Financial Reporting: Key Dates & Core Concepts

Key Dates

• Semester 2 of Academic Year 2024-2025 runs from February 17 to June 29, 2025
• Midterm Examination will be held on April 21-27, 2025
• Final Examination will be held on June 23-29, 2025

Core Topics

• Development of Financial Reporting Framework and Standard-Setting Bodies
• Conceptual Framework for Financial Reporting (2018)
• Presentation of Financial Statements based on IAS 1 and IAS 7
• Events After the End of the Reporting Period according to IAS 10
• Interim Reporting according to IAS 34
• Segment Reporting according to IFRS 8
• Related Party Disclosures according to IAS 24
• Cash to Accrual Basis and Single-Entry System

Accounting Definitions

• Accounting involves identifying, measuring, and communicating economic information
• This process enables informed judgments and decisions
• Definition provided by the American Accounting Association
• Accounting functions as a service to provide quantitative, financial information about economic entities
• This information assists in making economic decisions
• Definition provided by the Accounting Standards Council
• Accounting records, classifies, and summarizes transactions and events with financial character in terms of money
• It also interprets the results, as defined by The Committee on Accounting Technology of the American Institute of CPAs

Key Aspects of Accounting

• Quantitative information
• Financial in nature
• Useful for decision making

Three Components of Accounting

• Identifying: Analyzing events/transactions to determine recognition as accountable events
• Recognition: Including effects of accountable events in financial statements, done through journal entries
• Communicating: Transforming economic data into useful accounting information for dissemination to users

Accountable Events

• Events are quantifiable when they impact assets, liabilities, or capital
• The subject of accounting is economic activity, including the measurement of economic resources or obligations
• Accounting focuses on economic activities

Types of Economic Events

• External events involve the entity and another party
• Internal events do not involve an external party and only concern the entity

External Event Examples

• Exchange: sale, purchase, payment of liabilities, receipt of notes receivable
• Non-reciprocal: donations, gifts, taxes, theft, fines, distribution of ownership
• Other transfers: changes in fair value/price, obsolescence, technological changes

Internal Event Examples

• Production turns raw materials into finished goods
• Casualty is a sudden, unanticipated loss from events like fire, flood, or earthquake

Measuring

• Uses numbers, usually monetary values, for economic transactions/events
• The Philippine peso is the unit for measuring accountable economic transactions

Measurement Bases

• Historical cost is the most common.
• Fair value
• Present value
• Net realizable value
• Current cost
• Inflation-adjusted costs

Valuation

• Valuation by fact includes ordinary share capital at par value or land at acquisition cost
• Valuation by opinion uses estimates for depreciation, provisions, uncollectibles

Communication

• Transforms economic data into accounting information for financial statements and reports
• Involves interpreting the processed information's significance
• Involves systematically recording accountable events in the journal through journal entries
• Involves grouping similar items into classes through postings in the ledger
• Involves condensing recorded transactions and events, including preparing financial statements
• Interpreting involves computing financial statements ratios
• Regulatory bodies may request certain financial ratios in the notes

Purpose of Accounting

• Provides information useful for making economic decisions
• Generates general-purpose financial statements
• Provides information about economic entities used as a basis for decisions

Importance of Accounting

• Aids information flow to facilitate capital allocation
• Reliable data improves the capital allocation process and contributes to a healthier economy

Various Information Sources

• Financial Statements
• Current events
• Industry publications
• Internet resources
• Professional advice, expert systems

Branches of Accounting

• Financial Accounting focuses on recording transactions and preparing financial reports
• Management Accounting involves partnering in management decision making
• Cost Accounting deals with cost collection, allocation, and control for goods and services
• Auditing verifies reports for fairness and reliability
• Government Accounting identifies sources/uses of government funds
• Tax Accounting prepares tax returns and considers tax consequences
• Accounting Education guarantees the continuous development of the profession through educators and researchers

Financial Reporting

• Financial reporting is the communication of financial statements and other financial information

Purpose of Financial Reporting

• Provides information useful to investors, lenders, and creditors in making decisions about resource allocation

Objective of Financial Reporting

• General-purpose financial statements should provide the most useful information at the least cost
• Equity investors and creditors are primary users with critical and immediate needs for information
• Information helps assess a company's ability to generate cash and manage assets

Resources

• Resources = Accountability + Impartiality

Entity Perspective

• Company viewed separately from its investors
• Assets belong to the company, not specific creditors/shareholders
• Proprietary perspective focusing solely on shareholder needs is not appropriate

Decision Usefulness

• Financial statements should help assess cash flows, timing, and uncertainty
• Used to assess dividends, interest, and proceeds from sales
• Statements must provide information about economic resources, claims, and changes

Comparability

• Is enhanced when investors receive relevant financial information and a faithful representation of that information
• Achieved through a single set of high-quality accounting standards and other elements

Elements to Achieve Comparability

• High-quality accounting standards set by a single body
• Consistency in application and interpretation
• Common disclosures
• High-quality auditing standards and practices
• Regulatory review and enforcement
• Market participant education and training
• Common delivery systems (e.g., XBRL)
• Common frameworks for corporate governance and legal matters

