Page 1 of 5 | FAR Handouts No. 01
INTRODUCTION TO ACCOUNTANCY PROFESSION
& PREFACE TO PFRS
KARIM G. ABITAGO, CPA
INTRODUCTION TO ACCOUNTANCY
PROFESSION & PREFACE TO PFRS
KARIM G. ABITAGO, CPA
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The Accountancy Profession
Definition of Accounting
Accounting was defined in various ways by various organizations. Those definitions are as follows:
(a)
Accounting Standards Council (ASC)
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 decision.
(b)
Committee on Accounting Terminology of the American Institute of Certified Public Accountants (CAT of
AICPA)
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.
(c)
American Accounting Association (AAA)
Accounting is the process of identifying, measuring and communicating economic information to permit informed
judgment and decision by users of the information.
Note: Based from these definitions we can say that:
1.
Accounting is a user-based discipline.
2.
Accounting is quantitative in nature.
3.
Accounting is subject to interpretation.
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The definition that has stood the test of time is the definition given by AAA.
The definition stated three (3) important aspects or components of the accounting process.
(1)
Identifying process (Analytical Component)
It is the process of analyzing events and transactions to determine whether or not they will be recognized. Always
remember that only accountable events are recognized (i.e. journalized). On the other hand non-accountable
events are not recognized but disclosed in the notes to financial statements if they have accounting relevance.
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Measuring process (Technical Component)
It is the process of determining the monetary amounts at which the elements of the financial statements are to be
recognized and carried in the balance sheet and income statement.
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(2)
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Types of events and transactions
a)
External Events – are transactions involving the entity and another entity.
a.1) Exchange – an event wherein there is a reciprocal giving and receiving of economic resources
extinguishment of obligations. Examples: sale, purchase, payment of liabilities.
a.2) Non-reciprocal transfer – is a one way transaction wherein the entity giving does not receive anything
return. Examples: donation or gifts, payments of taxes and fines, theft, provision of capital.
a.3) External event other than transfer – an event that changes an entity’s economic resources
obligations caused by an external party or event but does not involve transfer of resources
obligations. Examples: changes in fair value, vandalism, obsolescence.
b)
Internal events – are events that do not involve outside party or event.
b.1) Production
b.2) Casualty
(3)
Communicating process (Formal Component)
It is the process of preparing and distributing accounting reports to potential users of accounting information.
Implicit in the communication process are the recording, classifying and summarizing aspects of accounting.
•
Recording or journalizing is the process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.
•
Classifying is the sorting or grouping of similar and interrelated economic transactions into their respective
class. Actually, classifying is accomplished by posting to the ledger.
•
Summarizing is the preparation of financial statements which include the statement of financial position,
income statement, statement of comprehensive income, statement of cash flows and statement of changes
in equity.
The Accountancy Law
Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines. This law is known as the
"Philippine Accountancy Act of 2004".
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Page 2 of 5 | FAR Handouts No. 01
KARIM G. ABITAGO, CPA
INTRODUCTION TO ACCOUNTANCY PROFESSION
& PREFACE TO PFRS
The Professional Regulatory Board of Accountancy (PR-BOA) is the body authorized by law to promulgate the rules
and regulations.
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The Accountancy Fields
Under RA 9298, the practice of accountancy is sub-classified into four (4) sectors:
(1)
Practice in Public Accountancy – involves rendering of accounting and auditing services to one or more client on a
fee basis.
Services rendered:
(a)
Auditing has traditionally been the primary service offered by most public accounting practitioners. Auditing
or specifically external auditing is the "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". This represents the “ATTEST FUNCTION” of CPAs.
(b)
Taxation service includes the preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors. The CPA not infrequently represents the client in tax
investigations.
(c)
Management advisory service has no precise coverage. Generally, this refers to services to clients on
matters of accounting, finance, business policies, organization procedures, product costs, distribution and
many other phases of business conduct and operations.
Limitations:
(a)
Certificate of Accreditation
•
Requires three (3) year meaningful experience.
•
CPD requirements
(b)
No corporation form is allowed to be registered for the practice of public accountancy.
(2)
Practice in Commerce and Industry – also known as private accounting. This refers to employment in the private
sector in a position which involves decision making requiring professional knowledge in the science of accounting.
The highest accounting officer in a business entity is the controller.
(3)
Practice in Education or Academe – employment in an education institution which involves teaching of accounting,
auditing, MAS, law, taxation, finance and other related subjects.
(4)
Practice in the Government – employment or appointment to a position in an accounting professional group in the
government or GOCC which involves decision making requiring professional knowledge in the science of
accounting or where civil service eligibility as a CPA is a pre-requisite.
Note: Generally speaking, practicing under numbers 2-4 above are considered in private practice.
