Module 1
DEVELOPMENT OF FINANCIAL REPORTING FRAMEWORK
AND STANDARD SETTING BODIES
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.
OBJECTIVE OF FINANCIAL REPORTING
The objective of general-purpose financial reporting is 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.
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 the 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.
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.
THE DEVELOPMENT OF ACCOUNTING STANDARDS
Accounting standards are authoritative statements of how particular types of transactions
and other events should be reflected in financial statements. Accordingly, compliance with
accounting standards will normally be necessary for the fair presentation of financial statements.
The Need for International Accounting Standards
At present, financial reports prepared for owners or shareholders and ither users involve
principles and procedures that can vary widely from country to country, and sometimes even
within a country. Accounting reports, therefore, can lack comparability. From the viewpoint of
company management, this is highly unsatisfactory because:
▪ It can cause preparation costs for financial reports that are much higher than necessary a multinational company may have to prepare different reports on its operations for use in
different countries; and
▪ Business will want to have a uniform system for assessing financial performance in their
operations in different countries. They will also want their external reports to be consistent
with internal assessment of performance.
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.
International Standard Setting
Most industrialized countries have organizations responsible for determining accounting
and reporting standards. In some countries, the United Kingdom, for instance, the responsible
organization is a private sector body like the Financial Accounting Standards Board (FASB) in the
United States. In other countries, the organization is governmental body. Historically, these
different organizations often produced different accounting standards, which complicated
accounting by multinational companies, reduced comparability between companies using
different standards, and potentially made it harder for companies to raise capital in international
markets.
In response to these problems, the International Accounting Standards Committee (IASC)
was formed in 1973 to develop global accounting standards. The IASC reorganized itself in 2001
and created a new standard-setting body called the International Accounting Standards Board
(IASB). The IASB’s 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.
The IASC issued 41 International Accounting Standards (IASs), and the IASB endorsed
these standards when it was formed in 2001. Since then, the IASB has revised many IASs and
has issued new standards of its own, called International Financial Reporting Standards (IFRS).
More and more countries are basing their national accounting standards on IFRS. By 2018, more
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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.
Are International Financial Reporting Standards Mandatory?
IASB has no authority to require compliance with its accounting standards. However,
many countries require the financial statements of publicly traded enterprises to be prepared in
accordance with IFRS, and where necessary, to give particulars of any material departure from
those standards and the reasons for it.
Companies and/or securities legislation in many countries requires management and
directors of publicly-traded companies (and, in many cases, all enterprises) to prepare financial
statements in accordance with IAS that present fairly (or give a true and fair view of) the financial
position of the enterprise at the end of the financial year and the results of its operations and cash
flows for the year.
The accountancy profession (through national institutes, international accounting firms
and the International Forum for Accountancy Development) is committed to promoting and
supporting compliance with IAS by prepares and auditors of financial information.
In short, where IFRS are the required accounting standards, or an enterprise chooses to
comply with IFRS, the requirements of all IFRS should be regarded as mandatory.
International Federation of Accountants
Between 1983 and 2000, there was a membership link between IASC and the professional
accountancy bodies that are members of the International Federation of Accountants (IFAC).
There is no such membership link between IASB and IFAC.
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.
Figure 1. The IASB’s Governance Structure
(Source: https://www.accountingnotes.net/accounting-standards/international-accounting-standards-committee-iasc-foundation/5570)
IASB’s structure provides a balanced approach to legitimacy based upon
representativeness among members of the Trustees, the International Financial Reporting
Interpretations Committee (IFRIC), and the Standards Advisory Council, and technical
competence and independence among Board Members.
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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 highquality 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 fulltime 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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(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
comment on an Exposure Draft below that is described as the minimum in the IFRS
Foundation Due Process Handbook.
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.
