CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

(ACCO 103)
Topic 1: Development of the Financial Reporting Framework and Standard-Setting Bodies

Learning Outcomes:
❖ describe the purpose of accounting and financial reporting;
❖ identify the need for information of the users of accounting information;
❖ describe the branches of accounting;
❖ discuss the development of accounting standards and financial reporting standards;
❖ identify the organizations involved in the promulgation of the accounting standards;
❖ describe the due process of developing the international financial reporting standards; and
❖ describe the due process of developing and promulgating Philippine Financial Reporting
Standards.

Purpose of Accounting
■ To generate general purpose financial statements that provide information about economic
entities that is to be used as basis for the formulation of economic decisions.
■ Accounting is important for markets, free enterprise, and competition because it assists in
providing information that leads to capital allocation. Reliable information leads to a better, more
effective process of capital allocation, which in turn is critical to a healthier economy.

Financial Accounting and Financial Statements

■ Financial accounting is the process that culminates in the preparation of financial reports on
the enterprise for use by both internal and external parties.
■ Financial statements are the principal means through which a company communicates its
financial information to those outside it.
The FS frequently provided are (1) the statement of financial position, (2) the income
statement or statement of comprehensive income, (3) the statement of cash flows, and (4) the
statement of changes in equity. Note disclosures are an integral part of each financial
statement. Other means of financial reporting include the president’s letter or supplementary
schedules in the corporate annual report, prospectuses, and reports filed with government
agencies.
The major standard-setters of the world, coupled with regulatory authorities, now
recognize that capital formation and investor understanding is enhanced if a single set of high
quality accounting standards is developed.

Financial Reporting
Financial reporting – the communication of the set of financial statements and other financial
information.
Purpose of financial reporting
■ To provide financial information about the reporting entity that is useful to present and
potential equity investors, lenders, and other creditors in making decisions about providing
resources to the entity, and for other stakeholders to make decisions for the entity. Since financial
reports are used for decision making then there should be a standard way of reporting.
OBJECTIVE OF FINANCIAL REPORTING
a. General-purpose financial statements provide at the least cost the most useful information
possible to a wide variety of users.
b. Equity investors and creditors are the primary user groups and have the most critical and
immediate needs for information in financial statements. Investors and creditors need this
information to assess a company’s ability to generate net cash inflows and to understand
management’s ability to protect and enhance the assets of a company.
c. The entity perspective means that the company is viewed as being separate and distinct from
its investors (both shareholders and creditors). Therefore, the assets of the company belong to the
company, not a specific creditor or shareholder. Financial reporting focused only on the needs of
the shareholder—the proprietary perspective—is not considered appropriate.
d. Decision-usefulness means that information contained in the financial statements should help
investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends
or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. For
investors to make these assessments, the financial statements and related explanations must
provide information about the company’s economic resources, the claims to those resources, and
the changes in them.

Elements to facilitate efficient capital allocation, ensure relevant information and faithful
representation comparable across borders:
a. A single set of high-quality accounting standards established by a single standard-setting
body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and practices.
e. A common approach to regulatory review and enforcement.
f. Education and training of market participants.
g. Common delivery systems (e.g., extensible Business Reporting
Language—XBRL).
h. A common approach to corporate governance and legal frameworks around the world.

Users of Financial Information Internal Users and External Users

■ Internal users – active owners of the business and management
They use financial information for the following:
– For internal decision-making purposes
– To evaluate the entity’s performance
– To make financial and operational plans
– To implement business decisions such as whether to
continue or to liquidate, to infuse capital or borrow from
creditors, to change business strategies
– To determine whether demands of employees for improved
remuneration and economic benefits will be granted

Managerial Accounting is the branch of accounting designed to meet the information

needs of internal users.
■ External users – inactive owners, creditors and lenders, suppliers, potential investors, taxing
authorities, regulatory bodies, employees and employee unions, financial analysts, financial
advisers and consultants, and the general public.
They use financial information for the following:
– Inactive users - to keep track of the enterprise’s financial condition and performance so they
can decide to hold or sell their equity interest
– Present and potential creditors – to assess the ability of the enterprise to pay its loans and
related interest
– Suppliers of goods/services – to determine if they will receive payment when receivables are
due
– Employees – to assess the firm’s ability to provide remuneration, retirement benefits and
employment opportunities
– Government agencies/regulators – to determine whether the firm is complying with prescribed
rules and regulations, is paying the correct amount of taxes, which help serve as basis for
taxation
policies and for national income and similar statistics.

