FDR1 Notes PDF - Introduction to Financial Accounting

Introduction to Financial Accounting pg. 61, IIntermediate Accounting (IFRS 4th Edition)) Financial accounting is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties. Users of these financial reports include investors,...

Introduction to Financial Accounting pg. 61, IIntermediate Accounting (IFRS 4th Edition)) Financial accounting is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties. Users of these financial reports include investors, creditors, managers, unions, and government agencies. In contrast, managerial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluate a company’s operations. from discussion: When auditing, auditors provide an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with applicable standards (e.g., PFRS). pg. 64, Intermediate Accounting (IFRS 4th Edition) The objective of general-purpose financial reporting is 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. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. Major Policy-Setting Bodies and Their Role in the Standard-Setting Process pg. 68-73, Intermediate Accounting (IFRS 4th Edition) The main international standard-setting organization is based in London, England, and is called the International Accounting Standards Board (IASB). The IASB issues International Financial Reporting Standards (IFRS), which are used on most foreign exchanges. The two organizations that have a role in international standard-setting [IFRS] are the International Organization of Securities Commissions (IOSCO) and the IASB The International Organization of Securities Commissions (IOSCO) is an association of organizations that regulate the world’s securities and futures markets. IOSCO does not set accounting standards. Instead, this organization is dedicated to ensuring that the global markets can operate in an efficient and effective basis. IOSCO supports the development and use of IFRS as the single set of high-quality international standards in cross-border offerings and listings. The standard-setting structure internationally is composed of the following four organizations:  1. The IFRS Foundation provides oversight to the IASB, IFRS Advisory Council, and IFRS Interpretations Committee. In this role, it appoints members, reviews effectiveness, and helps in the fundraising efforts for these organizations. 2. The International Accounting Standards Board (IASB) develops, in the public interest, a single set of high-quality, enforceable, and global international financial reporting standards for general-purpose financial statements. 3. The IFRS Advisory Council provides advice and counsel to the IASB on major policies and technical issues. 4. The IFRS Interpretations Committee assists the IASB through the timely identification, discussion, and resolution of financial reporting issues within the framework of IFRS IASB Due Process (1) an independent standard-setting board overseen by a geographically and professionally diverse body of trustees (2) a thorough and systematic process for developing standards (3) engagement with investors, regulators, business leaders, and the global accountancy profession at every stage of the process (4) collaborative efforts with the worldwide standard-setting community Accountancy-Related Organizations and Frameworks Global Organizations and Frameworks 1. The International Financial Reporting Standards (IFRS) are a set of globally recognized accounting principles and standards that provide guidance for the preparation, presentation, and reporting of financial statements. These standards aim to make financial statements consistent, transparent, and comparable across different countries and industries. 2. IFRS Foundation The IFRS Foundation develops high-quality accounting standards like the IFRS, used  globally to promote consistency and transparency in financial reporting. It oversees the IASB and ISSB. Its work directly impacts global standards that regulators and businesses adopt. 3. International Accounting Standards (IAS) IAS were the precursors to IFRS, providing a foundation for global financial reporting. Although replaced by IFRS, they still influence modern accounting standards and are referenced in updates by the IASB. 4. International Accounting Standards Board (IASB) The IASB is responsible for developing IFRS standards. It collaborates with IOSCO to ensure these standards are globally accepted and with local regulators like the FSRC to align with regional needs. 5. IFRS Interpretation Committee (IFRIC) IFRIC clarifies and interprets IFRS to ensure consistent application worldwide. It works closely with the IASB and regional interpretation committees like the Philippine Interpretation Committee (PIC). 