[Conceptual Framework and Accounting Standards] 1

[The Environment for Financial Accounting and Reporting Part 1]

Module 01: The Environment for Financial

Accounting and Reporting Part 1

Course Learning Outcomes:

1. Introduction in Accounting.
2. Understanding about Accountancy.
3. Objectives of Financial Reporting.
4. Accounting Information Users and Their Needs.
5. Generally Accepted Accounting Principles and Underlying Assumptions.
6. Financial Reporting Standards and Accounting Standards.

Definition of Accounting
The Financial Reporting Standards Council (formerly Accounting Standards Council)
mention the following:
Accounting is a service activity. Its function is to provide qualitative information, primarily
financial nature, about economic entities, that is intended to be useful in making economic
decision

The Committee on Accounting Terminology if the American Institute of Certified Public

Accountants (AICPA) defines Accounting as follows:
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 financial character,
and interpreting the results thereof.

The American Accounting Association in its Statement of Basic Accounting Theory defines
accounting as follows:
Accounting is the process of identifying, measuring and communicating economic information
to permit informed judgment and decision by users of the information

The Accountancy Profession

Republic Act No. 9298 is the law regulation the practice of accountancy in the Philippines.
This law is also known as the “Philippine Accountancy of 2004”.

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In the Philippines, in order to qualify to practice the accountancy profession, a person

must finish a degree in Bachelor of Science in Accountancy and pass a very difficult
government examination given by Board of Accountancy.

Board of Accountancy is the body authorized by law to promulgate rules and regulation
affecting the practice of the accountancy profession in the Philippines.

LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY

Single practitioners and partners of partnership organized for the practice of public
accountancy shall be registered certified public accountants in the Philippines.

A Certificate of Accreditation shall be issued to certified public accountants in public

practice only upon showing, in accordance with rules and regulations promulgated by the
Board and approved by the Commission, that such registrant has acquired a minimum of
three (3) years meaningful experience in any of the areas of public practice including
taxation.

The Securities and Exchange Commission shall not register any corporation organized for
the practice of public accountancy.

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

Certified public accountants, firms and partnerships of certified public accountants,
engaged in the practice of public accountancy, including partners and staff members
thereof, shall register with the Commission and the Board, such registration to be renewed
every three (3) years.

Certified Public Accountants generally practice their profession in three main areas: Public
Accounting, Private Accounting and Government Accounting.

 PUBLIC ACCOUNTING: Is the branch of accounting where an accountant works

with a range of clients to review and prepare financial documents that an individual
or corporation is required to disclose to the public. In simple terms, public
accountants work to verify important financial documents, reports and disclosures
from an outside perspective.

 Accounting and auditing services that involve maintaining financial records

and preparing and auditing financial statements for use by outside investors
and banks.

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 Tax services that involve the preparation of tax returns as well as advising
clients on tax deductions, tax planning, and other tax-related issues.

 Consulting services, which can involve financial planning services for

individuals as well as business consultation services to help management
design, develop and implement accounting systems and employee
compensation packages.

 PRIVATE ACCOUNTING: Deals with the financial information of a single company

they’re employed by, usually preparing or analyzing reports for an internal manager.
Often the work of private accounting professionals is reviewed and audited by public
accounting firms—this provides a sort of independent stamp of approval verifying
that their private internal accounting practices meet reporting standards.

 GOVERNMENT ACCOUNTING: Government accountants and auditors work in the

public sector to maintain and examine the records of government agencies and also
to audit private businesses and individuals who pay taxes. Government accountants
also audit entities subject to other government regulations, such as businesses
providing contract services to the government or organizations receiving
government grant money.

CONTINUING PROFESSIONAL EDUCATION (CPE) PROGRAM

All certified public accountants shall abide by the requirements, rules and regulations
on continuing professional education to be promulgated by the Board, subject to the
approval of the Commission, in coordination with the accredited national professional
organization of certified public accountants or any duly accredited educational institutions

Financial Reporting
Financial Reporting encompasses not only financial statements but also other members of
communicating information that relates directly or indirectly to the financial accounting
process.

Financial Reports represent the main products of financial reporting. Financial reports
include not only financial statements but also other information such as financial highlights,
summary of important financial figures, analysis of financial statements and significant
ratios.

Financial Reports include non financial information such as description of major products
and a listing of corporate officers and directors.

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Objective of Financial Reporting

The overall objective of Financial Reporting is to provide information that is useful for
decision making.
Specifically, the AICPA Financial Accounting Standards Board in its Statement of Financial
Accounting Concepts enumerates the following objectives of financial reporting:

1. Providing Information Useful in Making Investment and Credit Decisions

The objective of general purpose external financial reporting is to provide information that
is useful to present and potential investors and creditors and others in making investment,
credit, and similar resource allocation decisions.