Financial Accounting is the branch of accounting that focuses on information needs of

external users.

Users of Financial Information Direct Users and Indirect Users

■ Direct users – owners, managers, creditors, suppliers, customers, employees, and taxing
authority
- They use financial information as a tool to protect their own interest in the enterprise.
■ Indirect users – regulatory agencies, labor unions, financial consultants, legal consultants
– They use financial information to provide advice to or protect the interest of a direct
user.

Accounting Entity
■ A reporting entity is oftentimes called the accounting entity.
■ Accounting entity concept – separates the personality of the enterprise from its owners and
other stakeholders.
■ An accounting entity is capable of controlling its own economic resources and incurring
economic obligations
BRANCHES OF ACCOUNTING
■ Financial Accounting is the broadest branch of accounting focusing on the needs of external
users. Financial accountants accord importance to existing accounting standards.
■ Management Accounting, as defined by Institute of Management Accountants (IMA) is a
profession that involves partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial reporting and control to
assist management in the formulation and implementation of organization’s strategy. It serves the
information needs of the internal users.
■ Cost Accounting deals with the collection, allocation and control of the cost of producing
specific goods and services.
■ Auditing is an independent examination that ensures the fairness and reliability of the reports
that management submits to users outside the business entity.
■ Government Accounting is concerned with the identification of the sources and uses of
government funds.
■ Tax Accounting includes preparation of tax returns and the consideration of tax consequences
of proposed business transactions.
■ Accounting Education employs accountants either as researchers, professors or reviewers.
They guarantee the continued development of the profession.

What is the branch of accounting that makes financial information about an entity accessible to
external users? Financial Accounting

The Need for International Accounting Standards

■ Accounting reports need comparability
■ Accounting reports need consistency such that profit numbers in different countries for given
transactions will be reported similarly thus providing credibility to the accounting reports
■ There is need to bring into common basis, the system of measurement of economic activities.

International Accounting Standards Committee (IASC)

■ The following international bodies publicly urged the adoption of a single set of global
accounting standards:
➢ World Bank (WB)
➢ International Monetary Fund (IMF)
➢ International Organization of Securities
Commission (IOSCO)
➢ Organization of Economic Cooperation Development (OECD)
■ In 1973, the IASC was created to develop global accounting standards
■ The IASC issued a set of uniform global accounting standards called International Accounting
Standards (IAS) and promoted the use and application of these standards.
International Accounting Standards Board (IASB)
■ Replaced IASC in year 2001
■ IASB main objective is to develop a single set of high-quality, understandable, and enforceable
global accounting standards to help participants in the world’s capital markets and other users
make economic decisions.
■ IASB has revised many IASs. (even after revision, IAS that originated from the work of IASC
continue to be called IAS)
■ IASB has issued new standards of its own, called International Financial Reporting Standards
(IFRS)
■ The IASB has no authority to require compliance with its accounting standards. But through
the help of international bodies mentioned earlier (WB, IMF, IOSC, OECD) have enjoined
regulators in different countries to adopt the use of IAS and IFRS.

The international standard-setting structure is composed of:

a. The IFRS Foundation (22 trustees) provides oversight to the IASB, IFRS Advisory Council,
and IFRS Interpretations Committee. It appoints members, reviews effectiveness, and helps in
fundraising efforts for these organizations.
b. The International Accounting Standards Board (IASB) (16 members) develops in the
public interest, a single set of high-quality, enforceable, and global international financial
reporting standards for general-purpose financial statements.
c. The IFRS Advisory Council (30 or more members) provides advice and council to the IASB
on major policies and technical issues.
d. The IFRS Interpretations Committee (22 members) assists the IASB through the timely
identification, discussion, and resolution of financial reporting issues within the framework of
IFRS.

