UNIT 1: FINANCIAL REPORTING

What is accounting?

Accounting is a service activity. Its 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
CPAs)

Accounting is the process of identifying, measuring, and

communicating economic information to permit informed judgment and
decision by users of the information. (American Accounting Association)

Essential characteristics of accounting

i. Quantitative information;
ii. Financial in nature; and
iii. Useful in decision making.

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1.1 COMPONENTS OF ACCOUNTING

IDENTIFYING

The analytical component of accounting. This is the process of

determining whether or not a transaction is accountable.

Not all transactions that transpire in a business are accountable.

The hiring of employees and the death of the company manager are
business activities, but such events are not accountable because they
cannot be quantified or expressed in terms of a unit of measure.

An event is accountable or quantifiable when it has an effect on the

assets, liabilities, or equity, whether such events take place internally or
externally.

MEASURING

The technical component of accounting. This is the process of

assigning peso amounts to accountable economic transactions and events.

In order to be useful, accounting information must be expressed in

terms of a common financial denominator. Financial statements without
monetary amounts would be largely unintelligible or
incomprehensible.

The Philippine peso is the unit of measuring accountable economic

transactions in the Philippines.

After determining whether or not a transaction is accountable, the

next step would be to ascertain the values of each transaction using the
following measurement bases or financial attributes:

Historical cost
The amount of cash or cash equivalents paid, or the fair value of the
consideration given to acquire an asset at the time of acquisition. Also
known as “past purchase exchange price.”

If Rickrolled Inc. purchases brand-new equipment in 2021 for ₱20,000,000

then such an amount represents this equipment's historical cost. The
historical cost of an asset will remain unchanged despite the changes in the
price of the same asset.

Current cost
The amount of cash or cash equivalent that would have to be paid if the
same or equivalent asset was acquired currently. Also known as “current
purchase exchange price.”

Consider the previous illustration, suppose that after five years, the price
of the same equipment in a “brand-new” condition is ₱15,000,000, such
amount will represent the current cost of the equipment acquired by
Rickrolled, Inc., five years ago.

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Realizable value
The amount of cash or cash equivalent that could currently be
obtained by selling the asset in an orderly disposal. Also known as “current
sale exchange price.”

Assume that Rickrolled, Inc. is planning to dispose of the equipment

it acquired five years ago, and the market is willing to pay ₱13,000,000 for
the equipment; such an amount represents the assets realizable value.

Present value
The discounted value of the future net cash inflows that the item is
expected to generate in the normal course of business. Also known as
“future exchange price.”

The present value of an asset relates to the value that is still to be

received in the future but is presently recognized. If presently recognized,
a receivable of ₱20,000,000 forty years from today is not necessarily
valued for the same amount.

Note: The revised conceptual framework (2018) introduces new concepts on

measurement. The concept of measurement describes the factors to be
considered when selecting a measurement basis between historical
cost and current value (fair value, value in use, fulfilment value, and
current cost). The factors to consider when selecting a measurement basis
are relevance and faithful representation. (Refer to the copy of the 2018
revised conceptual framework shared with you.)

COMMUNICATING

The formal component of accounting. This is the process of

preparing and distributing accounting reports to potential users of
accounting information.

ASPECTS OF COMMUNICATION
Recording
Also known as journalizing. This is the process of systematically
maintaining a record of all economic business transactions after they have
been identified and measured.

Classifying
Also known as posting. This is the process of sorting or grouping
similar and interrelated economic transactions into their respective
classes.

Classifying involves the process of posting journalized transactions

to the ledger. A ledger is a group of “accounts” which are systematically
categorized into asset accounts, liability accounts, equity accounts,
revenue accounts and expense accounts.

Summarizing
The actual preparation of the financial statements and reports to be
presented to the users. A complete set of financial statements includes the

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statement of financial position, income statement, statement of
comprehensive income, statement of changes in equity and statement of
cash flows.

