Overview of Accounting PDF

# Overview of Accounting ## Learning Objectives - Define accounting and state its basic purpose. - Explain the basic concepts applied in accounting - State the branches of accounting and sectors in the practice of accountancy - Explain the importance of a uniform set of financial reporting standar...

# Overview of Accounting ## Learning Objectives - Define accounting and state its basic purpose. - Explain the basic concepts applied in accounting - State the branches of accounting and sectors in the practice of accountancy - Explain the importance of a uniform set of financial reporting standards. ## Definition of Accounting Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information." (American Association of Accountants) ## Three Important Activities Included in the Definition of Accounting - Identifying - Measuring - Communicating ### Identifying Identifying is the process of analyzing events and transactions to determine whether or not they will be recognized. - Recognition refers to the process of including the effects of an accountable event in the statement of financial position or the statement of comprehensive income through a journal entry. - Only **accountable** events are recognized (i.e. journalized). An accountable event is one that affects the assets, liabilities, equity, income or expenses of an entity. - It is also known as **economic activity**, which is the subject matter of accounting. Only economic activities are emphasized and recognized in accounting. - Sociological and psychological matters are not recognized. - Non-accountable events are not recognized but disclosed only in the notes, if they have accounting relevance. - Disclosure in the notes is not an application of the recognition process. - A non-accountable event that has an accounting relevance may be recorded through a memorandum entry. ## Types of Events or Transactions 1. **External Events** - Are events that involve an entity and another external party. - **Types of External Events** - **Exchange (Reciprocal Transfer)** - An event wherein there is a reciprocal giving and receiving of economic resources or discharging of economic obligations between an entity and an external party. - Examples: Sale, purchase, payment of liabilities, receipt of notes receivable in exchange for accounts receivable, and the like. - **Non-reciprocal Transfer** - Is a "one way" transaction in that the party giving something does not receive anything in return while the party receiving does not give anything in exchange. - Examples: Donations, gifts or charitable contributions, payment of taxes, imposition of fines, theft, provision of capital by owners, distributions to owners, and the like. - **External event other than transfer** - An event that involves changes in the economic resources or obligations of an entity caused by an external party or external source but does not involve transfers of resources or obligations. - Examples: Changes in fair values and price levels, obsolescence, technological changes, vandalism, and the like. 2. **Internal Events** - Are events that do not involve an external party. - **Types of Internal Events** - **Production** - The process by which resources are transformed into finished goods. - Examples: Conversion of raw materials into finished products, production of farm products, and the like. - **Casualty** - An unanticipated loss from disasters or other similar events. - Examples: Loss from fire, flood, and other catastrophes. ## Measuring Measuring involves assigning numbers, normally in monetary terms, to the economic transactions and events. - Several **measurement bases** are used in accounting, which include, but not limited to, historical cost, fair value, present value, realizable value, current cost, and sometimes inflation-adjusted costs. - The most commonly used is **historical cost** and often combined with other measurement bases. - Accordingly, financial statements are said to be prepared using a mixture of costs and values. - **Costs** include historical cost and current cost while **values** include the other measurement bases. ## Valuation by Fact or Opinion - The use of estimates is essential in providing relevant information. - Thus, financial statements are said to be a mixture of **fact and opinion**. - When measurement is affected by estimates, the items measured are said to be valued by **opinion**. - Examples: - Estimates of uncollectible amounts of receivables - Depreciation and amortization expenses, which are affected by estimates of useful life and residual value - Estimated liabilities, such as provisions - Retained earnings, which is affected by various estimates of income and expenses - When measurement is unaffected by estimates, the items measured are said to be valued by **fact**. - Examples: - Ordinary share capital valued at par value - Land stated at acquisition cost - Cash measured at face amount ## Communicating - Communicating is the process of transforming economic data into useful accounting information, such as financial statements and other accounting reports, for dissemination to users. - It also involves interpreting the significance of the processed information. - The communicating process of accounting involves three aspects: - **Recording** - Refers to the process of systematically committing into writing the identified and measured accountable events in the journal through journal entries - **Classifying** - Involves the grouping of similar and interrelated items into their respective classes through postings in the