IFRS Foundation
■ A not-for-profit international organization responsible for developing a single set of high-
quality global accounting standards, known as IFRS Standards.
■ IFRS Foundation Mission: “Our mission is to standards that bring transparency, accountability,
and efficiency to financial markets around the world. Our work serves the public interest by
fostering trust, growth, and long-term financial stability in the global economy.”
■ IFRS Standards are now required in more than 140 jurisdictions, with many others permitting
their use

Stages in IASB Due Process in Developing IFRS:

(1) Setting the agenda - Topics are identified and placed on the Board’s agenda.
(2) Planning the project
(3) Developing and publishing the discussion paper - Research and analysis are conducted, and
preliminary views of pros and cons are issued.
(4) Developing and publishing the exposure draft - The Board evaluates research and public
responses and issues an exposure draft.
(5) Developing and publishing the standard - The Board evaluates the responses and changes the
exposure draft, if necessary.
(6) Issuance of the standard - The final standard is issued
IASB and IFRS Interpretations Committee us the Due Process Handbook of 2020 as their
basis.

ELEMENTS of the IASB Due Process in Developing IFRS:

The IASB has a thorough, open and transparent due process in establishing financial accounting
standards. It consists of the following elements:
■ a. An independent standard-setting board overseen by a geographically and professionally
diverse body of trustees.
■ b. A thorough and systematic process for developing standards.
■ c. Engagement with investors, regulators, business leaders, and the global accountancy
profession at every stage of the process.
■ d. Collaborative efforts with the worldwide standard-setting community.
Stages in IASB Due Process in Developing IFRS:

Stages of the IASB Due Process in Developing IFRS:

1. To address users’ demand for better quality financial information, the IASB identifies an
issue or issues, and puts in its agenda after considering the relevance of information to the
users and the reliability of the information tat could be provided, and the possibility of
increasing convergence.
2. IASB decides where to conduct project alone or jointly with another standard setter
3. Discussions of the working group are contained in a discussion paper, including
comprehensive overview of the issue, possible approaches to address the issue,
preliminary views of its authors or the IASB, and an invitation to comment. The
discussion of all technical issues takes place in public sessions (public meetings, public
hearings and public round tables) where questions and answer sessions are conducted
4. IASB considers comments received on the discussion paper, results of staff research and
recommendations, suggestions by the IFRS Advisory Council, working groups and
accounting standard setters, suggestions from public education sessions. Then an
exposure draft is developed and voted upon. The exposure draft is the IASV’s main
vehicle to consult the interested public. Commend period for major projects 120 days, for
IFRIC interpretations 60 days.
5. Makes revisions on the draft after considering the comments on the exposure draft. When
deemed necessary, a second exposure draft is developed and published, following the
same process as previously described. Upon reaching conclusion on the issues covered in
the exposure draft, the pre-ballot IFRS is sent to selected parties for review. After which a
near final draft is posted on the IASB website. BALLOTING, which is circularizing the
near final reporting standard to the IASB members requires individual final review and
approval of the draft. The approved pronouncement is posted to the IASB’s limited
 access website for an initial period of about 10 days, after which the draft is freely
available online.
6. After issuance of an IFRS, the IASB holds regular meetings with interested parties to
address some i=unanticipated issues relating to implementation.

Why the need for high-quality standards?

1. To facilitate efficient capital allocation
2. In order to ensure adequate comparability across borders, a single, widely accepted set of
high-quality accounting standards is a necessity.
3. Identify the elements involved:
a. A single set of high-quality accounting standards established by a single standard-
setting body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and practices.
e. Common approach to regulatory review and enforcement.
f. Education and training of market participants.
g. Common delivery systems.
h. Common approach to corporate governance and legal frameworks around the world.