1.2 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN

THE PHILIPPINES (GAAP)

Generally accepted accounting principles represent the rules,

procedures, practices, and standards followed in preparing and presenting
financial statements.

Accounting, like all aspects of life, has changed over time, adjusting
to the demands of an ever-changing society. Established widely accepted
accounting standards are not intended to be everlasting and irreplaceable
monuments. GAAP must be able to modify and change in response to
changing societal needs in financial transactions, which are becoming
increasingly complicated over time.

1.3 STANDARD-SETTING BODIES OF THE PHILIPPINES

FINANCIAL REPORTING STANDARDS COUNCIL

In the Philippines, the development of generally accepted

accounting principles is formalized initially through the creation of the
Accounting Standards Council (ASC) which promulgated the Philippine
Accounting Standards (PAS).

The body mentioned above was later on replaced by the Financial

Reporting Standards Council (FRSC), which promulgated the Philippine
Financial Reporting Standards (PFRS). The FRSC is the accounting
standard-setting body created by the Professional Regulation Commission
upon recommendation of the Board of Accountancy (BOA) to assist the
BOA in carrying out its powers and functions provided under the
Philippine Accountancy Act of 2004. (R.A. 9298).

The FRSC is composed of fifteen (15) members with a Chirman, who

had been or presently a senior accounting practitioner in any of the scope
of accounting practice in any of the scope of accounting practice and
fourteen (14) representatives from the following:
a) Board of Accountancy 1
b) Securities and Exchange Commission 1
c) Bangko Sentral ng Pilipinas 1
d) Bureau of Internal Revenue 1
e) A major organization composed of preparers and users
of financial statements 1
f) Commission on Audit 1
g) Accredited National Professional Organization of CPAs
Public Practice 2
Commerce and Industry 2
Academe/Education 2
Government 2 8
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 The FRSC actively participates in the evaluation and deliberation of
proposed IFRSs provided by the IASB to the country's standard-setting
body, and offers its recommendation for adoption of the proposed IFRS to
the Board of Accountancy. The IFRS is labeled as the Philippine Financial
Reporting Standard once it has been approved (PFRS).

PHILIPPINE INTERPRETATIONS COMMITTEE

The FRSC formed the Philippine Interpretations Committee (PIC) to

replace the Interpretations Committee (IC) formed by the ASC.

The Role of the PIC is to prepare interpretations of PFRS for

approval by the FRSC and, in the context of the Conceptual Framework, to
provide timely guidance on financial reporting issues not specifically
addressed in current PFRS.

Generally Accepted Accounting Standards in the Philippines are

collectively composed of:

i. Philippine Financial Reporting Standard (PFRS);

ii. Philippine Accounting Standards (PAS); and
iii. Philippine Interpretations (PI).

INTERNATIONAL ARENA

The International Accounting Standards Board (IASB) is an

independent private sector body, with the objective of achieving
uniformity in the accounting principles which are used by businesses and
other organizations for financial reporting around the globe.

IASB replaced the International Accounting Standards Committee

(IASC).

IASB is tasked to public accounting standards in a series of

pronouncements known as International Financial Reporting Standards
(IFRS).

The IFRS is a global phenomenon intended to bring about greater

transparency and a higher degree of comparability in financial reporting.
Both will benefit the investors and are essential to achieving one uniform
and globally accepted financial reporting standard.

1.4 THE STANDARD-SETTING PROCESS

The promulgation of financial accounting standards is a

political process.

Several groups influence the standard-setting process. The

standard-setting process is a political process that is affected by the impact
of several lobbying groups. The government, through the SEC, influences

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accounting standards. The SEC has the authority to issue accounting
standards but has assigned this responsibility to the private sector.
Nonetheless, the SEC can exert pressure on the FASB to issue accounting
standards and veto the standards promulgated by the FASB. Auditing
firms, the corporate sector, creditors, financial analysts, the financial
community, accounting organizations, industry groups, and investors can
influence the FASB by written comments about Exposure Drafts and
participation in public meetings and public roundtables regarding a
proposed financial reporting standard.