Updates in Financial Reporting Standards

What is US GAAP?
GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set of rules and
procedures designed to govern corporate accounting and financial reporting in the United States
(US). The US GAAP is a comprehensive set of accounting practices that were developed jointly
by the Financial Accounting Standards Board (FASB) and the Governmental Accounting
Standards Board (GASB), so they are applied to governmental and non-profit accounting as well.
US securities law requires all publicly-traded companies, as well as any company that publicly
releases financial statements, to follow the GAAP principles and procedures.
In addition, or as an alternative, are the International Financial Reporting Standards (IFRS)
established by the International Accounting Standards Board (IASB). The IFRS rules govern
accounting standards in the European Union, as well as in a number of countries in South America
and Asia.

The Core GAAP Principles

GAAP is set forth in 10 primary principles, as follows:
1. Principle of consistency: This principle ensures that consistent standards are followed in
financial reporting from period to period.
2. Principle of permanent methods: Closely related to the previous principle is that of
consistent procedures and practices being applied in accounting and financial reporting to
allow comparison.
3. Principle of non-compensation: This principle states that all aspects of an organization’s
performance, whether positive or negative, are to be reported. In other words, it should not
compensate (offset) a debt with an asset.
4. Principle of prudence: All reporting of financial data is to be factual, reasonable, and not
speculative.
5. Principle of regularity: This principle means that all accountants are to consistently abide
by the GAAP.
6. Principle of sincerity: Accountants should perform and report with basic honesty and
accuracy.
7. Principle of good faith: Similar to the previous principle, this principle asserts that anyone
involved in financial reporting is expected to be acting honestly and in good faith.
8. Principle of materiality: All financial reporting should clearly disclose the organization’s
genuine financial position.
9. Principle of continuity: This principle states that all asset valuations in financial reporting
are based on the assumption that the business or other entity will continue to operate going
forward.
10. Principle of periodicity: This principle refers to entities abiding by commonly accepted
financial reporting periods, such as quarterly or annually.

History of GAAP
Generally Accepted Accounting Principles were eventually established primarily as a response to
the Stock Market Crash of 1929 and the subsequent Great Depression, which were believed to be
at least partially caused by less than forthright financial reporting practices by some publicly-
traded companies. The federal government began working with professional accounting groups to
establish standards and practices for consistent and accurate financial reporting.
Generally Accepted Accounting Principles began to be established with legislation such as the
Securities Act of 1933 and the Securities Exchange Act of 1934.
The GAAP has gradually evolved, based on established concepts and standards, as well as on best
practices that have come to be commonly accepted across different industries.

Why is GAAP Important?

Generally Accepted Accounting Principles make financial reporting standardized and transparent,
using commonly accepted terms, practices, and procedures. The consistency of presentation of
financial reports that results from GAAP makes it easy for investors and other interested parties
(such as a board of directors) to more easily comprehend financial statements and compare the
financial statements of one company with those of another company.
GAAP also seeks to make non-profit and governmental entities more accountable by requiring
them to clearly and honestly report their finances.
In short, GAAP is designed to ensure a consistent presentation of financial statements, making it
easier for people to read and comprehend the information contained in the statements.

Applications in Financial Analysis

For financial analysts performing valuation work and financial modeling, it’s important to have a
solid understanding of accounting principles. While this is important, financial models focus more
on cash flow and economic value, which is not significantly impacted by accounting principles
(other than for the calculation of cash taxes).

Alternatives to GAAP
GAAP is the set of standards and practices that are followed in the United States, but what about
other countries? Outside the US, the alternative in most countries is the International Financial
Reporting Standards (IFRS), which is regulated by the International Accounting Standards Board
(IASB). While the two systems have different principles, rules, and guidelines, IFRS and GAAP
have been working towards merging the two systems.

What is IFRS?
IFRS is short for International Financial Reporting Standards. IFRS is the international accounting
framework within which to properly organize and report financial information. It is derived from
the pronouncements of the London-based International Accounting Standards Board (IASB). It is
currently the required accounting framework in more than 120 countries. IFRS requires businesses
to report their financial results and financial position using the same rules; this means that, barring
any fraudulent manipulation, there is considerable uniformity in the financial reporting of all
businesses using IFRS, which makes it easier to compare and contrast their financial results.
IFRS is used primarily by businesses reporting their financial results anywhere in the world except
the United States. Generally Accepted Accounting Principles, or GAAP, is the accounting
framework used in the United States. GAAP is much more rules-based than IFRS. IFRS focuses
more on general principles than GAAP, which makes the IFRS body of work much smaller,
cleaner, and easier to understand than GAAP.
The Differences Between GAAP and IFRS
There are several working groups that are gradually reducing the differences between the GAAP
and IFRS accounting frameworks, so eventually there should be minor differences in the reported
results of a business if it switches between the two frameworks. There is a stated intent to
eventually merge GAAP into IFRS, but this has not yet occurred.
There will be a reduced cost for companies once the two accounting frameworks are more closely
aligned, since they will not have to pay to have their financial statements restated to show results
under the other framework in cases where they need to report their results in locations where the
other framework is required.

