Chapter 1: Overview of Accounting

Learning Objectives:
1. Define accounting and state its basic purpose.
2. Explain the basic concepts applied in accounting.
3. State the branches of accounting and the sectors in the practice of accountancy.
4. 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

1. Identifying
2. Measuring
3. 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 only in the notes is not an application of the recognition
process. A non-accountable event that has an accounting relevance may be recorded
through memorandum entry.

Types of Events or Transactions

1. External Events – are events that involve an entity and another external party.

Types of External Events

i. 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.
 ii. 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.

iii. 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

i. 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.
ii. 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, replacement cost, and
sometimes inflation-adjusted costs. The most commonly used is historical cost. This is usually
combined with the 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 measures are said to be valued by
opinion.

Examples:
a. Estimates of uncollectible amounts of receivables
b. Depreciation and amortization expenses, which are affected by estimates of
useful life and residual value.
c. Estimated liabilities, such as provisions.
d. 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
facts.

Examples:
a. Ordinary share capital valued at par value
b. Land stated at acquisition cost
c. 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:

1. Recording – refers to the process of systematically committing into writing the identified
and measured accountable events in the journal through journal entries.

2. Classifying – involves the grouping of similar and interrelated items into their respective
classes through postings in the ledger.

3. 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 advice, 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:
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
b. 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:
 1. Production – the process of converting economic resources into outputs of goods and
services that are intended to have greater utility than the required inputs.
2. Exchange – the process of trading resources or obligations for other resources or
obligations.
3. Consumption – the process of using the final output of the production process.
4. Income Distribution – the process of allocating rights to the use of output among
individuals and groups in society.
5. Savings – the process of setting aside rights to present consumption in exchange for
rights to future consumption.
6. 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

1. Quantitative Information – information expressed in numbers, quantities, or units.
2. 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.
3. 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 PFRS.
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, e.g., managerial accounting, 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.
a. Creative Thinking involves the use of imagination and insight to solve problems by
finding the new relationships (ideas) among items of information. It is most important in
identifying alternative solutions.
b. 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:
1. Recognizing a problem
2. Identifying alternative solutions
3. Evaluating the alternatives
4. Selecting a solution from among the alternatives
5. 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 a 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 PFRS Accounting
Standards.
Most accounting concepts are derived from the Conceptual Framework and the PFRS
Accounting Standards. However, some accounting concepts are implicit, meaning they are
not expressly stated in the Conceptual Framework or PFRS Accounting Standards but are
generally accepted because of their long-time use in the profession.

Examples of accounting concepts:

1. Double-Entry System – each accountable event is recorded in two parts – debit and
credit.

2. 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 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.
3. 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.

4. Stable Monetary Unit (Monetary Unit Assumption)

a. Assets, liabilities, equity, income, and expenses are stated in terms of a common
unit* of measure, which is the peso in the Philippines; and
b. 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.

5. 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.

6. 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.

7. Cost-Benefit (Cost constraint/Reasonable Assurance) – the cost of processing and

communicating information should not exceed the benefits to be derived from it.

8. Accrual Basis of Accounting – the effects of transaction 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 reporting 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.
9. 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 PFRS Accounting Standards 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.

10. 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.
- Information on issued and unissued shares in the statement of changes in equity
provides information on the availability of equity financing.
- Information on historical changes in cash and cash equivalents in the statement of
cash flows helps user assess future sources and uses of funds.
- The notes to financial statements provides information on the quality of earnings,
e.g., whether income or expenses are realized or unrealized or whether they are
recurring or non-recurring.

11. 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:
a. sufficient detail to disclose matters that make a difference to users, yet
b. sufficient condensation to make the information understandable, keeping in
mind the costs of preparing and using it.

12. 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 PFRS
Accounting Standards or when the change results to more relevant and reliable
information. Changes in accounting policies are disclosed in the notes.

13. Matching (Association of cause and effect) – costs are recognized as expenses when
the related revenue is recognized.

14. Entity Theory – the accounting objective is geared towards proper income
determination. Proper matching of costs against revenue is the ultimate end. This theory
emphasizes the income statement and is exemplified by the equation “Assets =
Liabilities + Capital.”

15. 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.”

16. 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.

17. 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.

18. 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.

19. 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.

Expense Recognition Principles

20. 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.
21. 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.

22. 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.