6. International Sustainability Standards Board (ISSB) The ISSB focuses on sustainability-related disclosures for global markets. It integrates inputs from frameworks like TCFD, GRI, and CDSB and collaborates with local councils like the FSRC to implement these standards. 7. UN Sustainable Development Goals (SDGs) The SDGs are global goals that provide a framework for addressing economic, social, and environmental challenges. They influence sustainability initiatives like ISSB standards and guide reporting practices such as GRI and VRF. 8. Global Reporting Initiative (GRI) GRI creates widely used standards for sustainability reporting, emphasizing corporate responsibility. It aligns with the ISSB and is used by businesses to fulfill reporting requirements. 9. Task Force on Climate-related Financial Disclosures (TCFD) The TCFD provides recommendations on climate-related financial disclosures to improve transparency for investors. It works alongside the CDSB and informs the ISSB’s sustainability reporting standards. 10. Climate Disclosure Standards Board (CDSB) The CDSB develops frameworks for environmental and climate reporting. It collaborates with the TCFD and ISSB, ensuring environmental disclosures align with global standards. 11. Sustainability Accounting Standards Board (SASB) SASB develops industry-specific sustainability disclosure standards. Its integration into the ISSB supports a unified framework for sustainability reporting globally.  12. Integrated Reporting Framework The Framework focuses on comprehensive reporting that combines financial and non-financial information. It aligns with ISSB and VRF to enhance corporate disclosures. 13. Value Reporting Framework (VRF) VRF, which includes and SASB, supports integrated thinking and sustainability disclosures. It contributes to the ISSB’s development of global standards. 14. International Organization of Securities Commissions (IOSCO) IOSCO regulates global securities markets, ensuring investor protection and market integrity. It endorses IFRS and ISSB standards, influencing their adoption by local regulators like the SEC. 15. International Federation of Accountants (IFAC) is the global organization for the accountancy profession, supporting high-quality international standards for accounting, auditing, ethics, and education. It promotes global consistency through member organizations like PICPA and collaborates with standard-setting bodies like IASB, ISSB, and IFAC’s independent boards to enhance financial reporting, sustainability, and ethical practices worldwide. Philippine Organizations 14. Philippine Financial and Sustainability Reporting Council (FSRC) The FSRC ensures the alignment of financial and sustainability reporting in the Philippines with global standards like IFRS and ISSB. It collaborates with PIC, PSRC, and regulators like the SEC. 15. Philippine Sustainability Reporting Committee (PSRC) The PSRC assists the FSRC in implementing sustainability reporting standards at the national level. It draws on ISSB frameworks and works with the PIC for clarity. 16. Philippine Interpretation Committee (PIC) PIC interprets IFRS and sustainability standards locally. It ensures consistent application of FSRC regulations and liaises with IFRIC for guidance. Philippine Regulatory Bodies 17. Professional Regulatory Commission (PRC) The PRC oversees licensed professionals in the Philippines, including CPAs. It collaborates with BOA to ensure accounting professionals comply with global standards. 18. Board of Accountancy (BOA) BOA regulates the accounting profession, aligning its policies with IFRS, FSRC, and SEC. It works with organizations like PICPA to promote professional development. 19. Securities and Exchange Commission (SEC) The SEC enforces corporate governance and financial reporting standards. It adopts  global standards like IFRS and sustainability disclosures guided by the FSRC and IOSCO. 20. Bureau of Internal Revenue (BIR) The BIR oversees taxation policies in the Philippines. It aligns financial reporting requirements with IFRS and FSRC standards to ensure tax compliance. 21. Bangko Sentral ng Pilipinas (BSP) BSP regulates the Philippine banking system and ensures compliance with IFRS and FSRC standards in financial reporting for banks and financial institutions. Philippine Professional Groups 22. Philippine Institute of CPAs (PICPA) PICPA supports CPA professionals through training and advocacy. It works with PRC, BOA, and FSRC to align with global standards. 23. National Association of CPAs in Education (nACPAE) nACPAE focuses on enhancing accounting education. It works with PICPA and BOA to incorporate global standards into curricula. 