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Preface to PFRS
The Philippine Financial Reporting Standards (PFRSs)
(a)
What are IFRS/ PFRS/ GAAP?
Are the laws in accounting, used as a guide in the preparation of financial statements. PFRSs are guiding principles
rather than law, technically speaking. Meaning, PFRSs are principle-based rather than rule based.
PFRSs set out recognition, measurement, presentation and disclosure requirements dealing with transactions and
events that are important in general purpose financial statements.
Scope of PFRS
PFRSs apply to all profit-oriented entities preparing general purpose financial statements. These financial
statements are directed towards the common information needs of a wide range of users.
(c)
Structure of PFRS
Standards approved by FRSC include paragraphs in bold type and plain type, which have equal authority.
Paragraphs in bold type indicate the main principles while paragraphs in plain type indicate supporting principles.
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(b)
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Any limitation of the scope of PFRS is made clear in the standard.
Standard Setting
(a)
Standard Setting Bodies
The current standard setting body in the Philippines is the Financial Reporting Standards Council (FRSC) while the
current standard setting body internationally is the International Accounting Standards Board (IASB). FRSC is the
successor of Accounting Standards Council (ASC). To fully understand these bodies, let us differentiate them.
(a) Setting
(b) Successor of
(c) Pronoucement
(d) Creator
Table 1.1 (FRSC vs. IASB)
FRSC
IASB
Local
International
ASC
IASC
PFRS
IFRS
BOA (2006)
IFRS Foundation (2001)
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Page 3 of 5 | FAR Handouts No. 01
KARIM G. ABITAGO, CPA
INTRODUCTION TO ACCOUNTANCY PROFESSION
& PREFACE TO PFRS
ASC
PICPA (1981)
PAS
8 members including chairman
1
1
1
-
1
1
8
2 per sector
14
4
1 per sector
8
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(a) Creator
(b) Pronouncement
(c) Composition
COA
BOA
SEC
BSP
BIR
Major Org. of FS Preparers
and Users (FINEX)
PICPA (APO)
Table 1.2 (FRSC vs. ASC)
FRSC
BOA (2006)
PFRS
Chairman + 14 members
1
1
1
1
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The pronouncements of FRSC are called PFRS, collectively known as:
(a)
PFRS – corresponding to IFRS
(b)
PAS – corresponding to IAS
(c)
Philippine Interpretations – corresponding to interpretations issued by IFRIC and SIC of IASC
and
interpretations issued by PIC.
Note: Interpretations are issued to give authoritative guidance on issues that are likely to receive divergent or
unacceptable treatment, in the absence of such guidance. Philippine Interpretations Committee (PIC) is created by
FRSC.
FRSC’s appointment and term of office
The chairman and all the members of FRSC are appointed by PRC upon recommendation of BOA in coordination
with APO, with a term of 3 years and are renewable for another term. Any member of ASC is not disqualified from
being appointed to FRSC.
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(b)
FRSC members are required to render service to the council on a part-time basis without compensation.
(c)
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The chairman should be a senior practitioner in any scope of accounting practice.
The Standard Setting Process (Due Process)
PFRSs are developed through a due process that involves accountants and various interested parties and
individuals. Due process normally involve the following steps.
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STEP 1: Consideration of pronouncements of the IASB.
STEP 2: Formation of a task force, when deemed necessary, to give advice to FRSC.
STEP 3: Issuing for comment an exposure draft approved by a majority of the FRSC members; comment period will
be at least 60 days, unless a shorter period (not less than 30 days) is considered appropriate by the FRSC.
STEP 4: Consideration of all comments received within the comment period and, when appropriate, preparing a
comment letter to the IASB.
STEP 5: Approval of a standard or an interpretation by a majority of the FRSC members.
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Page 4 of 5 | FAR Handouts No. 01
KARIM G. ABITAGO, CPA
INTRODUCTION TO ACCOUNTANCY PROFESSION
& PREFACE TO PFRS
1.
DISCUSSION EXERCISES
Accounting has been given various definitions, which of the following is not one of those definitions?
A.
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.
B.
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 of at least, of a financial character and interpreting the
results thereof.
C.
Accounting is a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these assertions and
established criteria and communicating the results to interested users.
D.
Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgment and decisions by users of information.
Consider the following definitions:
I.
The recognition or nonrecognition of business activities as accountable events.
II.
The assigning of peso amounts to the accountable events.
A.
I – Identifying, II – Measuring
C.
I – Recording, II - Measuring
B.
I – Identifying, II – Recording
D.
I – Measuring, II – Recording
3.
What is the basic purpose of accounting?
A.
To provide quantitative financial information about economic activities.
B.
To provide all information that users need in making economic decisions.
C.
To provide qualitative financial information about economic activities intended to be useful in making
economic decisions.
D.
To provide quantitative financial information about economic activities intended to be useful in making
economic decisions.