IFRS includes the following:

(a) Specific International Financial Reporting Standards
(b) Interpretations made by the International Financial Reporting Interpretations Committee
(IFRIC, the body that interprets the work of the IASB)
(c) International Accounting Standards (IAS)
(d) Interpretations made by the Standing Interpretations Committee (SIC, the body that interprets
the works of the IASC)

The body that authors the International Financial Reporting Standards (IFRS) is the
International Accounting Standards Board
An independent, not-for-profit private sector organization that governs the activities of
the International Accounting Standards Board is the IFRS Foundation

The Standard Setting Bodies in the Philippines Accounting Standards Council (ASC)
■ On November 18, 1981, the PICPA created the Accounting Standards Council (ASC) to
establish and improve accounting standards that will be generally accepted in the Philippines.
■ The ASC was composed of eight (8) members:
4 PICPA including the designated Chairman
1 SEC
1 CB
1 PRC
1 FINEX.
4 representatives of PICPA: Education, Public Practice, Commerce & Industry, Government
■ The accounting standards developed by the ASC were known as the Statement of Financial
Accounting Standards (SFAS).
■ The accounting standards would generally be based on the following:
– existing practices in the Philippines,
– research or studies by the Council;
– locally or internationally available literature on the topic or subject; and
– statements, recommendations, studies or standards issued by other standard-setting bodies such
as the International Accounting Standards Board (LASB) and the Financial Accounting
Standards Board (FASB).
■ In 1997 ASC decided to move fully to the International Accounting Standards (IAS)
■ 1997 to 2000 ASC developed accounting standards based on IAS (gradual transition from
SFAS to IAS and IFRS)
■ 2001 ASC adopted most of the standards developed by IASC
■ 2005 the year of full adoption of the IAS in the Philippines
The SEC in Memorandum Circular #19 Series of 2004 dated Dec 22, 2004 required the
adoption of the IAS, PAS and IFRS in the audited Financial Statements

The Standard Setting Bodies in the Philippines Financial Reporting Standards Council
(FRSC)
■ In 2006 the Financial Reporting Standards Council (FRSC) was established to replace and
takeover the functions of the ASC. (section 9(a) of the Rules and Regulations Implementing
RA9298 Philippine Accountancy Act of 2004)
■ FRSC was created by the Board of Accountancy in 2006
■ FRSC is composed of a chairman and 14 members representing BOA, SEC, BSP, BIR, COA
and a major organization composed of preparers and users of financial statements, and the
accredited national professional organization of CPAs in the Philippines (which is presently
PICPA)

PRFS consists of:

(a) Specific Philippine Financial Reporting Standards (PFRS), which are adopted from the
IFRSs;
(b) Philippine Accounting Standards (PAS), which are adopted from the IAS; and
( c) Philippine Interpretations, which are adopted from the interpretations of the IFRIC and the
SIC and
(d) Interpretations of the PIC (interprets the work of the IASB)

Philippine Financial Reporting Standards (PRFS)

■ PFRSs set out the recognition, measurement, presentation, and disclosure requirements dealing
with transactions and events that are important in general purpose financial transactions.
PFRSs are developed through a due process that involves members of PICPA, financial
executives, regulatory authorities, members of the academe and other interested individuals and
organizations.

Due Process in the Development of PRFS

■ PFRSs are developed through a due process that involves members of PICPA, financial
executives, regulatory authorities, members of the academe and other interested individuals and
organizations.

Steps in the Due Process of Development of PFRS

(a) Consideration of pronouncement of IASB;
(b) Formation of a task force, when deemed necessary, to give advise to the FRSC;
(c) Issuing for comment an exposure draft approved by a majority of the FRSC members;
comment period will be at least 60days, unless a shorter period (not less than 30 days) is
considered appropriate by the FRSC;
(d) Consideration of all comments received within the comment period and, when appropriate,
preparing a comment letter to the IASB; and
(e) Approval vote of a standard or an interpretation by a majority of the FRSC members