➢ Financial Statements are the structure representation of an entity’s financial

position and results of its operations. Financial statements are the end product of
the financial reporting process and the means by which the information gathered
 and processed is periodically communicated to users. The financial statements of
an entity pertain only to that entity and not to the industry where the entity
belongs or the economy as a whole.
➢ General Purpose Financial Statements are those intended to meet the needs of
users who are not in a position to require an entity to prepare reports tailored to
their particular information needs. General Purpose Financial Statements cater to
most of the common needs of a wide range 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. General purpose financial
statements are the main subject matter of the Conceptual Framework and the
PFRS Accounting Standards.

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.

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 Financial Report

1. Statement of Financial Position 1. Statement of Financial Position
2. Statement of Profit or Loss and Other 2. Statement of Profit or Loss and Other
Comprehensive Income Comprehensive Income
3. Statement of Changes in Equity 3. Statement of Changes in Equity
4. Statement of Cash Flows 4. Statement of Cash Flows
5. Notes 5. Notes
6. 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).

2. 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 include services to clients on
matters of accounting, finance, business policies, organization procedures, product
costs, distribution, and many other phases of business conduct and operations.

3. Cost Accounting – is the systematic recording and analysis of the costs of materials,
labor, and overhead incident to production.

4. Auditing – is the process of evaluating the correspondence of certain assertions with

established criteria and expressing an opinion thereon.

5. 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.

6. 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.

7. 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.
8. Estate Accounting – refers to the handling of accounts for fiduciaries who wind up the
affairs of a deceased person.

9. 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.

10. Institutional Accounting – the accounting for non-profit entities other than the
government.

11. Accounting Systems – the installation of accounting procedures for the accumulation
of financial data and designing of accounting forms to be used in data gathering.

12. 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
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:
1. Practice of Public Accountancy – involves the rendering of audit or accounting related
services to more than one client on a fee basis.

2. 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.

3. 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.

4. 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.

Philippine Financial Reporting Standards (PFRSs)

The Philippine Financial Reporting Standards (PFRSs) are Standards adopted by the Financial
and Sustainability Reporting Standards Council (FSRSC), the official accounting standard-
setting body in the Philippines, from the International Financial Reporting Standards (IFRSs). The
IFRS consist of the following:
a. IFRS Accounting Standards
i. Internation Financial Reporting Standards;
ii. International Accounting Standards; and
iii. IFRIC and SIC Interpretations
b. IFRS for SMEs Accounting Standard; and
c. IFRS Sustainability Disclosure Standards

The IFRS Accounting Standards and the IFRS for SMEs are issued by the International
Accounting Standards Board (IASB), while the IFRS Sustainability Disclosure Standards are
issued by the International Sustainability Standards Board (ISSB).
 The PFRSs are patterned from the IFRSs. Each International standard has a Philippine
counterpart. This means that the standards used here in the Philippines are similar to those
used in other countries worldwide.
The PFRS Accounting Standards consist of the following:
a. Philippine Financial Reporting Standards;
b. Philippine Accounting Standards; and
c. PIC Interpretations

The three components above have equal authority. The PFRS Accounting Standards are
accompanied by guidance to assist entities in applying their requirements. A guidance states
whether it is an integral part of the PFRS Accounting Standards. A guidance that is integral
part of the PFRS Accounting Standards 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:

1. the standard has been established by an authoritative accounting rule-making body,
e.g., the PFRS Accounting Standards adopted by the FSRSC; or
2. 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:
1. PFRS Accounting Standards
2. In the absence of a PFRS Accounting Standard 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,

1. management shall refer to, and consider the applicability of, the following sources
in descending order:
a. The requirements in PFRS Accounting Standards dealing with similar and related
issues;
b. The Conceptual Framework.
2. management may also consider the following:
a. Pronouncements of other standard-setting bodies
b. Accounting literature and accepted industry practices
 Although the selection of appropriate accounting policies is the responsibility of
the entity's management, the proper application of accounting principles is most
dependent upon the professional judgment of the accountant.

Accounting standard setting bodies and other relevant organizations

1. Financial and Sustainability Reporting Standards Council (FSRSC) - is the official accounting
standard setting body in the Philippines created under the Philippine Accountancy Act of
2004 (R.A. No. 9298). The FSRSC consists of a chairman and members who are appointed
by the BOA and include representatives from the BOA, SEC, BSP, BIR, Insurance Commission
(IC), Commission on Audit (COA), Financial Executives Institute of the Philippines (FINEX),
and Philippine Institute of Certified Public Accountants (PICPA).