2. Providing Information Useful in Assessing Cash Flow Prospects

To help achieve its objective, financial reporting should provide information to help
present and potential investors and creditors and others to assess the amounts, timing, and
uncertainty of the entity’s future cash inflows and outflows (the entity’s future cash flows).
That information is essential in assessing an entity’s ability to generate net cash inflows
and thus to provide returns to investors and creditors.

3. Providing Information about an Entity’s Resources, Claims to Those Resources, and

Changes in Resources and Claims
To help present and potential investors and creditors and others in assessing an entity’s
ability to generate net cash inflows, financial reporting should provide information about
the economic resources of the entity (its assets) and the claims to those resources (its
liabilities and equity). Information about the effects of transactions and other events and
circumstances that change resources and claims to them is also essential.

Accounting Information Users and Their Needs

Accounting information of a business enterprise is used by many stakeholders. Different
parties use this information for different purposes depending on their needs. Therefore,
the accounting information system of a business enterprise must be designed in a way that
it should generate the reports to satisfy the information needs of every interested party.

1. Investors
In corporate form of business, the ownership is often separated from the management.
Normally investors provide capital and management runs the business.

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The accounting information is used by both actual and potential investors. Actual investors
use this information to know how their funds are used by the management and what is the
expected performance of business in future in terms of profitability and growth. On the
basis of this information, they decide whether to increase or decrease investment in
corporation in future. Potential investors use accounting information to decide whether or
not a particular corporation is suitable for their investment needs.

2. Lenders
Lenders are individuals or financial institutions that normally lend money to businesses
and earn interest income on it. They need accounting information to assess the financial
performance and position and to have a reasonable assurance that the business to whom
they are going to lend money would be able to return the principal amount as well as pay
interest there on.

3. Suppliers
Suppliers are business individuals or organizations that normally sell merchandise or raw
materials to other businesses on credit. They use accounting information to have an idea
about the future creditworthiness of the business and to decide whether or not to continue
providing goods on credit.

4. Government agencies
Government agencies use financial information of businesses for the purpose of imposing
taxes and regulations.

5. General public
General public also uses accounting information of business organizations. For example,
accounting information is:

 a source of education for students of accounting and finance.

 a source of valuable data for those researching on organizational impacts on
individuals and economy as a whole.
 a source of information for the people looking for job opportunities.
 a source of information about the future of a particular enterprise.

6. Customers
Accounting information provides important information to customers about current
position of a business organization and to make a judgment about its future. Customers can

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be divided into three groups – manufactures or producers at various stages of production,

wholesalers and retailers and end users or final consumers.

Manufacturers or producers at every stage of processing need assurance that the

organization in question will continue providing inputs such as raw materials, parts,
components and support etc. The wholesalers and retailers must be assured of consistent
supply of products. The end users or final consumers are interested in continuous
availability of products and related accessories. Because of these reasons, the accounting
information is of significant importance for all three types of customers

7. Employees
Employees who do not have a hand in core management of the business are considered
external users of accounting information. They are interested in financial information
because their present and future is tied up with the success or failure of the business. The
success and profitability of business ensures job security, better remuneration, job
promotion and retirement benefits.

Generally Accepted Accounting Principles (GAAP)

GAAP are the concepts, standards, and rules that guide the preparation and presentation of
financial statements. The current set of principles that accountant use rests upon
underlying assumptions. If US accounting rules are followed, the accounting rules are called
US GAAP. International accounting rules are called International Financial Reporting
Standards (IFRS).

In the Philippines, the development of generally accepted accounting principles is

formalized initially through the creation of Accounting Standard Council (ASC). The
Accounting Standard are promulgated by the Accounting Standard Council constitute the
generally accounting principle in the Philippines.

The Accounting Standards used in the Philippines are the Philippine Accounting
Standards (PAS) and Philippines Financial Reporting Standards (PFRS).

UNDERLYING ASSUMPTIONS
Accounting assumptions are the basic notions or fundamentals premises on which the
accounting process is based. It serves as the foundation of accounting in order to avoid
misunderstanding but rather enhance the understanding and usefulness of the financial
statements.

