CFAS The Need for Financial Reporting PDF

ACC-106: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS LESSON 1: 1st SEMESTER | A.Y. 202Y – 202Y LECTURER: SIR/MS. THE NEED FOR FINANCIAL REPORTING (3) Potential Investors  They must see...

ACC-106: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS LESSON 1: 1st SEMESTER | A.Y. 202Y – 202Y LECTURER: SIR/MS. THE NEED FOR FINANCIAL REPORTING (3) Potential Investors  They must see the FS to know if their investments can grow, for them to see if they THE FINANCIAL REPORT AND ITS USERS should invest or not, and they use your FS to  It provides information about economic entities to see if you are able to give them dividends at be used as basis for future economic decisions to some point internal and external stakeholders.  To see of the company is profitable  It is a tool for transparency (4) Regulatory Agencies and Taxing Authorities o All transactions are captured in the financial  They rely on FS to determine whether statements to make sound economic business entities comply with prescribed rules decisions and regulations  They are dependent on the FS to collect the INTERNAL USERS right amount of taxes, to determine taxation policies, and to set basis for national income ─ the active owners and internal management that use and similar statistics the financial reports for internal decisions. (5) Employee ─ Active owners and managers use financial  They evaluate the financial status of the information to evaluate the entity’s performance, enterprise to assess the latter’s ability to make financial and operational plans, and implement provide remuneration, retirement benefits business decisions and employment benefits EXTERNAL USERS (6) Financial Advisers and Consultants/Lawyers  They need the company’s FS to give them ─ the inactive owners, creditors, lenders, suppliers, advice regarding the performance of the potential investors, regulatory agencies, employee company, legalities of contract, transactions, and employee unions, financial advisers, consultants etc. and the general public that rely heavily on this (7) General Public reports  They are interested in financial information ─ Users other than the management of the entity do about the trends and the range of business not have ready access to financial reports entities’ economic activities ─ Rely heavily on negotiations and regulations to obtain information about a business enterprise --------------- Based on the interest of the user ---------- DIRECT USERS (1) Inactive Owners  The difference of active and inactive owners ─ users with direct interest use financial information as is the participation a tool to protect their own interest in the enterprise.  Inactive owner (e.g., silent owner) do not ─ They include the owners, managers, creditors, actively participate in managing the business, suppliers, customers, employees, and taxing while active owner is vice versa authorities  They don’t have an involvement in the daily ─ Taxing authorities – its primary goal is to get the tax operations in the business, but they have a ─ Customers – have an interest in information about stake the continuance of an enterprise (long-term  They use the financial statements to keep involvement) track of the company’s financial condition and performance INDIRECT USERS (2) Creditors, Lenders, & Suppliers ─ those who use accounting information to provide  Through the FS, they will be able to assess advice to protect the interest of the direct user. the ability of the enterprise to pay its loans ─ They include regulatory agencies, labor unions, and the interesting attaching to such loans financial and legal consultants  They will be able to determine whether the ─ Regulatory Agencies – protect the interest of the cost of such goods and services will be paid investors and the public when due ─ Labor Unions (DOLE) – protect the interest of the  They will look at the balance sheet (because employees of current assets and current liabilities) 1|Page ─ Financial and Legal Consultants – provide advice and o Were you able to maximize as a business all assistance to their clients who may be customers, your economic resources to produce profits? lenders, or suppliers  Operating and Financial Flexibility NOTE: o Company’s ability to adjust to unexpected o Internal and external users can use the same set economic downturns or take advantage of of financial statement – the general-purpose business opportunities that arises within the financial statement environment in which they operate o The concern of upper management is also the concern of other branches of accounting o How flexible and agile is your business? o Internal users have more access to other o Adjust in case of economic downturn information than external users  Information about a business’ economic resources and claims MONETARY UNIT o Information about an entity’s economic o Stable monetary unit principle resource and claims (financial position) o It is generally the unit of measure used in o What resources does the company have and communicating accounting information what are the claims that need to be settled? o Home currency of reporting entity is used How well does the company put these resources to good use? Example: Pru Life UK o Primarily provided in the statement of financial o Pru Life UK Philippines is a subsidiary of Pru Life UK position Hong Kong o What are our resources? It’s in the ASSET o Parent-Subsidiary relationship section o Parent = HK o What are the claims need to be settled? It’s in Subsidiary = PH the LIABILITY section o If ever it reported in the Philippines, PESO is the currency to be used  Information on changes on a business’ economic o