Pamantasan ng Lungsod ng Valenzuela- Department of Accountancy

FAR2: Conceptual Framework and Accounting Standards

Definition of Accounting
- Accounting is a service activity. The accounting function is to provide quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making economic decisions. (Accounting Standards Council)
- 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 a financial character and interpreting the results thereof. (Committee on Accounting Terminology
of the American Institute of Certified Public Accountants)
- Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and
decision by users of the information. (Statement of Basic Accounting Theory of American Accounting Association)
Components of Accounting
1. Identifying- analytical component; this involves recognition or non- recognition of business activities as accountable events.
*An event is accountable or quantifiable when it has an effect on assets, liabilities and equity.
Classification of Economic Activities:
− External or Exchange Transactions- economic events involving one entity and another entity.
− Internal Transactions- economic events involving the entity only.
2. Measuring- technical component; this involves assigning of peso amounts to the accountable economic transactions and events.
3. Communicating- formal component; this involves preparing and distributing accounting reports to potential users of accounting
information.
Aspects of Accounting
1. Recoding- journalizing; this is the process of systematically maintaining a record of all economic business transactions after
they have been identified and measured.
2. Classifying- posting; this is the sorting or grouping of similar and interrelated economic transactions into their respective
classes.
3. Summarizing- this is the preparation of financial statements
Overall Objective of Accounting
- To provide quantitative financial information about a business that is useful to statement users in making economic decisions.
Republic Act No. 9298- This is the law regulating the practice of accountancy in the Philippines. This law is known as the Philippine
Accountancy Act of 2004.
Board of Accountancy- body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession
in the Philippines.
Four areas of Accountancy Profession
1. Public practice- composed of individual practitioners, small accounting firms and large multinational organizations rendering
independent and expert financial services to the public which include:
a. Auditing- primary service offered by most public accounting practitioners; specifically known as external auditing;
this refers to examination of financial statements by independent certified public accountant for the purpose of
expressing an opinion as to the fairness with which the financial statements are prepared; also known as attest function.
b. Taxation- includes preparation of annual income tax returns and determination of tax consequences of certain proposed
business endeavors.
c. Management Advisory Services- generally refers to services to clients on matters of accounting, finance, business
policies and many other phases of business conduct and operations.
2. Private practice- major objective of private accountant is to assist management in planning and controlling the entity’s
operations.
3. Government accounting- encompasses the process of analyzing, classifying, summarizing and communicating all transactions,
involving the receipt and disposition of government funds and property and interpreting the results thereof. Its focus is custody
and administration of public funds.
4. Accounting in Education- focuses on teaching accounting, taxation, business law, finance, business management and other
related fields in any higher education institutions.
GAAP- Generally Accepted Accounting Principles; rules, procedures, practice and standards followed in the preparation and
presentation of financial statements
Important Notes on GAAP
- The principles have developed on the basis of experience, reason, custom, usage and practical necessity.
- The process of establishing GAAP is a social process which incorporates political actions of various interested user groups as
well as professional judgment, logic and research.
Purpose of Accounting Standards
- To identify proper accounting practices for preparation of financial statements
- Create a common understanding between prepares and users of financial statements particularly the measurement of assets and
liabilities

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 Course File M01: Overview of Accounting • FAR2
Financial Reporting Standards Council- accounting standard setting body created by the Professional regulation Commission upon
recommendation of the Board of Accountancy to assist the BOA in carrying out its powers and functions provided under RA 9298 which
main function is establish and improve accounting standards that will be generally accepted in the Philippines.
Composition of FRSC
- Chairman (should be a senior accounting practitioner)
- 14 representatives from:
1. BOA 1 7. APO of CPAs in:
2. SEC 1 7.1. Public Practice 2
3. BSP 1 7.2. Commerce and Industry 2
4. BIR 1 7.3. Academe or Education 2
5. COA 1 7.4. Government 2
6. Major organization of preparers and users of
financial statements- FINEX 1
Philippine Interpretations Committee- formed by FRSC to prepare interpretations of PFRS for approval by FRSC and to provide timely
guidance on financial reporting issues not specifically addressed in current PFRS.
International Accounting Standards Board- formerly known as International Accounting Standards Committee; international counterpart
of FRSC.
Objectives of IASC:
- 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
- Work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the
presentation of financial statements
IASB Standard- Setting Process:
1. Research 2. Discussion Paper 3. Exposure Draft 4. Accounting Standard
Development of Philippine GAAP or Accounting Standards Observed in the Philippines:
- Pre- 1996: Formerly, accounting standards followed in the Philippines were called Statement of Financial Accounting
Standards (SFASs). These were based from existing US GAAP during that time.
- 1996: ASC started shifting basis of accounting standards from US GAAP to IAS. SFAS, in effect, were re-issued as Philippine
Accounting Standards (PAS).
- 1997: ASC decided to totally move to adoption of IAS.
- 2004: SEC indicated in SEC Memorandum Circular #19, series of 2004 requires the adoption of the IAS, PAS and IFRS in
audited financial statements.
- 2005: Effective January 2005, Philippines is fully compliant with IFRS.
- 2009: SEC resolved to adopt PFRS for SMEs as part of its rules and regulations.
Factors Considered by ASC in Deciding to move to IAS:
1. Support of IAS by Philippine Organizations 3. Improvement of IAS
2. Increasing Internationalization of Business 4. Increasing Recognition of IASB Standards
Philippine Financial Reporting Standards – this is the current Philippine GAAP which collectively include the following:
1. PFRS corresponding to IFRS
2. PAS corresponding to IAS
3. Philippine Interpretations corresponding to Interpretations of IFRIC and SIC
Comparisons of terms:
Local International
Accounting Standard Council International Accounting Standard Council
Interpretations Committee Standard Interpretations Committee
Philippine Accounting Standards International Accounting Standards
Financial Reporting Standards Council International Accounting Standards Board
Philippine Interpretations Committee International Financial Reporting Interpretations Committee
Philippine Financial Reporting Standards International Financial Reporting Standards

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