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 Accrual Assumption: Income is recognized when earned regardless of when received

and expense is recognized when incurred regardless of when paid.
 Going Concern Assumption: Continuing in operation indefinitely. In other words, the
financial statements are normally prepared on the assumption that the entity will
continue to operate in the future. Thus, asset are normally recorded at cost. Market Value
are ignored.
 Accounting Entity: The business enterprise is separate from the owners, managers and
employees who constitute the firm. It means, that every transactions of the firm should
not be merged with the transactions of the owners. The reason for this assumption is to
have a fair presentation of financial statement.
 Time Period: The life of a business can be divided into equal time periods. These time
periods are known as accounting periods for which companies prepare their financial
statements to be used by various internal and external parties. The “one-year period” is
traditionally the accounting period because usually it is after one year that the
government reports are required.
 Monetary Unit: Only those events and transactions are recorded in books of accounts of
the business which can be measured and expressed in monetary terms. An information
that cannot be expressed in terms of money is useless for financial accounting purpose
and is therefore not recorded .

Financial Reporting Standard Council (FRSC)

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”.

The FRSC is composed of 15 members with a Chairman who had been or is presently a
senior accounting practitioner and 14 representatives from the following:

Board of Accountancy 1

Securities and Exchange Commission 1

Bangko Sentral ng Pilipinas 1

Bureau of Internal Revenue 1

Commission on Audit 1

Major organizations of preparers and users of FS 1

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Accredited national professional organization of CPA’s:

 Public Practice 2

 Commerce and Industry 2

 Academe or Education 2

 Government 2

Total 14

The Chairman and members of the FRSC shall have a term of three years renewable for
another term. Any member of the ASC shall not be disqualified from being appointed to the
FRSC.
International Accounting Standards Committee (IASC)
The International Accounting Standards Committee or AISC is an independent private
sector body, with the objective of achieving uniformly in the accounting principles which
are used by business and other organization for financial reporting worldwide.

From 1983, the membership of IASC included all the professional accountancy bodies that
were members of International Federation of Accountants.

The objective of IASC are:

 To formulate and publish in the public interest accounting standards to be observed
in the presentation of financial statements and to promote their worldwide
acceptance and observance.

 To work generally for the improvement and harmonization of regulations,

accounting standards and procedures relating to the presentation of financial
statements.

The approved statements of the IASC are known as International Accounting

Standards(AIS).

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References and Supplementary Materials

Online Supplementary Reading Materials
1. Conceptual Framework for Financial Reporting;
https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220340119&acc
eptedDisclaimer=true; June 14, 2020
2. Financial Reporting Standards;
https://www.cfainstitute.org/en/membership/professional-development/refresher-
readings/2020/financial-reporting-standards; June 14, 2020
3. PRINCIPLES OF ACCOUNTING, VOLUME 1: FINANCIAL ACCOUNTING;
https://opentextbc.ca/principlesofaccountingv1openstax/chapter/prepare-an-income-
statement-statement-of-owners-equity-and-balance-sheet/; June 14, 2020
4. Accounting Terminology Guide; https://www.nysscpa.org/professional-
resources/accounting-terminology-guide#sthash.8LfoEJs1.dpbs; June 14, 2020
5. Users of accounting information; https://www.accountingformanagement.org/users-
of-accounting-information/; June 14, 2020
6. The Ten Generally Accepted Accounting Principles ( GAAP;
https://www.invensis.net/blog/finance-and-accounting/ten-generally-accepted-
accounting-principles-gaap/; June 14, 2020
7. Accounting principles and concepts (explanations);
https://www.accountingformanagement.org/monetary-unit-assumption/; June 14, 2020
8. Philippine Accounting Standards;
https://businessmirror.com.ph/2018/10/31/philippine-accounting-standards/; June 14,
2020
9. International Accounting Standards Committee (IASC) Foundation;
https://www.accountingnotes.net/accounting-standards/international-accounting-
standards-committee-iasc-foundation/5570; June 14, 2020
10. Republic Act No. 9298 ;
https://lawphil.net/statutes/repacts/ra2004/ra_9298_2004.html; June 14, 2020
11. Public Accountant Job Description; https://www.accountingedu.org/public.html; June
14, 2020

Online Instructional Videos

1. OVERVIEW ON FINANCIAL REPORTING; https://d3c33hcgiwev3.cloudfront.net/CK-
kWTjYEeig8Q74SlgkIA.processed/full/360p/index.webm?Expires=1592352000&Signat
ure=gGHPgp9FpXPeg0uJdME-7O1t6oCxcRoeUFEjXeT-
DJNim8GnRzTvRcYnTf8aujhJqBht4vLjp~v~Dogs7QaMkEljOU-sMxtMrVnQX-
8Y1Yu8fUZhNorfdok6c56U5rbAaFcnZZtCUGStbzfV7JXH2ahPhD4p~bQEO74ID2BeEe8_&
Key-Pair-Id=APKAJLTNE6QMUY6HBC5A; June 14,2020

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