Internal Users of Accounting Information

• Internal users include active owners and management with direct access
• They use information for internal decisions, performance evaluation, operational plans, and strategic decisions
• Managerial accounting meets the information needs of internal users

External Users of Accounting Information

• Include inactive owners, creditors, suppliers, investors, authorities, employees, unions, analysts, and the public
• Inactive users use information to track the enterprise's financial condition
• Creditors assess the ability to repay loans and related interest.
• Suppliers determine if they will receive payments
• Employees assess job security, remuneration, and benefits
• Government agencies determine compliance and taxes

Financial Accounting Focus

• Addresses information needs of external users

Direct vs Indirect Users

• Direct users include owners, managers, creditors, suppliers, customers, employees, and taxing authority
• Direct users use information to protect their own interests
• Indirect users include regulatory agencies, labor unions, and consultants
• Indirect users provide advice or protect the interest of a direct user

Group A: Information Needs Example

• Answer “do we lend?” = Potential creditors
• National Policies and Statistics = Government and its agencies
• Bargain for Wages = Employees
• Safety and Holdings profitability = Present shareholders
• Plan operations and control = Management
• Ability to deliver goods and services = Customers
• Tax Policies Implemented = Government and its agencies
• Hold, buy, sell decisions = Present/Potential Shareholders
• Enterprise pays for services = Suppliers/Present creditors

Accounting Entity Definition

• The terms reporting entity and accounting entity are often interchangable
• Accounting entity separates the business's identity from its owners and other stakeholders.
• An accounting entity can control its economic resources and incur its own obligations.

Accounting Standards

• Accounting Standards are guidelines representing generally accepted accounting principles

Need for International Accounting Standards

• Enhancing comparison across financial reports
• Applying consistent standards to profit reporting
• Establishing the baseline for economic activity measurements

International Standard-Setting Organizations

• Organizations urging a single set of global standards (1973-2000):
  • World Bank
  • International Monetary Fund
  • International Organization of Securities Commission
  • Organization for Economic Cooperation Development

International Accounting Standards Committee

• Formed to issue uniform global standards.
• Called International Accounting Standards (IAS).
• Issued 41 IASs.

International Accounting Standards Board (IASB)

• Replaced the IASC in 2001
• Located in London, UK
• Develops high-quality, understandable global standards
• Revises IASs and issues new standards called International Financial Reporting Standards (IFRSs)
• Lacks authority to enforce compliance
• Operates under the IFRS Foundation and is governed by trustees
• Has 14 members appointed by the Trustees for a 5-year renewable term
• Allows up to 3 part-time members

IASB Responsibilities

• Complete authority over technical matters, including IFRS standards and exposure drafts
• Publishes exposure drafts and discussion documents for public comment
• Can reduce (but not eliminate) the public comment period with 75% Trustee approval
• Full discretion in developing its technical agenda, consulting with Trustees and the Advisory Council
• Full discretion over project assignments, may outsource work
• Establishes procedures for reviewing comments on published documents
• Forms working groups for advice on major projects.

More IASB Procedures

• Consults the advisory council for major projects
• Publishes a Basis for Conclusion with a Standard or Exposure Draft
• Considers public hearings on standards
• Undertakes field tests in developed countries
• Gives respect to non-mandatory procedures

IFRS Foundation

• Oversees the IASB, IFRS Advisory Council, and IFRS Interpretations Committee
• Appoints members, reviews effectiveness, and fundraises for these organizations
• Consists of 22 trustees beginning July 1, 2005
• Formerly known as IASC Foundation and was renamed on July 1, 2010

IFRS Foundation Objectives

• Develop globally accepted and enforceable standards
• Promote the use and application of those standards
• Account for the needs of entities in diverse economic settings
• Facilitate adoption of IFRSs through convergence of national standards

IFRS Advisory Council

• Provides advice to the IASB on policies and technical issues
• Consists of 30 or more members
• Appointed by the Trustees for a renewable 3-year term
• Advisory Council advises Agenda decisions, provides views on major projects, gives advice to board and trustees

IFRS Interpretations Committee

• Assists the IASB in resolving financial reporting issues
• Consists of 14 voting members appointed by the Trustees
• Members’ terms can be renewed for 3 years
• Requires 10 voting members for a quorum
• Draft approval needs no more than 4 members against it for final interpretation

IFRS IC Functions

• Interprets IFRSs
• Provides timely guidance on financial reporting issues
• Undertakes tasks requested by IASB
• Aligns with the IASB's goal of converging national accounting standards and IFRSs
• Publishes draft interpretations for public comment
• Requires 8 member approvals for final interpretations among fewer than 14 members

Monitoring Board

• Establishes connection between accounting standard setters and those public authorities, promoting their legitimacy

IOSCO and the IASB

• The IASB is responsible for establishing accounting standards
• IOSCO ensures their implementation and consistency in different markets
• IOSCO does not create accounting standards
• Dedicated to global markets operating efficiently

Member Agencies Agreements

• Cooperate to promote high standards of regulation
• Share insights to develop domestic markets
• Unite to establish standards and supervision of securities transactions
• Provide mutual assistance to enforce standards and address offenses