24. Government Association of CPAs (GACPA) GACPA supports government CPAs and ensures their compliance with FSRC and IFRS standards. 25. Association of CPAs in Commerce and Industry (ACPACI) ACPACI focuses on CPAs in the private sector, promoting alignment with global and national standards like IFRS and FSRC. 26. Association of CPAs in Public Practice (ACPAPP) ACPAPP represents CPAs in audit and public practice. It collaborates with PICPA and FSRC to maintain adherence to global standards. 01/10 zoom class 3 Waves of Corporate Reporting #1 (c. 1920): Focus: Mostly financial reporting, driven by accounting standards. Characteristics: ○ Country-specific standards, no global standards. ○ Financial statements not necessarily audited annually (jurisdiction-dependent). Transition from GAAP to IFRS #2 (c. 1970): Focus: Addressing the need for global harmonized reports, including financial and non-financial bottom lines. Characteristics: ○ Voluntary reporting for most entities. ○ Emergence of other bottom lines such as TBL: profit, people, and planet. ○ IFRS was introduced to create universal standards. #3 (c. 2010): Focus: Value creation, capital utilization, and sustainability. Characteristics: ○ Voluntary reporting. ○ Question shifts to: "How do we become sustainable?"-- (maybe we aren’t looking for the bottom line) ○ Introduction of the Integrated Reporting (IR) Framework. ○ Emergence of Global Reporting Initiative (GRI). #4 Tidal Wave (c. 2021): Focus: Mainstreaming environmental, social, and governance (ESG) reporting. Characteristics: ○ Challenges in mainstreaming requirements. ○ Key organizations: Value Reporting Foundation (VRF), ISSB. ○ Development of investor-centric standards ? Key Drivers of Corporate Reporting 1. Financial Markets: ○ Global flow of capital and trade. ○ Demand for more information to enable informed decision-making. 2. Society: ○ Greater transparency and accountability. ○ Climate change awareness: How do corporations contribute to or mitigate climate change? They demand for more disclosures to prevent corporate failures 3. Government/Regulations: ○ Addressing corporate failures.  ○ Need for harmonization and evolving reporting requirements. These drivers influence the creation and evolution of standards for both financial and non-financial reporting. Reporting Standards Aim to cope with both financial and non-financial reporting requirements. Focus on integrating standards to harmonize local, regional, and global reporting levels. Impact on Firms 1. Increased Costs: ○ Different reporting standards lead to higher compliance costs. 2. Increased Competencies: ○ Firms must develop skills and systems to meet reporting requirements. These factors contribute to firms becoming more competitive globally. Sustainability Reporting how do we assess/address the 1%, 10% increase of climate change? that is the analysis we need to disclose Synonymous with ESG reporting: ○ Environment: Climate-related disclosures. ○ Social: Diversity, equity, inclusion (DEI), including issues like slavery. ○ Governance: Corporate governance structures. Double Materiality: 1. Financial Materiality: Internal financial impact on performance. 2. Impact Materiality: External impact on society and the environment. ISSB focuses only on financial materiality. Accounting Organizations and Frameworks IFRS Foundation: Central organization overseeing: ○ IR Framework. ○ IASB: Develops IFRS accounting standards. ○ ISSB: Develops IFRS sustainability disclosure standards.  FSRSC (previously FSRC, renamed in 2022): ○ Adopts IFRS sustainability standards + continues to be the standard-setting body in the country ○ 2022: BOA approved to adopt the IFRS sustainability disclosure standards ○ Members: Representatives from BOA, FINEX, PICPA, COA, BSP, BIR, SEC. ○ Funded by PICPA Foundation. Boards Under FSRSC: 1. PIC: ○ Provides guidance on PFRS and local implementations. 2. PSRC: ○ Evaluates ISSB’s IFRS sustainability disclosures for local use. Philippine Reporting Framework RA 9298 Accountancy Act 2004– the accounting practice in the Philippines Philippine Financial Reporting Standards (PFRS): 1. Definition and Purpose: ○ PFRS are the highest hierarchy of generally accepted accounting principles (GAAP) in the Philippines, approved by the Financial Reporting Standards Council (FRSC). ○ These standards guide how businesses recognize, measure, present, and disclose financial transactions in their general-purpose financial statements. 2. Scope: ○ PFRS apply to all profit-oriented entities and address transactions and events commonly found across industries. ○ They also provide specific guidelines for industries with unique conditions or activities Example: Exporting in US Dollars: Recognition: ○ How should export revenues in US dollars be treated? Should they be classified as cash or non-cash assets? Measurement: ○ These transactions must account for currency exchange rates, which may fluctuate between the transaction date and the reporting date.  