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.
establish procedures for reviewing comments made within a reasonable period on
documents published for comment.
normally form working groups or other types of specialist advisory groups to give
advice on major projects.
consult the Advisory Council on major projects, agenda decisions and work priorities.
normally publish a Basis for Conclusions with a Standard or an Exposure Draft.
consider holding public hearings to discuss proposed Standards, although there is no
requirement to hold public hearings for every project.
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) give reasons if it does not follow any of the non-mandatory procedures set out in
(b), (g), (i), (j) and (k).
IFRS Interpretations Committee
The Interpretations Committee, formerly called the International Financial Reporting
Interpretations Committee (IFRIC), shall comprise 14 voting members, appointed by the Trustees
for renewable terms of three years. The Trustees shall select members of the Interpretations
Committee so that it comprises a group of people representing, within that group, the best
available combination of technical expertise and diversity of international business and market
experience in the practical application of IFRS Standards and analysis of financial statements
prepared in accordance with the Standards. Expenses of travel on Interpretations Committee
business shall be met by the IFRS Foundation.
The Interpretations Committee shall meet as and when required and 10 voting members
present in person or by telecommunications shall constitute a quorum: one or two Board members
shall be designated by the Board and shall attend meetings as non-voting observers; other
members of the Board may attend and speak at the meetings. On exceptional occasions,
members of the Interpretations Committee may be allowed to send non-voting alternates, at the
discretion of the Chair of the Interpretations Committee. Members wishing to nominate an
alternate should seek the consent of the Chair in advance of the meeting concerned. Meetings of
the Interpretations Committee shall be open to the public, but certain discussions (normally only
about selection, appointment, and other personnel issues) may be held in private at the
Interpretations Committee’s discretion.
Each member of the Interpretations Committee shall have one vote. Members vote in
accordance with their own independent views, not as representatives voting according to the
views of any firm, organization, or constituency with which they may be associated. Proxy voting
shall not be permitted. Approval of draft or final IFRIC Interpretations shall require that not more
than four voting members vote against that draft or final Interpretation.
The Interpretations Committee shall:
(a) interpret the application of IFRS Standards and provide timely guidance on financial
reporting issues not specifically addressed in the Standards, in the context of the
Board’s Framework and undertake other tasks at the request of the Board;
(b) in carrying out its work under (a) above, have regard to the Board’s objective of
working actively with national standard-setters to bring about convergence of national
accounting standards and IFRS Standards to high quality solutions;
(c) publish, after clearance by the Board, draft Interpretations for public comment and
consider comments made within a reasonable period before finalizing an IFRIC
Interpretation; and
(d) report to the Board and obtain the approval of eight of its members for final IFRIC
Interpretations if there 13 members or fewer, or by nine of its members if there are 14
members.
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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.
DUE PROCESS FOR FINANCIAL REPORTING
The due process requirements are built on the principles of transparency, full and fair
consultation—considering the perspectives of those affected by IFRS Standards globally—and
accountability. The Board and the Interpretations Committee will often perform steps and
procedures over and above those described here because they are continually striving to improve
how they consult and operate. From time to time the Board and the Trustees’ Due Process
Oversight Committee (DPOC) review how the Board and the Interpretations Committee are
operating to determine whether some of these new and additional steps should be embedded into
their due process. Similarly, such reviews could remove or amend due process steps that impede,
rather than enhance, the efficient and effective development of the Standards and material to
support the consistent application of the Standards. The DPOC seeks to ensure that the
Handbook achieves a balance between timely development of high-quality Standards and a
thorough due process. The formal due process for the Board and the Interpretations Committee:
(a) specifies the minimum steps to be taken to ensure that their activities have benefited
from a thorough and effective consultation process;
(b) identifies the non-mandatory steps to be considered, the ‘comply or explain’ approach,
meaning that the non-mandatory steps in the process were still recommended, so noncompliance with them would require an explanation; and
(c) identifies other, optional, steps available to them to help improve the quality of IFRS
Standards and related documents.