If ever it reported the consolidated earnings of resources and claims Hong Kong and Philippines, HK dollar is the o How well did the company do during the currency to be used business year? o Consolidated earnings = currency of the parent to o Did we acquire or dispose something this year? be used o Information about an entity’s financial o Figures in peso will be converted to HK dollar for uniformity performance reflected by accrual accounting o Primarily provided in the statement of comprehensive income WHAT DO THE USERS WANT TO KNOW? o Financial Performance = income statement, cash flows, notes to FS, and changes in equity No matter the classification of the users, all of them have common information needs, which is to evaluate the organization’s… FOUR SECTORS OF ACCOUNTING PROFESSIONS  Liquidity 1. Commerce and Industry o Refers to the availability of cash in the near o ACPACI - Association of CPAs in Commerce and future after taking into account of financial Industry commitments over the current period o Private firms o Short-term financial obligation 2. Public Practice o Liquid = current assets > current liabilities o ACPAPP - Association of CPAs in Public Practice (have enough fund to cover liabilities) 3. Government o GACPA – Government Association of CPAs  Solvency 4. Education o The availability of cash over the long term to o nACPAE – National Association of CPAs in meet financial commitments as they fall due Education o Long-term financial obligation o Academe  Profitability o It is the ability of the enterprise to generate THE FINANCIAL REPORT AND ITS USERS cash flows from its existing resource base (1) FINANCIAL ACCOUNTING o It refers to the effectiveness with which the entity has employed its resources ─ The broadest branch of accounting, it focuses on o How effective are they in doing business? the needs of external users. 2|Page  ─ Its main concern is the recognition,  The main use of the report is to help measurement and communication of economic management in forming plans and implement resources and economic obligations short-term/long-term plans ─ These are communicated in a complete set of  Some of the information that is not disclosed in financial statements. the public (like calculations) are part of ─ Both internal and external users can use management accounting—it will only help to financial accounting make decisions because it contains classified  External users have common information needs information that only that only mangers have (i.e., to evaluate the business entity's access to profitability, liquidity and stability) ─ Decisions are based on:  Internal users use FS as it communicate  Financial accounting disclosed to external users substantial information (i.e., to evaluate an and general public entity’s performance and financial condition to  Management accounting that are more detailed better perform their planning and control and helpful functions) ─ Financial accounting should conform to the (3) COST ACCOUNTING accounting standards as developed by standard ─ It is concerned with measurement and setting bodies. recognition of cost of services provided or  They follow a standard products manufactured  Philippine Accounting Standards (PAS) ─ This is a sub-branch of management accounting  Philippine Financial Reporting Standards ─ It is more ordinarily associated with (PFRS)—these two are our codexes when manufacturing companies as a tool of both preparing FS financial accounting and management ─ In financial accounting, we make an implicit accounting statement of 100% compliance to PFRS ─ We are the ones preparing FS for and in behalf (4) TAX ACCOUNTING of the company—financial accountants ─ It is concerned with the computation of taxes PHILIPPINE ACCOUNTING STANDARDS (PAS) and preparation of tax returns submitted to a o Accounting adopted in the Philippines by FRSC and taxing authority. ASC—the originated from the works of the IASC ─ We are the ones making the ITR (income tax return) PHILIPPINE FINANCIAL REPORTING STANDARDS ─ The financial statements for reporting, SEC, or (PFRS) other users are different to the BIR because it o Comprised the specific PFRS as adopted from doesn’t use accrual basis specific International Financial Reporting ─ It is cash basis accounting Standards  This does not use actual basis in financial statements for tax purposes (2) MANAGEMENT ACCOUNTING (5) GOVERNMENT ACCOUNTING ─ Also called managerial accounting ─ It encompasses the process of analyzing, ─ Serves the information needs of the internal classifying, summarizing, and communicating all users for making and implementing short-term transactions involving the receipt and disposition and long-term plans for the enterprise as well as of government funds and property and routine and major economic decisions. interpreting the results thereof. ─ Internal users access to both financial ─ It has separate rules—NGAS (New Government accounting prepared by financial accounts and Accounting System) management accounting prepared by ─ It is similar to financial accounting, but they make management separate FS of three different funds (fund ─ The information provided is not structured and is accounting) not necessarily conforming to the accounting  Trust Fund – funds that are not used in day-to- standards day operations of government  Doesn’t follow any standard (no set of rules to  Special-Education Fund – funds used for qualified follow) projects (like for schools)  Because information required by the  General Fund – funds that LGUs use in every day management may vary based on the specific operations needs at a particular time  Free-form = own way/format to present the Bookkeeping report and