Presentation: ○ The standards specify how to present foreign currency transactions in financial statements, ensuring clarity for stakeholders. Key Philippine Standards: 19 PFRS corresponding to IFRS. 25 PAS corresponding to IAS. Philippine interpretations aligned with IFRIC, SIC, and PIC interpretations. not all businesses comply with all 19 PFRS and 25 PAS standards ○ Industry practice: PFRS and PAS may not cater to all the industries ○ Cost-benefit Analysis: small businesses may find it harder to comply with all the standards; costs should not overweight the benefits of complying Large Entities: Full PFRS. Medium Entities: PFRS for SMEs. Small Entities: PFRS for SEs. Micro Entities: Income tax basis or PFRS for SEs. Legal Framework: ○ Cooperatives, under the Cooperative Development Authority (CDA) have different reporting standards, given the nature of the entity. FRSC due process Consideration of pronouncement of IASB Formation of a task force to give advice to FSRSC Issue for comment an exposure draft approved by a majority of the FSRSC members (comment period: 30 - 60 days) Consideration of all comments received within the comment period and, when appropriate, preparing a comment letter to the IASB Approval of a standard or an interpretation by a majority of the FSRSC members Reporting Standard-Setting Process 1. IFRS Foundation: ○ Independent, not-for-profit organization. ○ Standards developed by IASB and ISSB. ○ Public accountability through a monitoring board.  ○ Monitoring Board: Ensures IFRS public accountability. i. pg. 71, Intermediate Accounting (IFRS 4th Edition) The purpose of this board is to establish a link between accounting standard-setters and those public authorities (e.g., IOSCO) that generally oversee them. The Monitoring Board also provides political legitimacy to the overall organization ○ Trustees: Responsible for governance, strategy, and oversight. ○ IASB: Prepares IFRS accounting standards. i. IFRS accounting standards -> IFRS interpretation committee ii. tasked to set standards in preparing audits or using financial reports and in accounting education ○ ISSB: Prepares IFRS sustainability standards. i. IFRS sustainability disclosure standards ii. in charge of the sustainability side– to creare balance, they added more members since there are regions that are more progressive ○ Advisory Council: Provides advice to trustees, IASB, and ISSB. 2. Standard-Setting (IASB) Steps in Developing IFRS: ○ Agenda-setting: Five-year work plan based on stakeholder input. ○ Research: Explore issues and potential solutions. ○ Standard-setting projects: Public exposure drafts, debate, and feedback. ○ Maintenance: Periodic review and updates. Business Landscape in Sustainability Reporting Reporting formats are evolving, majority still use STC17-A. Popular frameworks include: ○ GRI ○ IR Framework ○ SASB ○ TCFD Recent Developments: IFRS S1 and S2: Issued in June 2023. ○ Supported by a BOA resolution in the Philippines for mandatory reporting Consolidation of frameworks: ○ IR (integration framework) and SASB (industry specific) merged into VRF.  ○ CDSB integrated into IFRS. TCFD: Influenced ISSB S2 standards on climate change. GRI: Complements ISSB standards. SEC Draft Circular 2023: Sustainability reporting format includes: ○ SR Narrative. ○ Sustainability Report (SuRe) Form (Excel). ○ Sustainability and Climate-related Opportunities and Risk Exposures (SCORe). ○ Cross-Industry Standard Metrics (CISM). ○ Industry-Specific Metrics (ISM). Norwalk Agreement Agreement between IFRS, ISSB, and US GAAP to minimize differences and align global standards 01/14: QUIZ ONE – financial reporting standards; the process, people, concept + sustainability as it impacts reporting | multiple choice, theoretical, essay Accounting Standard-Setting Bodies and Process (supplementary material) Importance of IFRS (International Financial Reporting Standards) Guidance for Disclosure: IFRS provides companies with guidance on what information to disclose, ensuring comparability between companies. ○ Without IFRS, companies might disclose inconsistent information, making comparisons difficult. ○ Investors benefit by having reliable data to inform their decisions. Role of Standards: Standards are crucial to ensure uniformity and reliability in financial reporting. A single set of standards facilitates global consistency. Role of Accounting Purpose: Helps users make informed economic decisions by providing reliable financial information. Communication: Financial data is conveyed through financial