ledger. - **Summarizing** - Putting together or expressing in condensed form the recorded and classified transactions and events. - This includes the preparation of financial statements and other accounting reports. - Interpreting the processed information involves the computation of financial statement ratios. - Some regulatory bodies, such as the Bangko Sentral ng Pilipinas (BSP), require certain financial ratios to be disclosed in the notes to financial statements. ## Basic Purpose of Accounting - The basic purpose of accounting is to provide information that is useful in making economic decisions. - Various sources of information are used when making economic decisions, and the financial statements are only one of those sources. - Other sources may include current events, industry publications, internet resources, professional advices, expert systems, etc. - Economic entities use accounting to record economic activities, process data, and disseminate information intended to be useful in making economic decisions. - An **economic entity** is a separately identifiable combination of persons and property that uses or controls economic resources to achieve certain goals or objectives. - An economic entity may either be a: - **Not-for-profit entity** - One that carries out some socially desirable needs of the community or its members and whose activities are not directed towards making profit; or - **Business entity** - One that operates primarily for profit. - **Economic activities** are activities that affect the economic resources (assets) and obligations (liabilities), and consequently, the equity of an economic entity. - Economic activities include: - **Production** - The process of converting economic resources into outputs of goods and services that are intended to have greater utility than the required inputs. - **Exchange** - The process of trading resources or obligations for other resources or obligations. - **Consumption** - The process of using the final output of the production process. - **Income Distribution** - The process of allocating rights to the use of output among individuals and groups in society. - **Savings** - The process of setting aside rights to present consumption in exchange for rights to future consumption. - **Investment** - The process of using current inputs to increase the stock of resources available for output as opposed to immediately consumable output. ## Types of Information Provided by Accounting - **Quantitative Information** - Information expressed in numbers, quantities, or units. - **Qualitative Information** - Information expressed in words or descriptive form. Qualitative information is found in the notes to financial statements as well as on the face of the other financial statements. - **Financial Information** - Information expressed in money. - Financial information is also quantitative information because monetary amounts are normally expressed in numbers. ## Types of Accounting Information Classified as to Users’ Needs. 1. **General Purpose Accounting Information** - Designed to meet the common needs of most statement users. - This information is provided under financial accounting. - General purpose information is governed by generally accepted accounting principles (GAAP) represented by the Philippine Financial Reporting Standards (PFRSs). 2. **Special Purpose Accounting Information** - Designed to meet the specific needs of particular statement users. - This information is provided by other types of accounting other than financial accounting, such as managerial accounting and tax basis accounting. ## Sources of Information in Financial Statements - Information in the financial statements is not obtained exclusively from the entity’s accounting records. - Some are obtained from **external sources**. - For example, fair value measurements, resolutions of uncertainties, future lease payments, and contractual commitments are only a few of the information presented in the financial statements that are derived from external sources. ## Accounting as Science and Art 1. **As a social science, accounting is a body of knowledge which has been systematically gathered, classified and organized.** 2. **As a practical art, accounting requires the use of creative skills and judgment.** ## Accounting As An Information System - Accounting identifies and measures economic activities, processes information into financial reports, and communicates these reports to decision makers. ## Accounting as a Language of Business - Accounting is often referred to as a “language of business” because it is fundamental to the communication of financial information. ## Creative and Critical thinking in Accounting - The practice of accountancy requires the exercise of creative and critical thinking. - **Creative thinking** involves the use of imagination and insight to solve problems by finding new relationships (ideas) among items of information. - It is most important in identifying alternative solutions. - **Critical thinking** involves the logical analysis of issues, using inductive or deductive reasoning to test new relationships to determine their effectiveness. - It is most important in evaluating alternative solutions. - Creative skills and judgment are exercised in problem solving. The following are the steps in problem solving. - Recognizing a problem - Identifying alternative solutions - Evaluating the alternatives - Selecting a solution from among the alternatives - Implementing the solution ## Accounting Concepts - Accounting concepts refer to the principles upon which the process