4.
Which of the following statements is true?
I.
Loss from theft should be classified as a nonreciprocal transfer
II.
Internal events are changes in economic resources by actions of other entities that do not involve transfers of
enterprise resources and obligations
III.
Nonreciprocal transfers involve the transfer of resources in only one direction, either from an entity to other
entities or from other entities to the entity.
IV.
Internal events are sudden, substantial, unanticipated reductions in enterprise resources not caused by other
entities
V.
Fire, earthquake and flood are examples of accountable events classified as internal events.
A.
I, II, III, V
C.
II, III, IV, V
B.
I, III, V
D.
I, III, IV, V
5.
One of the basic features of financial accounting is
A.
Direct measurement of economic resources and obligations and changes in them in terms of money.
B.
Direct measurement of economic resources and obligations and changes in them in terms of money and
sociological impact.
C.
Direct measurement of economic resources and obligations and changes in them in terms of money and
psychological impact.
D.
Direct measurement of economic resources and obligations and changes in them in terms of money and
sociological and psychological impact.
6.
The practice of accountancy in the Philippines is regulated under
A.
R.A. 9892
C.
R.A. 8992
B.
R.A. 9298
D.
RH bill
7.
Consider the following statements:
S1: The Board of Accountancy (BOA) shall be composed of a Chairman and six (6) members for a total of seven
(7) individuals
S2: Continuing Professional Education is required for both renewal of CPA license and accreditation to practice
the accountancy profession
S3: All firms practicing public accountancy in the Philippines are formed in any type of business organization.
A.
False, true, true
C.
False, true, false
B.
True, true, false
D.
False, false, false
8.
Determine whether the following statements are true or false:
I.
Independent external auditors perform attest function.
II.
If a CPA wants to practice public accountancy, one must obtain first certificate of recognition from the board
of accountancy.
A.
True, false
C.
False, false
B.
False, true
D.
True, true
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2.
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Page 5 of 5 | FAR Handouts No. 01
KARIM G. ABITAGO, CPA
INTRODUCTION TO ACCOUNTANCY PROFESSION
& PREFACE TO PFRS
9.
Standards approved by the FRSC include paragraphs in bold type and plain type, which have equal authority.
Paragraphs in bold type indicate main principles.
Any limitation of the scope of a PFRS is made clear in the standard.
A.
True, True
C.
False, False
B.
False, True
D.
True, False
Determine whether the following statements are true or false:
I.
Any limitation of any standard is made clear on the standard itself.
II.
PFRS apply to all profit-oriented entities even though Government owned and/or controlled.
III.
PFRS is collectively known as PFRS, PAS and Philippine Interpretations.
A.
False, false, true
C.
True, true, false
B.
False, true, true
D.
True, true, true
11.
Arrange in proper order the due process for projects of FRSC:
I.
Issuing for comment an exposure draft approved by a majority of the FRSC members; comment period will
be at least 60 days, unless a shorter period (not less than 30 days) is considered appropriate by the FRSC.
II.
Consideration of pronouncements of the IASB.
III.
Formation of a task force, when deemed necessary, to give advice to FRSC.
IV.
Approval of a standard or an interpretation by a majority of the FRSC members.
V.
Consideration of all comments received within the comment period and, when appropriate, preparing a
comment letter to the IASB.
A.
I, II, III, IV and V
C.
II, III, I, V and IV
B.
III, II, I, V and IV
D.
II, III, V, I and IV
12.
Determine whether the following statements are true or false:
Statement 1: FRSC members are appointed by PRC with a term of 3 years renewable for another 3 years.
Statement 2: PIC members are appointed by PRC.
Statement 3: All sectors of the accountancy profession are represented in FRSC but majority of which came from
Public Practice
Statement 4: FRSC members render services on a part-time basis and receive financial support from the Bangko
Sentral ng Pilipinas.
A.
True, false, false, false
C.
True, false, false, true
B.
True, true, false, false
D.
True, true, true, true
13.
Representatives from the following is included in the composition of FRSC, except
I.
CHED
IV.
SEC
II.
BIR
V.
FINEX
III.
PDIC
A.
II, IV and V
D.
I and III
B.
I, III and V
E.
I, III and IV
C.
II and IV
14.
The process of establishing financial accounting standards
A.
Is a democratic process in that majority of practicing accountants must agree with a standard before it
becomes implemented.
B.
Is a legislative process based on rules promulgated by government agencies.
C.
Is based solely on economic analysis of the effects each standard will have if implemented.
D.
Is a social process which it incorporates political actions of various interested user groups as well as
professional research and logic.
15.
Financial Reporting Standards Council (FRSC) has
A.
14 members with a chairman
C.
B.
15 members with a chairman
D.
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10.
--- END OF HANDOUTS ---
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8 members with a chairman
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