statements. Standards ensure the data is comprehensive and comparable. Accounting Scandals and Globalization: ○ Highlighted the need for a single set of standards. ○ Globalization demands consistency in application and interpretation. Standard-Setting Bodies Primary Role: Promulgate guidance for financial reporting. Key Organizations: ○ IASB IFRS Foundation IFRS IC (Interpretation Committee) IFRS AC (Advisory Council) ○ FRSC (Financial Reporting Standards Council) ○ PIC (Philippine Interpretations Committee) Timeline of Standard-Setting 1973: IASC (International Accounting Standards Committee) created IAS (International Accounting Standards). SIC (Standing Interpretations Committee) interpreted IAS. 1981: ASC (Accounting Standards Council),established by PICPA, created SFAS (Statements of Financial Accounting Standards). Before this, accounting in the Philippines was freestyle, leaving disclosures to accountants. 2001: IASB replaced IASC and created IFRS. IFRIC (International Financial Reporting Interpretations Committee) interprets IFRS. 2002: Norwalk Agreement initiated convergence between IASB and FASB (Financial Accounting Standards Board).  2004: FRSC replaced ASC and approved PFRS (Philippine Financial Reporting Standards) and PAS (Philippine Accounting Standards) under RA 9298. 2006: FRSC formed PIC. As of 2020: 17 IFRS and 28 IAS exist. IASB (International Accounting Standards Board) Role: Main global standard-setting organization. IFRS Adoption: ○ Used in over 120 countries. ○ Plays a critical role in foreign exchanges. ○ IASB collaborates with IOSCO to ensure international standards are adopted and enforced. IOSCO (International Organization of Securities Commissions) Role: Comprises security regulators worldwide. Responsibilities: ○ Ensures global markets operate efficiently and effectively. ○ Supports IFRS use but does not set accounting standards. ○ Focuses on implementation and enforcement of standards. Characteristics of IASB and Due Process Independence: Free from influence of specific countries or sectors. Thoroughness: Standards developed systematically with public participation and revision. They are continually revised to reflect the current situation  Collaboration: Involves investors, regulators, and business leaders. Process of Revising/Issuing a Standard (in simple terms…) 1. Identify a topic and conduct research. 2. Publish discussion paper. 3. Release exposure draft for comments. 4. Finalize and issue standards. Types of Pronouncements Conceptual Framework: Lays out general principles and guiding characteristics of IFRS. IFRS: Specific recognition, measurement, and disclosure requirements. IFRS Interpretations: Explains and clarifies IFRS provisions. Hierarchy of IFRS IFRS – + if IAS is superseded, it means the IAS has already been replaced. The provisions of that particular IAS can no longer be used, meaning companies should use IFRS In absence of IFRS, refer to the Conceptual Framework (as guidance, not a standard). Consider pronouncements of other standard-setting bodies like US GAAP. Philippine Setting Financial Reporting Standards Council (FRSC) Creation: By PRC (Professional Regulation Commission) on BOA’s (Board of Accountancy) recommendation. Responsibilities: ○ Assist BOA in carrying out its powers: supervise, regulate, and control the accounting profession. ○ Promulgate accounting standards. Structure: ○ 15 members (Chairman + 14 representatives) with renewable 3-year terms. FRSC Due Process Consider IASB pronouncements. Option to form a task force for advice. Issue exposure draft (open for public comments for 60 days, but can be changed to 30 days). Consideration + letter to IASB Approval by majority of FRSC Submit finalized standards to PRC for approval. (to do this, it is submitted to the PRC by BOA) Philippine Standards PFRS and PAS: Patterned after IFRS and IAS. SEC requires publicly listed companies must adopt PAS and PFRS. First-Time Adoption of PFRS: ○ Select accounting policies. ○ Choose PFRS reporting period. ○ Reclassify previous Statement of Financial Position items into IFRS ○ Measure IFRS-recognized assets and liabilities. ○ Recognize adjustments in Retained Earnings at transition. Philippine Interpretations Committee (PIC) Formation: By FRSC in 2006. Role: ○ Interpret standards. ○ Inform FRSC of issues not addressed by current standards. ○ Counterpart of IFRS IC Other Relevant Organizations BIR (Bureau of Internal Revenue): Collects national taxes. SEC (Securities and Exchange Commission): Regulates listed securities. BSP (Bangko Sentral ng Pilipinas): Controls monetary policy (supply, demand, interest rates). PICPA (Philippine Institute of Certified Public Accountants): Governing body for CPAs in the Philippines.