of accounting is based. - The term “accounting concepts” is used interchangeably with the following terms. - **Accounting assumptions (Accounting postulates)** – Are the fundamental concepts or principles and basic notions that provide the foundation of the accounting process. - **Accounting theory** - Is logical reasoning in the form of a set of broad principles that (i) provide a general frame of reference by which accounting practice can be evaluated and (ii) guide the development of new practices and procedures. - It is the organized set of concepts and related principles that explain and guide the accountant’s action in identifying, measuring, communicating accounting information. - Accounting theory comprises the Conceptual Framework and the Philippine Financial Reporting Standards (PFRSs). - Most accounting concepts are derived from the Conceptual Framework and the Philippine Financial Reporting Standards (PFRSs). - However, some accounting concepts are implicit, meaning they are not expressly stated in the Framework or PFRSs but are generally accepted because of their long-time use in the profession. - **Examples of Accounting Concepts:** - **Double-entry system** - Each accountable event is recorded in two parts - debit and credit. - **Going concern assumption** - The entity is assumed to carry on its operations for an indefinite period of time. - Meaning, the entity does not expect to end its operations in the foreseeable future. - The measurement basis involving a mixture of costs and values is appropriate only when the entity is a going concern. - If the entity is a liquidating concern, the appropriate measurement basis is realizable value, i.e., estimated selling price less estimated costs to sell for assets and expected settlement amount for liabilities. - **Separate entity (Accounting entity / Business entity concept/ Entity concept)** - The entity is viewed separately from its owners. - Accordingly, the personal transactions of the owners among themselves or with other entities are not recorded in the entity’s accounting records. - This concept defines the area of interest of the accountant. - **Stable monetary unit (Monetary unit assumption)** - Assets, liabilities, equity, income and expenses are stated in terms of a common unit* of measure, which is the peso in the Philippines; and - The purchasing power of the peso is regarded as stable or constant and that its instability is insignificant and therefore ignored. *To be useful, accounting information should be stated in a common denominator. For example, amounts in foreign currencies should be translated into pesos. - **Time Period (Periodicity/ Accounting period)** - The life of the entity is divided into series of reporting periods. - An accounting period is usually 12 months and may either be a calendar year or a fiscal year period. - A calendar year period starts on January 1 and ends on December 31 of that same year. - A fiscal year period also covers 12 months but starts on a date other than January, 1 - **Materiality concept** - Information is material if its omission or misstatement could influence economic decisions. - Materiality is a matter of professional judgment and is based on the size and nature of the item being judged. - **Cost-benefit (Cost constraint/ Reasonable assurance)** - The cost of processing and communicating information should not exceed the benefits to be derived from it. - **Accrual Basis of accounting** - The effects of transactions and other events are recognized when they occur (and not as cash is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. - Under accrual basis, income is recognized when earned rather than when cash is collected and expenses are recognized when incurred rather than when cash is paid. - **Historical cost concept (Cost principle)** - The value of an asset is determined on the basis of acquisition cost. - This concept is not always maintained. - Some PFRSs require the departure from this concept, such as when inventories are measured at net realizable value (NRV) rather than at cost when applying the “lower of cost and NRV” measurement - **Concept of Articulation** - All of the components of a complete set of financial statements are interrelated. - The preparation of a worksheet (and the eventual completion of the financial statements) recognizes that the financial statements are fundamentally interrelated and interact with each other. - Accordingly, when users use the financial statements in making decisions, they need to use each financial statement in conjunction with the other financial statements. - For example, when evaluating an entity’s ability to generate future cash flows, all the financial statements should be used and not only the statement of cash flows. - Receivables and payables in the statement of financial position provide information on expected cash receipts and cash disbursements in future periods. - Income and expenses in the statement of profit or loss and other comprehensive income provide information on the entity’s ability to generate cash flows from its operations. - **Full disclosure principle** - This principle recognizes that the nature and amount of information included in the financial statements reflect a series of judgmental trade-offs. - The trade-offs strive for: - Sufficient detail to disclose matters that make a difference to users, yet - Sufficient condensation to make the information understandable, keeping in mind the costs of preparing and using it. - **Consistency concept** - The financial statements are prepared on the basis of