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Overview:
This module describes the environment that has influenced both the development and use
of the financial accounting process. The chapter traces the development of financial accounting
standards, focusing on the groups that have had or currently have the responsibility for developing
such standards. Certain groups other than those with direct responsibility for developing financial
accounting standards have significantly influenced the standard-setting process.
Module Objectives:
❖ 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.
BRANCHES OF ACCOUNTING
❖ Financial Accounting is focused on the recording of business transactions and the
periodic preparation of reports on financial position and results of operations. 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.
❖ 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.
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❖ 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.
These objectives are not achievable if accounting standards vary from country to country.
Investment analysts and other users of financial reports incur extra costs of analysis when
the reports ae prepared according to different standards in different countries. They may be
confused in their interpretation of the reports. Effective competition among the capital markets of
the world may be impaired and companies may have to higher costs of capital because of the
difficulties involved in financial analysis. The credibility of accounting suffers. Accounting reports
will significantly lose credibility if a company reports different profit numbers in different countries
for given transactions.
International Accounting Standards are also of great usefulness for developing countries
or other countries, which do not have a national standard-setting body or do not have the
resources to undertake the full process of preparing accounting standards.
The preparation of accounting standards involves considerable cost and, quite apart from
the advantages of uniformity, it would not be economic for each country to have separate process.
The magnitude of cross-border financing transactions, securities trading, and direct
foreign investment is enormous, often in smaller as well as larger countries. The need of a single
set of rules by which assets, liabilities, and income are recognized and measured is urgent.
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than 120 jurisdictions, including Hong Kong, Egypt, Canada, Australia, and the countries in the
European Union (EU), require or permit the use of IFRS or a local variant of IFRS.
Structure
The IASB structure has the following main features: the IASC Foundation is an
independent organization having two main bodies, the Trustees and the IASB, as well as a
Standards Advisory Council and the International Financial Reporting Interpretations Committee.
The IASC Foundation Trustees appoint the IASB Members, exercise oversight and raise the funds
needed, whereas IASB has sole responsibility for setting accounting standards.
The following diagram is a visual representation of the structure of IASB. The structure is
designated to support those attributes considered desirable to establish the legitimacy of a
standard setting organization: the representativeness of the decision-making body, the
independence of its members, and technical expertise.
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The IASC Foundation/ IFRS Foundation
The governance of the IASB organization is ultimately in the hands of the Trustees of the
IASC Foundation. There are 22 Trustees (changes adopted the IASC Foundation as of July 1,
2005). Trustees shall normally be appointed for a term of three years, renewable once. The
Trustees appoint the members of the IASB, the Standing Interpretations Committee and the
Standards Advisory Council. Other duties are fundraising and annual review of strategy. The
trustees are not involved in technical matters relating to accounting standards.
IFRS Foundation is the new name, approved in January 2010, of the IASC Foundation.
The name change formally took effect on 1 July 2010. From that date, the Foundation's website
(including IASB materials) also changed to www.ifrs.org and email addresses changed to end in
'@ifrs.org'. The objectives of the IFRS Foundation are:
(a) to develop, in the public interest, a single set of high quality, understandable,
enforceable, and globally accepted financial reporting standards based upon clearly
articulated principles. These standards should require high quality, transparent and
comparable information in financial statements and other financial reporting to help
investors, other participants in the world's capital markets and other users of financial
information make economic decisions.
(b) to promote the use and rigorous application of those standards.
(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate,
the needs of a range of sizes and types of entities in diverse economic settings.
(d) to promote and facilitate adoption of the IFRS Standards, being the Standards and
IFRIC Interpretations issued by the Board, through the convergence of national accounting
standards and IFRS Standards.