2. Philippine Interpretations Committee (PIC) is a committee formed by the Accounting

Standards Council (ASC), the predecessor of FSRSC, with the role of reviewing the
interpretations of the International Financial Reporting Interpretations Committee (IFRIC) for
approval and adoption by the FSRSC.

3. 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.

4. 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.

5. 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.

6. Bangko Sentral ng Pilipinas (BSP) - influences the selection and application of accounting
policies by banks and other entities performing banking functions.

7. 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 accounting 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.
Of the IFRS Accounting Standards (see previous discussion), the International Financial
Reporting Standards are the standards issued by the IASB after it replaced its predecessor, the
International Accounting Standards Committee (IASC), in April 1, 2001. The International
Accounting Standards were originally issued by the IASC but adopted by the IASB. The
Philippine Financial Reporting Standards and Philippine Accounting Standards 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 IFRS 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:
1. The staff identifies and reviews issues associated with a topic and considers the
application of the Conceptual Framework to the issues;
2. Study of national accounting requirements and practice, including consultation with
national standard-setters;
3. Consulting the Trustees and the Advisory Council about the advisability of adding the
topic to the IASB's agenda;
4. Formation of an advisory group to give advice to the LASB on the project;
5. Publishing a discussion document for public comment;
6. Publishing an exposure draft for public comment;
7. Publishing with an exposure draft a basis for conclusions and the alternative views of
any IASB member who opposes publication;
8. Consideration of all comments received;
9. Holding a public hearing and conducting necessary; and tests, if
10. Publishing a standard, 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.

Other relevant international organizations

1. 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:
a. The standards do not include specific authoritative guidance; and
b. 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.

2. 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 LASB'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.

3. 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.

4. 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 U.S. national standard setting
body.
The move to IFRS was primarily brought about by the increasing acceptance of IFRS
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

The future of IFRSS

A significant milestone towards achieving the goal of having one set of global standards was
reached in October 2002 when the FASB and the IASB entered into a memorandum of
understanding called the "Norwalk Agreement."
 In this Agreement, the FASB and the IASB formalized their commitment to the
convergence of U.S. GAAP and IFRSS by agreeing to use their best efforts to:
a. make their existing financial reporting standards fully compatible as soon as
practicable, i.e., minimize differences and
b. coordinate their future work programs to ensure that once achieved,
compatibility is maintained.
Since the publication of the Norwalk Agreement, the IASB and FASB have been working
together with the common goal of producing a single set of global accounting standards. "In
a public statement issued in January 2017, the outgoing (US) SEC Chair expressed support for
the development of high-quality, globally accepted accounting standards, and suggested
that the (US) SEC support further efforts by the FASB and IASB to converge their accounting
standards to enhance the quality and comparability of financial reporting."

Changes in reporting standards

Once established, financial reporting standards are continually reviewed, revised or
superseded. Changes to reporting standards are primarily made in response to users' needs.
Users' needs for financial information change, and so must financial reporting standards in
order to continually provide useful information. Legal, political, business and social
environments also influence changes in reporting standards. Regulatory bodies, lobbyists, laws
and regulations, and changes in economic environments affect the choice of accounting
treatment provided under the reporting standards.

Summary:
• Accounting involves the activities of identifying, measuring and communicating
information that is useful in making economic decisions.
• Recognition refers to the process of incorporating the effects of an accountable event
in the financial statements through a journal entry.
• External events are events that involve an entity and another external party. It includes
(a) exchanges, (b) non-reciprocal transfers, and (c) external events other than transfers.
• Internal events are events that do not involve an external party. It includes (a)
production and (b) casualties.
• Measuring is the accounting process of assigning numbers, commonly in monetary
terms, to the economic transactions and events. Several measurement bases are used
in preparing financial statements.
• Financial accounting is the branch of accounting that focuses on the general purpose
financial statements.
• General purpose financial statements are those that cater to the common needs of a
wide range of external users.
• External users are those who do not have the authority to demand financial reports
tailored to their specific needs, i.e., those who are not involved in managing the entity.
• The four sectors in the practice of accountancy are: (a) public practice, (b) commerce
and industry, (c) academe, and (d) government.
• The reporting standards used in the Philippines are the PFRS, which are based on the
IFRSs. The PFRSs includes the PFRS Accounting Standards which consist of the following:
 (1) Philippine Financial Reporting Standards, (2) Philippine Accounting Standards and
(3) Interpretations.
• The Financial and Sustainability Reporting Standards Council (FSRSC) is the official
accounting standard setting body in the Philippines.
• Financial reporting standards continuously change primarily in response to users' needs.