accounting principles that are applied consistently from one period to the next. - Changes in accounting policies are made only when required or permitted by the PFRSs or when the change results to more relevant and reliable information. - Changes in accounting policies are disclosed in the notes. - **Matching (Association of cause and effect)** - Costs are recognized as expenses when the related revenue is recognized. - **Entity theory** - The accounting objective is geared towards proper income determination. - Proper matching of costs against revenues is the ultimate end. This theory emphasizes the income statement and is exemplified by the equation “Assets = Liabilities + Capital.” - **Proprietary theory** - The accounting objective is geared towards the proper valuation of assets. - This theory emphasizes the importance of the balance sheet and is exemplified by the equation “Assets - Liabilities = Capital.” - **Residual equity theory** - This theory is applicable when there are two classes of shares issued, i.e., ordinary and preferred. - The equation is “Assets - Liabilities - Preferred Shareholders’ Equity = Ordinary Shareholders’ Equity.” - This theory is applied in the computation of book value per share and return on equity. - **Fund theory** - The accounting objective is neither proper income determination nor proper valuation of assets but the custody and administration of funds. - The objective is directed towards cash flows, exemplified by the formula “cash inflows minus cash outflows equals fund.” - This concept is used in government accounting and fiduciary accounting - **Realization** - The process of converting non-cash assets into cash or claims for cash. - It is also the concept that deals with revenue recognition. - For example, realization occurs when goods are sold for cash or in exchange for accounts receivable or notes receivable. - The goods are non-cash assets and they are converted into cash or, in the case of the receivables, claims for cash. - **Prudence (Conservatism)** - Is the use of caution when making estimates under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. - In other words, when exercising prudence, the one which has the least effect on equity is chosen. - However, the exercise of prudence does not allow the deliberate understatement of assets or overstatement of liabilities in order to create hidden reserves because the financial statements would not be faithfully represented. - An example of a hidden reserve is the “cookie jar reserve.” - It is a form of fraudulent reporting wherein during periods of high profits, liabilities are overstated through excessive provisions of expenses or non-recognition of income. - In subsequent periods, when the entity’s financial performance is poor, the “cookie jar reserve” is reversed to income in order to report high profits. - Management engages in such fraud because of various reasons, which may include smoothing earnings in order to secure bonuses over time, defer profits to the periods when they are evaluated for promotion or for election as members of the board of directors, or to show profits when other entities belonging to the same industry show declining financial performance. - **Matching concept (Direct association of costs and revenues)** - Costs that are directly related to the earning of revenue are recognized as expenses in the same period the related revenue is recognized. - For example, the cost of inventory is initially recognized as asset and recognized as expense (i.e., cost of sales) when the inventory is sold. - Other examples include freight-out and sales commissions; these are expensed in the period the related sales are recognized. - **Systematic and rational allocation** - Costs that are not directly related to the earning of revenue are initially recognized as assets and recognized as expenses over the periods their economic benefits are consumed, using some method of allocation. - For example, the cost of equipment is initially recognized as asset and subsequently recognized as depreciation expense over the periods the equipment is used. - Other examples include amortization, expensing of prepayments, and effective interest method of allocation. - **Immediate recognition** - Costs that do not meet the definition of an asset, or ceases to meet the definition of an asset, are expensed immediately. - Examples include casualty losses and impairment losses. ## Common Branches of Accounting 1. **Financial accounting** - Is the branch of accounting that focuses on general purpose financial statements. - **General purpose financial statements** are those statements that cater to the common needs of external users, primarily the potential and existing investors, and lenders and other creditors. External users are those who are not involved in managing the entity. - Financial accounting is governed by the Philippine Financial Reporting Standards (PFRSs). ## Financial Accounting vs. Financial Reporting - The term “financial accounting” is often used interchangeably with the term “financial reporting.” - Although, both financial accounting and financial reporting focus on general purpose financial statements, the latter endeavors to promote principles that are also useful in “other financial reporting.” - **“Other financial reporting”** comprises information provided outside the financial statements that assists in the interpretation of a complete set of financial statements or improves users' ability to make efficient economic decisions. <start_of_image> - **Financial statements vs. Financial report** - **Financial