The IFRS Foundation Constitution gives the IASB full discretion in developing and
pursuing its technical program and in organizing the conduct of its work. The Trustees and the
Board have established consultative procedures with the objective of ensuring that, in exercising
its independent decision-making, the Board conducts its standard-setting in a transparent
manner, considering a wide range of views from interested parties throughout all stages of the
development of International Financial Reporting Standards (IFRS Standards). (Note that when
this document refers to the development of an IFRS Standard or an amendment to an IFRS
Standard, the same process also applies to the development of an IFRS for SMEs Standard or
an amendment to the IFRS for SMEs Standard.) The Board uses these procedures to gain a
better understanding of different accounting alternatives and the potential effect of the proposals
on affected parties. A comprehensive and effective due process is essential to developing high-
quality IFRS Standards that serve investors and other primary users of financial statements.
The IASB
Decisions on accounting principles are made by the IASB and issued in the form of
International Financial Reporting Standards. Members of the Board are appointed by the Trustees
for a term of five years, renewable once. The Board has complete responsibility for all technical
matters.
The International Accounting Standards Board (the Board) shall normally comprise 14
members. The members of the Board are appointed by the Trustees. Up to three members may
be part-time members (the expression ‘part-time’ meaning that the members concerned commit
most of their time to paid employment by the IFRS Foundation) and shall meet appropriate
guidelines of independence established by the Trustees. The remaining members shall be full-
time members (the expression ‘full-time’ meaning that the members concerned commit all of their
time to paid employment by the IFRS Foundation). The work of the Board shall not be invalidated
by its failure at any time to have a full complement of members, although the Trustees shall use
their best endeavors to achieve a full complement.
The board shall:
(a) have complete responsibility for all Board technical matters, including the preparation
and issuing of IFRS Standards (other than IFRIC Interpretations) and Exposure Drafts,
each of which shall include any dissenting opinions, and the approval and issuing of
IFRIC Interpretations developed by the Interpretations Committee.
(b) publish an Exposure Draft on all projects and normally publish a discussion document
for public comment on major projects in accordance with procedures approved by the
Trustees.
(c) in exceptional circumstances, and only after formally requesting and receiving prior
approval from 75% of the Trustees, reduce, but not dispense with, the period for public
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comment on an Exposure Draft below that is described as the minimum in the IFRS
Foundation Due Process Handbook.
(d) have full discretion in developing and pursuing its technical agenda, subject to the
following:
(i) consulting the Trustees, and the Advisory Council, and
(ii) carrying out a public consultation every five years from the date of the most
recent public agenda consultation.
(e) have full discretion over project assignments on technical matters: in organizing the
conduct of its work, the Board may outsource detailed research or other work to
national standard-setters or other organizations.
(f) establish procedures for reviewing comments made within a reasonable period on
documents published for comment.
(g) normally form working groups or other types of specialist advisory groups to give
advice on major projects.
(h) consult the Advisory Council on major projects, agenda decisions and work priorities.
(i) normally publish a Basis for Conclusions with a Standard or an Exposure Draft.
(j) consider holding public hearings to discuss proposed Standards, although there is no
requirement to hold public hearings for every project.
(k) consider undertaking field tests (both in developed countries and in emerging markets)
to ensure that proposed Standards are practical and workable in all environments,
although there is no requirement to undertake field tests for every project.
(l) (l) give reasons if it does not follow any of the non-mandatory procedures set out in
(b), (g), (i), (j) and (k).
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IFRS Advisory Council (the Advisory Council)
The Advisory Council, formerly called the Standards Advisory Council, whose members
shall be appointed by the Trustees provides a forum for participation by organizations and
individuals, with an interest in international financial reporting, having diverse geographical and
functional backgrounds, with the objective of:
(a) giving advice to the Board on agenda decisions and priorities in the Board’s work;
(b) informing the Board of the views of the organizations and individuals on the Advisory
Council on major standard-setting projects; and
(c) giving other advice to the Board or the Trustees.
The Advisory Council shall comprise 30 or more members, having a diversity of
geographical and professional backgrounds, appointed for renewable terms of three years. The
Chair of the Advisory Council shall be appointed by the Trustees and shall not be a member of
the Board or a member of its staff. The Trustees shall invite the Chair of the Advisory Council to
attend and participate in the Trustees’ meetings, as appropriate.