The due process includes the following stages:
1. setting the agenda
2. planning the project
3. developing and publishing the discussion paper
4. developing and publishing the exposure draft
5. developing and publishing the standard
6. post implementation review
STANDARD SETTING BODIES IN THE PHILIPPINES
On November 18, 1981, the Philippine Institute of Certified Public Accountants (PICPA)
created the Accounting Standards Council (ASC) to establish and improve accounting standards
that will be generally accepted in the Philippines.
The creation of the Council received the support of the following: the Securities and
Exchange Commission (SEC) and the Central Bank of the Philippines (CB)-regulatory agencies
where the financial statements are filed; the Professional Regulation Commission (PRC) through
the Board of Accountancy—which supervises CPAs and auditors, and the Financial Executives
Institute of the Philippines (FINEX)—which is the largest organization of financial executives who
are responsible for the preparation of the financial statements. The ASC was composed of eight
(8) members- four (4) from PICPA including the designated Chairman; and one (1) each from
SEC, CB, PRC and FINEX.
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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.
The ASC approved the re-issuance as Philippine Accounting Standards (PASs) of
previously issued Statements of Financial Accounting Standards (SFASs) and Statements of
Financial Accounting Standards (SFASs)/Internal Accounting Standards (IASs) that were based
on IASs. The Standards are re-issued for the following reasons:
❖ To update these for consequential amendments arising from adopted new International
Financial Reporting Standards (IFRSs) and revised IASs which resulted from the
Improvements Project of the International Accounting Standards Board (IASB) and for
editorial amendments made to all existing IASs, and;
❖ To maintain consistency of format and designation of Standards issued by the ASC.
The updated Standards (PAS Nos. 7, 11, 12, 14, 18, 20, 23, 26, 34 and 37) are effective
for periods beginning on or after Jan. 1, 2005.
Accounting standards issued by the ASC were re-named to correspond better with the
issuances of the IASB. Philippine Accounting Standards (PASs) correspond to the adopted
International Accounting Standards (IASs). Philippine Financial Reporting Standards (PFRSs)
correspond to the adopted International Financial Reporting Standards (IFRSs). SFASs and
SFASs/IASs not superseded by revised IASs and new IFRSs will be re-issued as PASs.
Previously, Standards issued by the ASC were designated as SFASs.
The new and revised Standards are PAS Nos. 1, 2, 8, 10, 16, 17, 19, 21, 24, 27, 28, 29,
30, 31, 32, 33, 36, 38, 39, 40, 41 and PFRS Nos. 1, 2, 3, 4, 5, 6, 7 and 8. The ASC also approved
the issuance of a revised Preface to Philippine Reporting Financial Standards and Interpretations
of the Standards, which are based on Interpretations issued by the Standing Interpretations
Committee of the IASC.
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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.
Financial Reporting Standards Council
When created per Section 9(A) of the Rules and Regulations Implementing Republic Act
No. 9298 otherwise known as the Philippine Accountancy Act of 2004, the Financial Reporting
Standards Council (FRSC) shall be the new accounting standard setting body.
The FRSC shall be composed of fifteen (15) members including the Chairman, who had
been or presently a senior accounting practitioner in any of the scope of accounting practice and
fourteen (14) representatives from the following: one each from the BOA, SEC, BSP, BIR, COA
and a major organization composed of preparers and users of financial statements, and two
representatives each from the accredited national professional organization of CPAs in public
practice, commerce and industry, education/academe and government.
The FRSC’s due process of developing the accounting standards include the following
steps (Empleo, Robles & Sy, 2019):
1. Consideration of pronouncement of IASB
2. Formation of a task force, when necessary
3. Issuance of exposure draft duly approved by the majority vote of the FRSC members
4. Consideration of comments (comment period is at least 60 days, may be shortened to
not less than 30 days)
5. Approval by majority of the FRSC members
6. Publication in the official gazette or a newspaper of general circulation
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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