statements** are the structured representation of an entity’s financial position and results of its operations. - They are the end product of the accounting process and the means by which information gathered and processed are periodically communicated to users. - **A financial report** includes the financial statements plus other information provided outside the financial statements that assists in the interpretation of a complete set of financial statements or improves users’ ability to make efficient economic decisions. - **Financial Statements** - Statement of financial position - Statement of profit or loss and other comprehensive income - Statement of changes in equity - Statement of cash flows - Notes - Additional statement of financial position - **Financial Report** - Statement of financial position - Statement of profit or loss and other comprehensive income - Statement of changes in equity - Statement of cash flows - Notes Additional statement of financial position - Other information - **Financial reporting** is the provision of financial information about an entity that is useful to external users, primarily the investors, lenders, and other creditors, in making investment and credit decisions. - **Primary objective of financial reporting** - To provide information about an entity’s economic resources, claims to those resources, and changes in those resources. - **Secondary objective of financial reporting** - To provide information useful in assessing the entity’s management stewardship (i.e., how efficiently and effectively the entity’s management has discharged its responsibilities to use the entity’s economic resources). ## Management Accounting - Refers to the accumulation and communication of information for use by internal users or management. - An offshoot of management accounting is **management advisory services** which includes services to clients on matters of accounting, finance, business policies, organization procedures, product costs, distribution, and many other phases of business conduct and operations. ## Cost Accounting - Is the systematic recording and analysis of the costs of materials, labor, and overhead incident to production. ## Auditing - Is the process of evaluating the correspondence of certain assertions with established criteria and expressing an opinion thereon. ## Tax Accounting - The preparation of tax returns and rendering of tax advice, such as the determination of the tax consequences of certain proposed business endeavors. ## Government Accounting - Refers to the accounting for the government and its instrumentalities, placing emphasis on the custody of public funds, the purposes for which those funds are committed, and the responsibility and accountability of the individuals entrusted with those funds. ## Fiduciary Accounting - Refers to the handling of accounts managed by a person entrusted with the custody and management of property for the benefit of another. ## Estate Accounting - Refers to the handling of accounts for fiduciaries who wind up the affairs of a deceased person. ## Social Accounting (Social and Environmental Accounting or Social Responsibility Reporting) - The process of communicating the social and environmental effects of an entity’s economic actions to the society. ## Institutional Accounting - The accounting for non-profit entities other than the government. ## Accounting Systems - The installation of accounting procedures for the accumulation of financial data and designing of accounting forms to be used in data gathering. ## Accounting Research - Pertains to the careful analysis of economic events and other variables to understand their impact on decisions. - Accounting research includes a broad range of topics, which may be related to one or more of the other branches of accounting, the economy as a whole, or the market environment. ## Bookkeeping and Accounting - Bookkeeping refers to the process of recording the accounts or transactions of an entity. Bookkeeping normally ends with the preparation of the trial balance. - Unlike accounting, bookkeeping does not require the interpretation of the significance of the processed information. ## Accountancy - Refers to the profession or practice of accounting. - The practice of accounting can be broadly classified into two — (1) Public practice and (2) Private practice. - Public practice does not involve an employer-employee relationship while private practice involves an employer-employee relationship, meaning the accountant is an employee. ## Four Sectors in the Practice of Accountancy - Under R.A. 9298 also known as the “Philippine Accountancy Act of 2004", the practice of accounting is sub-classified into the following: - **Practice of Public Accountancy** - Involves the rendering of audit or accounting related services to more than one client on a fee basis. - **Practice in Commerce and Industry** - Refers to employment in the private sector in a position which involves decision making requiring professional knowledge in the science of accounting and such position requires that the holder thereof must be a certified public accountant. - **Practice in Education/Academe** - Employment in an educational institution which involves teaching of accounting, auditing, management advisory services, finance, business law, taxation, and other technically related subjects. - **Practice in the Government** - Employment or appointment to a position in an accounting professional group in the government or in a government-owned and/or controlled corporation, including those performing