calculations that will be understood o Refers only to one phase—recording phase o While accounting, consist of all phases—recording, classifying, summarizing, & interpreting 3|Page   His winnings are subject to the US taxation (as it Auditing part of their conditions) o Refers to an independent examination of the  If you are a Filipino citizen and residing in the financial statements conducted by a certified public Philippines, you are called resident citizen. If you accountant for the purpose of rendering an opinion are a Filipino resident citizen with income from as to the fairness of the presentation of the other countries and your income in those financial statements countries will be taxable to your home country, regardless where it came from. (6) FINANCIAL MANAGEMENT  Kahit san siya lumaban, he will be taxed by the BIR ─ No accounting involved  There are treaties—Law of Reciprocity—US has ─ Financial management involves the management its own set of tax rules and the Philippines has its of finances of an organization to achieve financial own set of tax rules objectives of the entity  Non-resident contractor (pumunta ng US para ─ It covers investment decisions, financing lang magtrabaho) is tax exempt and the rest decisions, distributing back to investors, and risk need to follow the 1040r (tax form for non- management resident aliens)—and Manny Pacquiao is a non- ─ The management relies on us to give them a resident alien decent and sound recommendation (7) ACCOUNTING EDUCATION FINANCIAL REPORTING AND STANDARD – SETTING PROCESS ─ It aims to produce competent and professional accountants capable of making a positive contribution over their lifetime to the profession THE PROBLEM OF GLOBALIZATION and to society in which they work  In this era of globalization, it has become increasingly ─ For those in academe apparent that we live in a borderless world. (8) ACCOUNTING RESEARCH Businesses have also become global and business transaction has become more complex. Therefore, ─ Accounting research is often time associated with there was a need to bring into a common basis the accounting education system of measurement and communication of ─ It is the systematic process of collecting and economic activities. analyzing information to increase one’s o International accounting was born because of understanding of the function of a professional globalization accountant and contribute to the solutions of the o The rise of globalization in business give rise problems that be setting of the practice of the also to one set of standards we adapt today profession  There was a need to bring into common basis system of measurement and communication of economic (8) FORENSIC ACCOUNTING activities o Through the creation of International ─ Forensic accounting is all about detection of Accounting Standards Committee (IASC) in fraud, the prevention of fraud, business 1973 valuations, and expert witness services, and  From 1971 to 2001, IASC developed a set of uniform other investigating services. global accounting standards and promote the use of ─ In case there were accusation in the court, the this standards—International Accounting Standards forensic accountant can vouch for the books (IAS) (litigation support) o IAS was adopted in the Philippines setting ─ Forensic accounting becomes third party expert (PAS) (9) INTERNATIONAL ACCOUNTING  IAS Committee reconstituted in 2001 as the International Accounting Standards Board (IASB) ─ It is necessary for us accountants to be aware of under the umbrella of the International Financial the standards and guidelines, as well as the rules Reporting Standards (IFRS) Foundation of accounting, auditing, and tax that exist within o IASB is the governing body that develops and other countries—since we now operate global promotes accounting standards business internationally up to today ─ We need to hone our skills in knowing standards o IASB is responsible for IFRS in other place for us to comply with them in the  The IFRS Foundation is a not-for-profit, public event of international ops interest organization established to develop a single set of high-quality, understandable, enforceable and Example: Manny Pacquiao is a Filipino that went to globally accepted accounting standards—IFRS Las Vegas for a competition and won. Standards 4|Page  After its reconstitution, the IASB took the initiative to  the lASB’s main vehicle to consult the interested undertake an improvements project in the light of public queries and criticisms raised in relation to the AS—  It is a proposed standard or a proposed the convergence project amendment to a standard o IASB’s work is to enhance and develop the  The comment period for major projects is usually accounting standards more (eliminate 120 days, and for IFRIC Interpretations is alternatives, redundancies, ad conflicts within usually 60 days, but may be less in urgent cases. IAS)  The IASB makes revisions on the draft after  IAS Committee’s work was revised by IASB and the considering the comments on the exposure draft collective revisions became IFRS and make new standards 5. Developing And Publishing The Standard  Upon reaching conclusion on the issues covered International Accounting Standards (IAS) in the exposure draft, the pre-ballot IFRS is sent o Accounting standards originated from the IAS to selected parties for review; after which, a near Committee, even improved/revised by IASB final draft is posted on the IASB's website International Financial Reporting Standards (IFRSs) 6. Afterwards, The Standard Is Issued o The standards that originated from the works of  The approved pronouncement is posted to the the IASB IASB’s limited access website for