The Challenges of Adopting International Accounting Standards: The Philippine Case

By Arnel Onesimo O. Uy, C.P.A., M.B.M

The quest for internationally harmonized financial reporting standards started in 1973 when professional
bodies from nine countries formed a council to formulate, develop and promulgate a set of international
accounting standards. Since then, the clamor and need for businesses to adopt such standards has become
more pronounced with the onset of globalization and trade liberalization.

In the Philippines, we have to date already realigned 23 of our financial accounting standards to-date
and are gearing up to put into practice 11 more by the year 2005.

General Observations on the IAS

Unlike our current rule-based, US-patterned standards, these international accounting standards (IAS),
recently renamed International Financial Reporting Standards (IFRS), are more concept-based. This approach
provides more flexibility for businesses around the world and contextualizes the application of these standards
across different industries and business conditions.

In addition, these IAS emphasize substance over form (with the exception of the proposed IAS on
financial instruments) and the use of fair values in measuring and reporting assets (e.g. fixed assets, intangibles
and investment property). They also promote non-deferral of costs (e.g. immediate charging of pre-operating
expenses or organization costs to current operations) and require more expanded disclosures. In fact,
practitioners anticipate that financial reports will be 70-100 pages long when all standards are implemented and
properly observed, excluding reports of the President/CEO and on the business outlook.

Implementing IAS
However, implementing such standards in this country is a different story. A survey of financial
statements submitted to the Security and Exchange Commission (SEC) reveals that we have a long way to go.
While big business and multinational companies in our country have already taken significant steps to comply
with these standards, the majority of local businesses, comprising the small and medium enterprises (SME)
have yet to abide by these principles.

In order for us to move forward and improve our level of compliance, we need to educate our
accountants (and auditors). This is a daunting task considering the number of practicing accountants and
auditors we have, and the nature and magnitude of changes to current reporting standards. To further
compound the situation, these standards are implemented on a staggered basis and hence, compliance cannot
be ensured by merely holding a one-time one-week or one-month seminar. Moreover, on top of the 11
standards to be implemented in the next two years, the ones already in force are currently being altered, revised
and updated as of this writing. To be exact, nine out of the 23 standards already adopted are currently being
revised including IFRS No. 1 which sets the principles for presentation of financial statements. In the near
future, more changes are expected with the harmonization of US-based GAAP and the IFRS which is currently
being initiated.

The current impasse between the Professional Regulatory Commission (PRC) and the Philippine
Institute of Certified Public Accountants (PICPA) regarding the continuous professional education (CPE)
requirement for accountants does not help us in accomplishing this.

Another major impediment to implementing these standards is the additional investment required by
businesses in re-designing their current accounting systems (both manual and computerized) and procedures.
For instance, adopting the standards on impairment of assets (IAS No. 36) would require accounting systems to
be more flexible in capturing cumulative impairment losses in addition to accumulated depreciation for each
asset or asset class.

Moreover, with the unfavorable economic conditions current in our country, most businesses, especially
the SMEs, would be more willing to allocate whatever funds they have left to income-generating projects instead
of upgrading their accounting (support) systems.

We must also consider the implications of these changes for our already complicated tax rules and laws.
We need to align our some of our tax regulations to consider the consequences of these modifications. For
instance, our income taxation regulation needs to address the effect of shifting to fair value accounting for
property assets from our (acquisition) cost-based accounting.

Lastly, we also need to consider how we view and analyze our financial statements. Principles on
traditional financial analysis will have to be polished to provide a more meaningful interpretation of operating,
investing and financing activities of a firm and our comparative analysis of another firm. The concept-based
approach to financial reporting, for example, can make it harder to compare the effects of accounting treatments
of the same transaction across different firms in different industries.

These are but a few of the challenges we face in adopting these new and internationally harmonized
standards. There’s no turning back for us now. The whole world is marching forward and so must we unless we
want to be left behind.

The foregoing observations bring to mind what a moderator in the just concluded PICPA national
convention in Bicol said: “I see not a dim light at the end of this tunnel but a ray of bright light. However, I do not
know how long this tunnel is.”

Mr. Arnel Onesimo Uy is director of graduate studies, College of Business and Economics, De La Salle
University – Manila.