proprietary functions, where decision making requires professional knowledge in the science of accounting, or where civil service eligibility as a certified public accountant is a prerequisite. Accountants practicing under numbers 2 to 4 above are considered in private practice. ## Accounting Standards - The Philippine Financial Reporting Standards (PFRSs) represent the generally accepted accounting principles (GAAP) in the Philippines. - The PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise: - Philippine Financial Reporting Standards (PFRSs) - Philippine Accounting Standards (PASs) - Interpretations - PFRSs are accompanied by guidance to assist entities in applying their requirements. A guidance states whether it is an integral part of the PFRSs. A guidance that is an integral part of the PFRSs is mandatory. ## The Need for Reporting Standards - For financial statements to be useful, they should be prepared using reporting standards that are generally acceptable. Otherwise, each entity would have to develop its own standards. - If that is the case, every entity may just present any asset or income it wants and omit any liability or expense it does not want. Financial statements would not be comparable, the risk of fraudulent reporting is heightened, and economic decisions based on these financial statements would be grossly incorrect. - For this reason, entities should follow a uniform set of reporting standards when preparing and presenting financial statements. - The term "generally acceptable" means that either: - The standard has been established by an authoritative accounting rule-making body, e.g., the PFRSs adopted by the FRSC; or - The principle has gained general acceptance due to practice over time and has been proven to be most useful, e.g., double-entry recording and other implicit concepts. - The process of establishing financial accounting standards is a democratic process in that a majority of practicing accountants must agree with a standard before it becomes implemented. ## Hierarchy of Reporting Standards - When selecting its accounting policies, an entity considers the following in descending order: - Philippine Financial Reporting Standards (PFRSs) - In the absence of a PFRS that specifically applies to a transaction or event, management shall use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. - In making the judgment, management shall refer to, and consider the applicability of, the following sources in descending order: - The requirements in PFRSs dealing with similar and related issues - The Conceptual Framework - Management may also consider the following: - Pronouncements of other standard-setting bodies - Accounting literature and accepted industry practices ## Accounting Standard Setting Bodies and Other Relevant Organizations - **Financial Reporting Standards Council (FRSC)** - Is the official accounting standard setting body in the Philippines created under the Philippine Accountancy Act of 2004 (R.A. No. 9298). - The FRSC is composed of fifteen (15) individuals - a chairperson who had been or presently a senior accounting practitioner in any of the scope of accounting practice and fourteen (14) representative members: - Chairperson - Fourteen representative members from: - Board of Accountancy (BOA) - Commission on Audit (COA) - Securities and Exchange Commission (SEC) - Bangko Sentral ng Pilipinas (BSP) - Bureau of Internal Revenue (BIR) - A major organization composed of preparers and users of financial statements - **Philippine Interpretations Committee (PIC)** - Is a committee formed by the Accounting Standards Council (ASC), the predecessor of FRSC, with the role of reviewing the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) for approval and adoption by the FRSC. - **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. - The BOA consists of a chairperson and six (6) members appointed by the President of the Philippines. - The Board shall elect a vice-chairperson from among its members for a term of one (1) year. - **Securities and Exchange Commission (SEC)** - Is the government agency tasked in regulating corporations and partnerships, capital and investment markets, and the investing public. - Some SEC rulings affect the accounting requirements of entities and the adoption and application of accounting policies. - **Bureau of Internal Revenue (BIR)** - Administers the provisions of the National Internal Revenue Code. - These provisions do not always reflect the goals of financial reporting. - However, they do at times influence the choice of accounting methods and procedures. - **Bangko Sentral ng Pilipinas (BSP)** - Influences the selection and application of accounting policies by banks and other entities performing banking functions. - **Cooperative Development Authority (CDA)** - Influences the selection and application of accounting policies by cooperatives. - Accounting policies prescribed by a regulatory body (e.g., BSP, CDA) are sometimes referred to as **regulatory accounting principles**. ## International Accounting Standards - The **International Accounting Standards Board (IASB)** is the standard-setting body of the IFRS Foundation with the main objectives of developing and promoting global accounting standards. - The IASB was established in April 1, 2001 as part of the International Accounting Standards Committee (IASC) Foundation. - The IASC Foundation is a non-profit organization based in Delaware, USA and is the parent of the IASB, which is based in London. - On July 1, 2010, the IASC Foundation was renamed to International Financial Reporting Standards Foundation or IFRS Foundation. - The **standards issued by the IASB** are the **International Financial Reporting Standards (IFRSs) **, composed of the following: - International Financial Reporting Standards (IFRSs) - International Accounting Standards (IASS) - Interpretations - The **IFRSs are standards issued by the IASB** after it replaced its predecessor, the International Accounting Standards Committee (IASC), in April 1, 2001. - The **IASs are standards issued by the IASC** which were adopted by the IASB. - The **PFRSs and PASs are based on these standards.