The Accountancy Profession Definition of Accounting (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. (Most used definition.) 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 (1.1) to financial statements if they have accounting relevance. 1.1 Disclosure notes facilitate the evaluation of enterprise position and performance because they include information which helps to explain the quality of earnings. It is an integral part of the FS. 1.2 Accountable Events - events or transactions that has an impact on the company's assets, liabilities or equities. Types of Accountable Events and Transactions A. External Events – are transactions involving the entity and another entity. Exchange an event wherein there is a reciprocal giving and receiving of economic resources or extinguishment of obligations. Examples: sale, purchase, payment of liabilities. Non-reciprocal transfer a one-way transaction wherein the entity giving does not receive anything in return. Examples: donation or gifts, payments of taxes and fines, theft, provision of capital. External event an event that changes an entity’s economic resources or obligations caused by an other than transfer external party or event but does not involve transfer of resources or 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 2. 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. (Assigning numbers) 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. 3.1 Recording or journalizing is the process of systematically maintaining a record of all economic business transactions after they have been identified and measured. 3.2 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. 3.3 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. Based from these definitions we can say that: 1. Accounting is a user-based discipline. MAIN OUTPUT: Financial Statements - without users there's no FS. 2. Accounting is quantitative in nature. 3. Accounting is subject to interpretation. Other notes: Recognition principle requires that revenues are recognized on the income statement in the period when realized and earned—not necessarily when cash is received. The residual equity theory says that common shares make up the only true equity of a company. Preferred shares should be treated like a liability. Thus, the value of stockholder equity equals only the common shares. Residual Equity = Assets - Liabilities - Preferred Shares Classifying preference dividends as expense is an application of residual equity Fiduciary accounting is an application of fund theory. General purpose financial statements can be prepared by non-CPAs. Information in FS does not need to be adjusted for changing purchasing power. Management accounting branch of accounting which deals primarily with the specific needs of users oriented to the past a science Financial accounting branch of accounting which deals primarily with the common needs of users oriented to the future an art The Accountancy Law Republic Act No. 9298 "Philippine Accountancy Act of 2004" The Professional Regulatory Board of Accountancy (PR-BOA) is the body authorized by law to promulgate the rules and regulations. The Accountancy Fields Under RA 9298, the practice of accountancy is sub-classified into four (4) sectors: 1. Practice in Public Accountancy – involves public practitioners rendering 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. It 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. (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. Tax Compliance - preparation of tax returns Tax Planning - practitioner and the client will plan the taxes the company will pay in the future. Process of reducing the taxes (tax avoidance). (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 for CPA who will put their own accounting firm: 2. 3. 4. Certificate of Accreditation (Provided by BOA) o Requires three (3) year meaningful experience. o CPD requirements (Continuing Professional Development) known before as CPE (Continuing Professional Education) CPAs must complete at least 120 hours of CPD in every three-year period and submit a CPD Declaration each year. Permanently exempted from CPE requirement for the renewal of CPA license: 65year old CPA No corporation form is allowed to be registered for the practice of public accountancy. 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 (chief accountant). Practice in Education or Academe – employment in an education institution which involves teaching of accounting, auditing, MAS, law, taxation, finance and other related subjects. 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. Generally speaking, practicing under numbers 2-4 above are considered in private practice. Set of Definitions Government Accounting deals with accounting for the national government and its instrumentalities, focusing attention on the custody of public funds and the purpose or purposes to which such funds are committed. Fiduciary accounting deals handling of accounts managed by a person entrusted with the custody and management of property for the benefit of another. Estate accounting deals with the handling of accounts for fiduciaries who wind up the affairs of a deceased person. Social responsibility accounting the process, of measuring and disclosing the performance of firm in terms of community involvement and related criteria. Accounting Systems deals with the installation of accounting procedures for the accumulation of financial data; includes designing of accounting forms to be used in data gathering. Cost accounting the systematic recording and analysis of the costs of material, labor, and overhead incident to production. Fund accounting the accounting for not-for-profit entities other than the government. Preface to PFRS The Philippine Financial Reporting Standards (PFRSs) (a) IFRS/ PFRS/ GAAP International Financial Reporting Standards / Philippine Financial Reporting Standards, Generally Accepted Accounting Standards. 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 (b) 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. Specific / Special Purpose Financial Statements - Internal Reporting General Purpose Financial Statements - External Reporting (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. 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. Table 1.1 (FRSC vs. IASB) FRSC IASB (a) Setting Local International (b) Successor of ASC IASC (c) Pronouncement PFRS IFRS BOA (2006) IFRS Foundation (2001) (d) Creator 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. To qualify a generally accepted standard, it must have substantial authoritative support. Philippine Interpretations Committee (PIC) is created by FRSC. Table 1.2 (FRSC vs. ASC) FRSC ASC BOA (2006) PICPA ( Nov. 1981) PFRS PAS Chairman + 14 members 8 members including chairman COA 1 - BOA 1 1 SEC 1 1 BSP 1 1 BIR 1 - Major Org. of FS Preparers and Users (FINEX) 1 1 PICPA (APO) 8 4 2 per sector 1 per sector 14 8 (a) Creator (b) Pronouncement (c) Composition BOA is composed of Chairman and 6 members, a total of 7 individuals. B. 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. FRSC members are required to render service to the council on a part-time basis without compensation. The chairman should be a senior practitioner in any scope of accounting practice. APO Accredited Professional Organization of CPAs Philippine's APO is PICPA. 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. 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. The standard-setting process is a SOCIAL PROCESS. NOTES: International Financial Reporting Interpretations Committee (IFRIC) is responsible for reviewing accounting issues that are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance, with a view to reaching consensus as to the appropriate accounting treatment IFRIC should consider issuing an interpretation on the following: a. Newly identified financial reporting issues not specifically addressed in IFRSs b. Issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop IFRS and IAS Role: to reduce possible number of accounting differences and to produce globally recognized standards. Generally accepted accounting principles derive their credibility and authority from general recognition and acceptance by the accountancy profession. Conflict between PFRS and the local standards: rule of local standards, laws and regulations shall prevail.
