Unit 1 Financial Reporting PDF - Accountancy

lOMoARcPSD|47174902 UNIT 1 Financial Reporting accountancy (Saint Paul School of Professional Studies) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Gwynette Peneda (sophiagwynettepeneda...

lOMoARcPSD|47174902 UNIT 1 Financial Reporting accountancy (Saint Paul School of Professional Studies) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Gwynette Peneda ([email protected])  lOMoARcPSD|47174902 UNIT 1: FINANCIAL REPORTING Introduction Unit Learning Objectives This unit provides a By the end of this unit you should be general review and refresher able to: of the basic concepts of  review basic concepts of accounting. It also contains the financial reporting; Financial Reporting Standard  identify the standard-setting Setters and the general bodies of the Philippines; and political process of standard  know the process involved in setting. drafting accounting standards. Timing This unit is expected to consume four (4) study hours – three hours (3) for reading and comprehension, and an hour (1) for answering the assessments. Getting Started! What is accounting? Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. (Accounting Standards Council) Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof. (Committee on Accounting Terminology of the American Institute of CPAs) Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decision by users of the information. (American Accounting Association) Essential characteristics of accounting i. Quantitative information; ii. Financial in nature; and iii. Useful in decision making. 1 Downloaded by Gwynette Peneda ([email protected])  lOMoARcPSD|47174902 1.1 COMPONENTS OF ACCOUNTING IDENTIFYING The analytical component of accounting. This is the process of determining whether or not a transaction is accountable. Not all transactions that transpire in a business are accountable. The hiring of employees and the death of the company manager are business activities, but such events are not accountable because they cannot be quantified or expressed in terms of a unit of measure. An event is accountable or quantifiable when it has an effect on the assets, liabilities, or equity, whether such events take place internally or externally. MEASURING The technical component of accounting. This is the process of assigning peso amounts to accountable economic transactions and events. In order to be useful, accounting information must be expressed in terms of a common financial denominator. Financial statements without monetary amounts would be largely unintelligible or incomprehensible. The Philippine peso is the unit of measuring accountable economic transactions in the Philippines. After determining whether or not a transaction is accountable, the next step would be to ascertain the values of each transaction using the following measurement bases or financial attributes: Historical cost The amount of cash or cash equivalents paid, or the fair value of the consideration given to acquire an asset at the time of acquisition. Also known as “past purchase exchange price.” If Rickrolled Inc. purchases brand-new equipment in 2021 for ₱20,000,000 then such an amount represents this equipment's historical cost. The historical cost of an asset will remain unchanged despite the changes in the price of the same asset. Current cost The amount of cash or cash equivalent that would have to be paid if the same or equivalent asset was acquired currently. Also known as “current purchase exchange price.” Consider the previous illustration, suppose that after five years, the price of the same equipment in a “brand-new” condition is ₱15,000,000, such amount will represent the current cost of the equipment acquired by Rickrolled, Inc., five years ago. 2 Downloaded by Gwynette Peneda ([email protected])  lOMoARcPSD|47174902 Realizable value The amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly disposal. Also known as “current sale exchange price.” Assume that Rickrolled, Inc. is planning to dispose of the equipment it acquired five years ago, and the market is willing to pay ₱13,000,000 for the equipment; such an amount represents the assets realizable value. Present value The discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Also known as “future exchange price.” The present value of an asset relates to the value that is still to be received in the future but is presently recognized. If presently recognized, a receivable of ₱20,000,000 forty years from today is not necessarily valued for the same amount. Note: The revised conceptual framework (2018) introduces new concepts on measurement. The concept of measurement describes the factors to be considered when selecting a measurement basis between historical cost and current value (fair value, value in use, fulfilment value, and current cost). The factors to consider when selecting a measurement basis are relevance and faithful representation. (Refer to the copy of the 2018 revised conceptual framework shared with you.) COMMUNICATING The formal component of accounting. This is the process of preparing and distributing accounting reports to potential users of accounting information. ASPECTS OF COMMUNICATION Recording Also known as journalizing. This is the process of systematically maintaining a record of all economic business transactions after they have been identified and measured. Classifying Also known as posting. This is the process of sorting or grouping similar and interrelated economic transactions into their respective classes. Classifying involves the process of posting journalized transactions to the ledger. A ledger is a group of “accounts” which are systematically categorized into asset accounts, liability accounts, equity accounts, revenue accounts and expense accounts. Summarizing The actual preparation of the financial statements and reports to be presented to the users. A complete set of financial statements includes the 3 Downloaded by Gwynette Peneda ([email protected])  lOMoARcPSD|47174902 statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows. 1.2 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE PHILIPPINES (GAAP) Generally accepted accounting principles represent the rules, procedures, practices, and standards followed in preparing and presenting financial statements. Accounting, like all aspects of life, has changed over time, adjusting to the demands of an ever-changing society. Established widely accepted accounting standards are not intended to be everlasting and irreplaceable monuments. GAAP must be able to modify and change in response to changing societal needs in financial transactions, which are becoming increasingly complicated over time. 1.3 STANDARD-SETTING BODIES OF THE PHILIPPINES FINANCIAL REPORTING STANDARDS COUNCIL In the Philippines, the development of generally accepted accounting principles is formalized initially through the creation of the Accounting Standards Council (ASC) which promulgated the Philippine Accounting