** - The IASC was founded in June 1973. It was established as a result of an agreement by accountancy bodies in ten national jurisdictions which constituted the original board, namely, Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the UK, Ireland and the US. ## Due Process - The IFRSs are developed through an international due process that involves accountants and other various interested individuals and organizations from around the world. - Due process normally involves the following steps: - The staff identifies and reviews issues associated with a topic and considers the application of the Conceptual Framework to the issues. - Study of national accounting requirements and practice, including consultation with national standard-setters. - Consulting the Trustees and the Advisory Council about the advisability of adding the topic to the IASB’s agenda. - Formation of an advisory group to give advice to the IASB on the project. - Publishing a discussion document for public comment. - Publishing an exposure draft (a) for public comment. - Publishing with an exposure draft a basis for conclusions and the alternative views of any IASB member who opposes publication. - Consideration of all comments received. - Holding a public hearing and conducting field tests, if necessary; and - Publishing a standard (a), 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 IASB member. - (Preface to IFRS.17) - (a) Approved by at least 8 votes of the IASB if there are fewer than 14 members, or by 9 if there are 14 members. ## Other Relevant International Organizations - **International Financial Reporting Interpretations Committee (IFRIC)** - Is a committee that prepares interpretations of how specific issues should be accounted for under the application of IFRS where: - The standards do not include specific authoritative guidance; and - There is a risk of divergent and unacceptable accounting practices. - The IFRIC is composed mostly of technical partners in audit firms but also includes preparers and users. - In 2002, IFRIC replaced the former Standing Interpretations Committee (SIC) which had been created by the IASC. - All of the SIC Interpretations have been adopted by the IASB. - **IFRS Advisory Council (previously known as the Standards Advisory Council ‘SAC’)** - Is a group of organizations and individuals with an interest in international financial reporting. - The Advisory Council’s role includes advising on priorities within the IASB’s work program. - The IASB is required to consult with the Advisory Council in advance of any board decisions on major projects that it wishes to add to its agenda. - Members of the Advisory Council are appointed by the IFRS Foundation which also appoints members to the IASB. - These members are drawn from different geographic locations and have a wide variety of backgrounds, including users, preparers, academics, auditors, analysts, regulators and professional accounting bodies. - **International Federation of Accountants (IFAC)** - Is a non-profit, non-governmental, non-political organization of accountancy bodies that represents the worldwide accountancy profession. - Its mission is to develop and enhance the profession to provide services of consistently high quality in the public interest. Membership to the IFAC is open to all accountancy bodies recognized by law or consensus within their countries. - **International Organization of Securities Commissions (IOSCO)** - Is an international body of security commissions. - The Philippine SEC is a member of IOSCO. ## Move to IFRSS - Prior to the full adoption of the IFRSs in 2005, the accounting standards used in the Philippines were previously based on US GAAP, i.e., the Statements of Financial Accounting Standards issued by the Federal Accounting Standards Board (FASB), the US national standard setting body. - The move to IFRSs was primarily brought about by the increasing acceptance of IFRSs world-wide and increasing internationalization of businesses thereby increasing the need for a common financial reporting standards that minimize, if not eliminate, inconsistencies of financial reporting among nations. - “A good example of inconsistent national financial reporting is that of German car manufacturer Daimler-Benz AG (prior to its merger with Chrysler). Daimler-Benz obtained a listing of its shares in the US in 1993, and in so doing needed to report under both U.S. GAAP and German GAAP. While one might expect that the profit reported would be similar (as it was exactly the same set of economic transactions being presented), this was not the case. - The company reported a huge loss of $1 billion under US GAAP, while at the same time reporting a profit of $370 million under its own domestic German GAAP. This difference was simply the result of different accounting practices being used by different countries. - Such significant differences undermine the usefulness of financial statements.” (source: The Institute of Chartered Accountants in