The Advisory Council shall normally meet at least two times a year. Meetings shall be
open to the public. The Advisory Council shall be consulted by the Board in advance of decisions
of the Board on major projects and by the Trustees in advance of any proposed changes to the
Constitution.
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In developing accounting standards that will be generally accepted in the Philippines, the
Accounting Standard Council (ASC) considered standards issued by other standard-setting
bodies such as the U.S. Financial Accounting Standards Board (FASB) and the International
Accounting Standards Committee (now the IASB). In the past years, the ASC based most of the
standards it issued on U.S. accounting standards. Starting in 1996, however, the ASC issued
accounting standards that were based on international accounting standards (i.e., standards on
retirement benefit costs, borrowing costs, construction contracts, revenues, and earnings per
share). In 1997, the ASC decided to move totally to International Accounting Standards.
The ASC considered the following factors in deciding to move to International Accounting
Standards:
▪ Support of IAS by Philippine organizations. The Philippine Securities and Exchange
Commission, in its Revised Securities Act (RSA) Rule 48, Rules and Regulations Covering
Form and Content of Financial Statements, specifically include IAS in its hierarchy of
generally accepted accounting principles.
The Board of Accountancy supports IAS by its implementation of GATS with
respect to accountancy services. The accounting profession is one of the first services to
be liberalized under GATS and there appears to be no alternative but to support
International Accounting Standards.
PICPA has a commitment to support the work of IAS and to use its best endeavors
to foster compliance with International Accounting Standards.
▪ Increasing internationalization of business. The increase in globalization of business
and in cross border financing has heightened interest in a common language for financial
reporting. More and more Philippine companies are now seeking capital abroad and go to
countries other than the U.S., such as Hong Kong, Singapore, and Europe, where
International Accounting Standards have increasing acceptability.
▪ Improvements of IAS. The IASC completed a comparability and improvements project,
which was aimed at the removal of free choices of accounting treatments permitted in
certain of the International Accounting Standards. The IASC also reviewed and revised
many of the standards for developments that had taken place since the standards were
first issued.
▪ Increasing recognition of IASB standards. International financial institutions, such as
the World Bank and Asian Development Bank prefer that borrowers use International
Accounting Standards. The World Trade Organization (WTO), the premier entity for trade
and investment liberalization, issued a statement of support for IASC initiatives to
harmonize accountancy standards.
The International Organization of Securities Commissions (IOSCO) has agreed to
consider use of International Accounting Standards in cross border capital raising and
listing purposes in all global markets if IASC can complete certain core and other
standards.
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The Securities and Exchange Commission (SEC) as indicated in SEC Memorandum
Circular #19, Series of 2004 dated Dec. 22, 2004 requires the adoption of the IAS, PAS and IFRS
in the audited financial statements.
The FRSC formed the Philippine Interpretation Committee (PIC) in August 2006. The main
objective of the PIC are:
1. Principally, to issue implementation guidance on Philippine Accounting Standards
(PAS), Philippine Financial Reporting Standards (PFRS) and related Interpretations
(collectively referred to as PFRS) adopted by the Financial Reporting Standards
Council (FRSC) from accounting pronouncements issued by the International
Accounting Standards Board.
2. To comment on exposure drafts of proposed PFRS and other documents that may be
issued for comment by the FRSC.
3. To comment on exposure drafts of proposed accounting standards or proposed
regulations with accounting relevance that may be issued by government agencies,
such as the Securities and Exchange Commission, Bangko Sentral ng Pilipinas and
Insurance Commission.
The PIC shall deal with accounting issues of reasonably widespread importance and not
issues of concern only to a single entity or small group of entities. It is preferred that accounting
issues are coursed through the respective external auditors of companies or through the
leadership of professional organizations.
/NABergonia2020
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