Standards (PAS). The body mentioned above was later on replaced by the Financial Reporting Standards Council (FRSC), which promulgated the Philippine Financial Reporting Standards (PFRS). The FRSC is the accounting standard-setting body created by the Professional Regulation Commission upon recommendation of the Board of Accountancy (BOA) to assist the BOA in carrying out its powers and functions provided under the Philippine Accountancy Act of 2004. (R.A. 9298). The FRSC is composed of fifteen (15) members with a Chirman, who had been or presently a senior accounting practitioner in any of the scope of accounting practice in any of the scope of accounting practice and fourteen (14) representatives from the following: a) Board of Accountancy 1 b) Securities and Exchange Commission 1 c) Bangko Sentral ng Pilipinas 1 d) Bureau of Internal Revenue 1 e) A major organization composed of preparers and users of financial statements 1 f) Commission on Audit 1 g) Accredited National Professional Organization of CPAs Public Practice 2 Commerce and Industry 2 Academe/Education 2 Government 2 8 14 4 Downloaded by Gwynette Peneda ([email protected])  lOMoARcPSD|47174902 The FRSC actively participates in the evaluation and deliberation of proposed IFRSs provided by the IASB to the country's standard-setting body, and offers its recommendation for adoption of the proposed IFRS to the Board of Accountancy. The IFRS is labeled as the Philippine Financial Reporting Standard once it has been approved (PFRS). PHILIPPINE INTERPRETATIONS COMMITTEE The FRSC formed the Philippine Interpretations Committee (PIC) to replace the Interpretations Committee (IC) formed by the ASC. The Role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and, in the context of the Conceptual Framework, to provide timely guidance on financial reporting issues not specifically addressed in current PFRS. Generally Accepted Accounting Standards in the Philippines are collectively composed of: i. Philippine Financial Reporting Standard (PFRS); ii. Philippine Accounting Standards (PAS); and iii. Philippine Interpretations (PI). INTERNATIONAL ARENA The International Accounting Standards Board (IASB) is an independent private sector body, with the objective of achieving uniformity in the accounting principles which are used by businesses and other organizations for financial reporting around the globe. IASB replaced the International Accounting Standards Committee (IASC). IASB is tasked to public accounting standards in a series of pronouncements known as International Financial Reporting Standards (IFRS). The IFRS is a global phenomenon intended to bring about greater transparency and a higher degree of comparability in financial reporting. Both will benefit the investors and are essential to achieving one uniform and globally accepted financial reporting standard. 1.4 THE STANDARD-SETTING PROCESS The promulgation of financial accounting standards is a political process. Several groups influence the standard-setting process. The standard-setting process is a political process that is affected by the impact of several lobbying groups. The government, through the SEC, influences 5 Downloaded by Gwynette Peneda ([email protected])  lOMoARcPSD|47174902 accounting standards. The SEC has the authority to issue accounting standards but has assigned this responsibility to the private sector. Nonetheless, the SEC can exert pressure on the FASB to issue accounting standards and veto the standards promulgated by the FASB. Auditing firms, the corporate sector, creditors, financial analysts, the financial community, accounting organizations, industry groups, and investors can influence the FASB by written comments about Exposure Drafts and participation in public meetings and public roundtables regarding a proposed financial reporting standard. Unit Summary  Accounting standards in the Philippines are adopted from the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB).  The IFRS is a set of accounting standards that are recognized by at least 120 countries (including the Philippines) and provides a guide on how particular types of transactions and other events should be reported in financial statements. The rationale for using the IFRS/Philippine Financial Reporting Standards (PFRS) is to ensure consistency in recording, recognizing, and measuring financial transactions, which, if followed correctly, will ensure stability and transparency throughout the company's financial reporting process. These standards are not enforceable as compliance is voluntary.  The PFRS, our version of the IFRS with some minor modifications, and the Philippine Accounting Standards are issued by the PFRS Council (formerly the Accounting Standards Council [ASC]), under the oversight of the BOA. Hence, the PFRS and the PAS are our current set of Generally Accepted Accounting Principles. GAAPs vary “from country to country due to differences in the legal system, levels of inflations, culture, degrees of sophistication and use of capital markets, and political and economic ties with other countries.” Entities registered with the Securities and Exchange Commission (SEC) are required to apply PFRS as their financial reporting framework.  The PAS corresponds to the adopted International Accounting Standards (IAS), while the PFRS corresponds to the adopted IFRS. Previously, standards issued by the ASC were designated as Statement of Financial Accounting Standards.  The FRSC is a standard-setting body created by the Professional Regulation Commission upon the recommendation of the BOA under the implementing rules of Republic Act 9298 “Philippine Accountancy Act of 2004”. It has a chairman, and representatives from the BOA, the SEC, the Bangko Sentral ng Pilipinas, the Bureau of Internal Revenue, the Commission on Audit, a major organization composed of preparers and users of financial statements (currently Finex), and two representatives each from an accredited national professional organization of certified public accountants in public 6 Downloaded by Gwynette Peneda ([email protected])  lOMoARcPSD|47174902 practice, commerce and industry, academe, and the government. The chairman and members shall have a term of three years and are renewable for another term.  The FRSC formed the Philippine Interpretations Committee in August 2006 to assist the FRSC in establishing and improving financial reporting standards in the Philippines. It is a mere committee of the FRSC. The role of the PIC is principally to issue implementation guidance on PFRS. The PIC members are appointed by the FRSC and include accountants in public practice, academe and regulatory bodies, and users of financial statements. The PIC replaced the Interpretations Committee created by the ASC in 2000. (https://businessmirror.com.ph/2018/10/31/philippine- accounting-standards) See APPENDIX A - https://businessmirror.com.ph/2018/10/31/philippine-accounting- standards 7 Downloaded by Gwynette Peneda ([email protected])