IOSCO Standards and Practices

• IOSCO lets multinational issuers use IFRS in cross-border offerings
• Supplemented by reconciliation, disclosure, and interpretation

IASB Due Process

• Thorough, open, transparent in setting financial accounting standards
• Independent standard- setting overseen by diverse body of trustees
• Includes investors, regulators, business leaders, and accountants
• Requires collaborative efforts with the global standard-setting community

Formal Due Process

• Involves minimum steps for thorough consultation (2020 Due Process Handbook)
• Identifies non-monetary steps with a "comply or explain" approach
• Identifies optional steps to improve IFRS Standards

IASB Implementation

• Follows six steps to develop an IFRS
• Identifies topics for the board's agenda
• Research and analysis, with views of pros and cons
• Public hearings on proposed standard (discussion paper)
• Board assesses research and issues exposure draft
• Evaluation of exposure draft responses
• Then the final standard is issued
• Conduct post-implementation review

IASB Characteristics

• There are 16 well-paid members, from different countries, serving a 5 year renewable term
• Independence: operates separately from professional organizations
• Full-time members selected based on standard-setting expertise
• Autonomy: appointed by and answerable only to the IFRS Foundation
• Supermajority voting: 9 of 14 votes needed for a new IFRS

IASB Pronouncements

• Issues International Financial Reporting Standards, the IASB has issued 13 standards, including IASC issued 41 IAS.
• Issues Conceptual Framework which serves as an aid for solving existing and emerging problems even though it's not an IFRS
• Issues International Financial Reporting Interpretations which are considered authoritative and must be followed

IOSCO Regulations and Authority

• The IASB has no regulatory mandate or enforcement mechanism
• Relies on regulators like the European Union, which requires listed companies to use IFRS

Authoritative Pronouncements Hierarchy

• The hierarchy from highest to lowest are:
  • IFRS
  • IAS
  • Interpretations
  • conceptual framework

Regulation

• Regulated by other standard-setting bodies, such as U.S. GAAP

Accounting profession regulation in the Philippines includes:

• Creating the Accounting Standards Council (ASC).

Regulation Support

• The creation of ASC was supported by the SEC and the CB.
• It was also supported by other local entities

ASC Membership

• The ASC was composed of eight members, including four from the PICPA

Accounting practice guiding principles

• Guiding principles are (1) existing local practices, (2) Council research, (3) existing literature and (4) other sources

Philippine statements and interpretations

• Represent generally accepted accounting principles

Philippine Transitions to IAS

• 1997 move to fully transition to International Accounting Standards (IAS)
• 2001 adopted a staggered basis
• Factors in deciding to move to IAS included supporting IAS by Philippine organizations

SEC Issuances

• SEC in December 22, 2004, issued MC 19 adoption for Audited Financial Statements (AFS).
• RA 9298 Philippine Accountancy Act of 2004 was enacted which created FRSC

FRSC

• In 2006, FRSC was established and replaced ASC.

Regulations for FRSC establishment include:

• FRSC is being the new accounting standard-setting body
• FRSC is composed of 15 members with 3 years of service

Rules and Responsibilities

• The FRSC members each represent different parts of finance
• These different parts of finance include BOA, SEC, BSP, BIR, CAO

FRSC monitoring standards include:

• The technical activities of the IASB
• Issuing Invitations to comment on exposure drafts of proposed IFRSs and the IASB

FRSC standards and interpretations for PFRSs include:

• Philippine Financial Reporting Standards
• The FRSC likewise monitors issuances of the IFRS Interpretations Committee of the IASB

The Philippine Interpretations Committee (PIC).

• The PIC was formed in August 2006
• Role of the PIC is to issue implementation guidance on PFRSs
• The PIC replaced the Interpretations Committee created by the ASC in 2000

Objectives with respect to the PIC

• the PIC issues implementation guidance on PASs, PFRSs, and related interpretations
• It also provides comments on exposure drafts
• The PIC provides comments on proposed accounting standards

Standards for PFRS consist of:

- Adopted IFRSs
- Adopted IASs
- Adopted Interpretations

• Interpretations of the Philippine Interpretations Committee (PIC).

Financial and Sustainability Reporting Standards Council (FSRSC)

• In September 2022, FRSC was renamed to the Financial and Sustainability Reporting Standards Council
• Was approved by BOA.
• The change is due to the increasing demand for high-quality reporting on climate and other matters
• The FSRSC receives financial support from the PICPA Foundation.

Steps for FSRSC Standards

• Consideration of pronouncement of IASB
• Formation of a task force
• Issuing an exposure draft
• Give at least 60 days for exposure draft period
• Consideration of comments of exposure draft
• Approving for standard interpretation

The Board of Accountancy

• Composed of a chairman and six other members
• The chairman is appointed by the Philippine President
• The Board is authorized to create rules and regulations in accordance with law

PICPA Objectives

• PICPA, the Philippine Institute of Certified Public Accountants, is the accredited professional organization of CPAs

ASPC Objectives

• Standards and procedures in auditing

RA 10912

• Continuing Professional Development (CPD)