an initial period of about ten days, after which the draft is freely available online. THE WORKS OF THE IAS COMMITTEE IFRS include the following: THE STANDARD SETTING PROCESS IN THE PHILIPPINES a.) Specific International Financial Reporting Standards;  Before 1981, the Philippines did not have a formal b.) Interpretation made by the International process for the development of accounting Financial Reporting Interpretation Committee practices. (IFRIC), the body interpreting the work of the  In late November 18, 1981, Philippine Institute of IASB. Certified Public Accountants (PICPA), the accredited c.) International Accounting Standards; and professional organization of certified public d.) Interpretations made by the Standing accountants in the Philippines, organized the Interpretations Committee (SIC), the body that Accounting Standards Council (ASC) that formalized interprets the work of the IAS Committee. the standard setting process in the country o The main function of the ASC was to establish  Overall objective is the objective of financial and improve generally accepted accounting reporting—to communicate financial information that principles in the Philippines achieves transparency, accountability, and efficiency  The Standards developed by the ASC was called the Statements of Financial Accounting Standards (SFAS), based on existing practices, research and THE STANDARD SETTING PROCESS OF THE IASB studies done by the council, international The IASB follows a due process in the development of accounting literature, statements by then financial reporting standards. The due process involves International Accounting Standards Committee and interested individual and organizations around the world the Financial Accounting Standards Board of the and comprises the following stages: United States.  In 1997, the ASC decided to move fully to the 1. Setting The Agenda International Accounting Standards (IAS) and a  the IASB identifies an issue item to its agenda transition was made gradually. after considering the relevance of information to  From 1997 to 2000, the ASC developed accounting the users and the reliability of the information standards that were already based on IAS. that could be provided  In 2001, it adopted most of the standards that had 2. Planning The Project been developed by the IASC. The ASC set the year  the IASB decides whether to conduct the project 2005 for the full adoption of the International alone or jointly with another standard-setter Accounting Standards in the Philippines. 3. Developing And Publishing The Discussion Paper  In 2006, the Board of Accountancy established the  the discussion of the working group Financial Reporting Standards Council (FRSC) to  not mandatory replace and take over the functions of the ASC.  includes a comprehensive overview of the issue, o The Board of Accountancy is the body that possible approaches in addressing the issue regulates the practice of accountancy in the 4. Developing And Publishing The Exposure Draft Philippines. 5|Page  THE FINANCIAL REPORTING STANDARDS COUNCIL  Securities and Exchange Commission  Bangko Sentral ng Pilipinas The FRSC formed the Philippine Interpretations  Bureau of Internal Revenue Committee (PIC) in November 2006 to provide the  Financial Executives of the Philippines Council assistance in establishing and improving financial  Commission on Audit reporting standards in the Philippines. The PIC issues  2 members from each of the four sectors implementation guidelines on Philippine Financial (Public Practice, Commerce and Industry, Reporting Standards (PFRS). The PFRS is composed of: Government and Education) of the accredited professional organization of CPAs in the  Specific Philippine Financial Reporting Standards Philippines (which is presently the Philippine (PFRS) adopted from the International Financial Institute of Certified Public Accountants or Reporting Standards (IFRS); PICPA).  Philippine Accounting Standards (PAS), adapted from the International Accounting Standards (IAS);  Philippine Interpretations, adopted from the interpretations of IFRIC and the SIC and the Interpretations of the PIC. The PFRSs set out the recognition, measurement, presentation, and disclosure requirements dealing with transactions and events that are important in general purpose financial transactions. THE DEVELOPMENT PROCESS OF PFRS The PFRSs are developed through a due process that involves members of PICA, financial executives, regulatory authorities, members of the academe and other interested individuals and organizations. Due process for projects, normally, but not necessarily involves the following steps (Preface to PFRSs, paragraph 19):  Consideration of the pronouncements of the IASB;  Formation of a task force, when deemed necessary that will give advice to the FRSC;  Issuing for a comment an exposure draft approved by a majority of the FRSC members; comment period will be at least 60 days, unless a shorter period is considered (not less than 30 days).  Consideration of all comments received within the comment period and when appropriate, preparing a comment letter to the IASB; and  Approval of the standard or interpretation by a majority of the FRSC members. The FRSC continues to monitor the revisions of and the amendments to the IFRS to ensure that improvements made in the IFRS are being made effective in the Philippines. The Board of Accountancy also monitors the implementation of the PFRS. NOTE: o Under the Implementing Rules and Regulations of the Philippine Accountancy Act (Republic Act 9298), the FRSC shall be composed of a chairman and 14 members representing the following organizations:  Board of Accountancy 6|Page