The Philippine Accounting Professions

The Philippine public accounting practices originated in the 1700s, but it was on March 17, 1923,
when the accounting profession was formally recognized by the Philippine government. Such
formalization served as an initial move toward the growing accountancy profession in the country,
and was written through Republic Act (RA) 3105. Through such Act, the Board of Accountancy
was created and vested with the authority to issue certificates to qualified applicants. Such
certificate serves as a tangible proof of passing the rigorous process of being a CPA, which
includes passing the CPA board exam, among others; it is a symbol of years of hard work and
perseverance, and finally, a fruit of one’s labor.
Through the years of development in the accounting profession, several changes have occurred
with RA 3105. Some of the many changes in the 1923 law include: (1) the CPA examination scope;
(2) the qualification to apply; and (3) the rating required to pass.

(1) The CPA examination scope. Back in 1923, the scope of the CPA board exam consisted of
only four subjects, namely, Theory of Accounts, Practical Accounting, Auditing and
Commercial Law. Today, the theoretical and computational parts are already combined in
related subjects. The CPA board exam is now composed of six subjects, namely, Financial
Accounting and Reporting, Advanced Financial Accounting and Reporting, Management
Advisory Services, Audit, Taxation and Regulatory Framework for Business Transactions.
(2) The qualification to apply. Today, in order to qualify as a CPA board examinee, the
applicant must be a Filipino citizen; of good moral character; with a Bachelor of Science
degree in Accountancy; must not have been convicted of any criminal offense involving
moral turpitude; and with no minimum age requirement. Back in 1923, an applicant must
be over 21 years of age, and there was nothing explicitly requiring a bachelor’s degree in
accountancy.
(3) The rating required to pass. Back in 1923, a general average rating of 75 percent or over
meant a passing rate. Today, in addition to the general average of 75 percent, the applicant
must not have had any grade below 65 percent in any subject.
From only having 43 registered accountants in 1923, the number of Certified Public Accountants
has increased to hundreds of thousands. With the world’s growing need to understanding the
language of business comes the increasing demand, as well, for accountants who are expected to
know and give sense of the figures in the financial statements. The Philippine law on accountancy
recognizes the importance of accountants in nation-building and its development. The revisions in
the accountancy law prove how the accounting profession continues to develop and move forward,
and more revisions are expected in the future.
The Philippine Institute of Certified Public Accountants (PICPA)
The Philippine Institute of Certified Accountants or PICPA is the accredited professional
organization (APO) of CPAs by the Professional Regulation Commission (PRC) and has been
awarded twice as PRC most outstanding APO from among other professional organizations.
PICPA was founded in November 1929 by a group of illustrious pioneers in the accounting
profession: Enrique Caguiat, Santiago de la Cruz, Francisco Dalupan, Jaime Hernandez, Felipe
Ollada, Ramon del Rosario, Antonio Sanchez, Jose Torres, Artemio Tulio, Clemente Uson and
Jesus Zulueta. W. W. Larkin, holder of CPA Certificate No. 1, was its first president.

The group set forth the following objectives:

 To promote and maintain high professional and ethical standards among accountants;
 To advance the science of accounting;
 To develop and improve accountancy education;
 To encourage cordial relations among accountants, and
 To protect the Certificate of Certified Public Accountant granted by the Republic of the
Philippines.

The PICPA Organization Structure

PICPA is a registered non-stock corporation with Geographical divisions, regions and chapters all
over the country. Geographical Areas, Regions and Chapters do not have juridical personality
separate and distinct from each other or from the national office. The PICPA organization consists
of the National Office (supported by a national secretariat), the geographical area, regions, the
chapters and the general membership.
The National Office is under the management of officers elected by the members of the Board
themselves; headed by the President, the Executive Vice President, the Vice President for
Commerce and Industry, Education, Government and Public Practice, the Vice President for
Operations, the Secretary, the Assistant Secretary, the Treasurer and the Assistant Treasurer. The
composition of the Board are twenty one (21) from the nine (9) regions and four (4) from the
sectors. Regional directors are elected regionally; four (4) from Metro Manila and two each from
each of the remaining regions. Sectoral directors are voted nationally, one coming from each
sector. The President is elected annually but rotated among the regional directors from Metro
Manila, Luzon, Visayas and Mindanao and to the extent practicable, among the four sectors of the
profession.
The PICPA recognizes the four (4) sectors by which a CPA may be in practice: namely, Public
Practice, Commerce and Industry, Education / Academe and Government. The PICPA endeavors
to have equal sectoral representations in all its offices from the National Office to its chapters and
affiliates. Each Regional Unit elects four (4) Regional Sectoral Representatives who are tasked
with the professional development of each particular sector through participation in an accredited
Continuing Professional Education program. The Geographical Area Office and Regional
Councils are under uniform rules prescribed by the National Board Board of Directors.
References:
Accounting tools: Accounting CPE Courses and Books, IFRS Definition, December 21, 2020,
Retrieved from: https://www.accountingtools.com/articles/what-is-ifrs.html
David, Christine Bernadette C. Accountancy then and now, March 18, 2018, Business Mirror,
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now/#:~:text=The%20Philippine%20public%20accounting%20practices,recognized%20by
%20the%20Philippine%20government.&text=Through%20such%20Act%2C%20the%20B
oard,issue%20certificates%20to%20qualified%20applicants.
GAAP: A commonly recognized set of rules and procedures governing corporate accounting and
financial reporting, Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/accounting/gaap/#:~:text=Histo
ry%20of%20GAAP,by%20some%20publicly%2Dtraded%20companies.
Philippine Institute of Certified Public Accountants: The National Organization of Certified
Public Accountants, Retrieved from:
http://www.picpa.com.ph/content.html?article=History&page=About