippines

Sectors of the Accounting Profession

1. Public practice

a. Audit Service

b. Design, installation, and revision of accounting system; or

c. Preparation of income tax returns when related to accounting procedures;

d. represents clients before government agencies on tax and other matters related to accounting

2. Commerce and industry

3. Education/Academe

4. Government

Accredited by the PRC and the Board of Accountancy renewable every three years. The CPA-applicant
shall provide a proof that he/she had at least 3 years meaningful experience in any of the areas of the
accountancy profession before being issued with a Certificate of Accreditation