CHAPTER 1

THE DEVELOPMENT OF THE ACCOUNTING

PROFESSION

Intentfea £.earning Outcomes

.ftjter reatfin9 tliis cliapter, you slioufa 6e a6[e to:

1. tfejine accounting antiiaentify its [Link];

2. ~numerat~ .tfi.e users of accounting infonnation antf tfieir
information neeas; . .
3. ufentify the [Link] of accounting antf tlieir specific
purposes;
4. narrate tli.e [Link](!ry oftli.e accountiTlfJ profession,·
5. unaerstana tfie recent tfeve{opments affectiTlfJ tlie accounting
profession;
6. iaentify tlie purposes of t/i,e Conceptua[ 'Framework__ for
'Financial fJ?.!'portin9;
1. aefine tlie [Link] offinancia[ statements;
8. . unaerstantf tlie qualitative [Link] of financia[
infomzation;
9. iaentify ana aefine tlie elements offinancial statements; ana
10. aistiTlfJuisli tfie two concepts ofcapita[ana capita[
maintenance.

Introduction

The use of Information significantly helps business enterprises t o

survive and compete. fnformation has to be acquired , processed , anaJyzed
and communicated for forrnulation__of better decisions. The evolving
changing needs of different users for information and the changes in
bus inc;:ss practices are some primary factors why accounting is so dynamic.
Accounting practices have to be c ontinuously modified to cope with the
changes in users' information needs and the c hanges in business practices .

THE NATURE OF ACCOUNTING

and TH.E USERS OF ACCOUNTING INFORMATION

A business entity, from the time of its organization, interacts with

different stakeholders, whic h include the owner s, management, employees,
regulatory age ncies , creditors apd lende rs, su_ppliers, c u s tom e r s, taxing

•
 ter 1 - The Deve lo the Accountin
t
auth orities labor unions, financial analysts and advisers, and the public.
These stakeholders use financial _information provided by a system or
discipline called ~ccounting. The primary purpose of accounting is to
provide quantitative information, a b out econ omic entities, tha [Link] to be used
as basis for formula tion of economic d ecisions.

The acti'{_~_owners of Jn~~Jne_s_l? en~~rprises and tbe management use

financial information for internal decision-making purposes. Active owners
• • • • I • •

and managers ·use fin~cial information to evaluate the entity's

performance, mak~ _finantjal aJ?.d opera~~nal .plan~~~~d i~plement
business decisioI).~. To continue or ·to liquidate, to. infuse additional
investments, to borrow from ci:editors and to change business methods and
strategies are some -decision needs faced by the owners and managers. They
also evaluate financial information to determine whether demands of
employees for improved remunera tion and economic benefits · will be
granted. These users who have ready access to spedfic types of accounting
information are called internal u sers. A branch of · accounting called
management ~ccouritirig is designed to meet the info~atioIJ. i:i~eds of these
internal users. ·- ·-- · ·

Because of their actual involvement in the operations of the

business, the active owners and managers mayrequire that the information
be communicated and made available to them in a form fitting their specific
decision-making needs.

All other users do n ot have ready access to financial reports and rely
heavily on negotiations ..and regulations to obtain information about a
business enterprise. The~e users, <:alled external u sers, include the
inactive owners, creditors and lenders , suppliers, potential investor§., taxing
authorities 1 regulatory bodies, employees and employee union s, financial
analysts., advisers and the general public. The general-purpose reports
provided to this group are called the financial s tatements, which are the
produc t of a broad branch of recounting called financial accounting.

External users have diversified information needs. The enterprise's

!-flaC:tive owners delegate the stewardship of the enterprise's resources to
the management, and they use the ·f inancial statements to keep track of the
enterprise's financial · condition and financial performance to make
decisions whether they should hold or sell th~ir equity interests. Pre~e_nt
and potential creditors, through the financial information, assess the ability
of t he enterprise to pay its loans and the interest attaching to such loans.
Suppliers of good s and services, on the other hand, determine whether the
cost of such goods and services will be paid when due. They are dependent
upon the continuation of the enterprise as a major customer.

Employees evaluate the financial status of the enterprise to asses~

the latter's ability t o provide remuneratio11, retirement benefits ~
employment opportunities. Customers h a ve an interest in informauon
about the continuance of an enterprise, especially when they have a long-

2
 Chapter 1 _: The Development of the Accounting Profession

term involvement with, or are dependent on, the enterprise as their

supplier.

. A business e?ti~y is su~ject to government regUlations mainly for

·: ·•.the interest of P':1blic . mv~stors and other parties dea1ing with it. The
government and its agencies rely on financial information to determine
· ~hether busines~ entities co~ply y.riQl_ P._res<:~1?.~~- -~les and regulations .
, They are ·dependent on the financial information to collect correct arnoun t
· of truces, to determine taxation policies and to set 6asis-for national income
.: ·a nd similar statistics ..... - · · ----, - ----- · ·

The :pul?)Jc is interested in financial information about the trends

fange of
. · -~d ._~h,(: __ business entities' economic actjvities, as the general .
-' direction of bus~ess growth is _indicative- ?f the nation's economic status.

· · .O ther than classifying users of financial information into internal or

external, users may also be categorized as direct or indirect. Users with
~irect · interest use financial ·information as a tool to protect· their · own
tnterest in the enterprise. They include the owners; managers, creditors,
suppliers, c:ustome_I'.'.S, employees and trucing authority .

.Some other users use accounting information to provide advice to or

protect the interest of a direct user. These indirect us-ei-s include regulatory
...- agencies, labor unions and financial and legal consultants. The regulatory
. agencies prnte~t the interest of the investors and the public; the labor
unions protect the interest of the employees; and the financial and legal
consultants piovide advice and assistance to their clients who may be
customers, lenders or .suppliers of the firm.

Although users are interested in both quantitative and qualitative

information about the entity, accounting primarily provides mtormation
that can be measured and expressed in ,terms of units of measure. The
monetary unit is generally the unit of measure used in communicating
accounting information. The quantitative or measurable information
focuses on the entity's economic resources, economic obligations, changes
in economic resources and economic obligations brought about by income
and expenses and other transactions.

A reporting entity, oftentimes called accounting entity, may be a

business enterprise, a government unit, a not-for-profit organization, an
individual, a unit within an enterprise and any other unit that is considered
to have a personality different from the personality of its owners, members,
and employees. The concept that separates the personality of the enterprise
from that of its owners and other stakeholders is conventionally called the
"accounting entity concept". An accounting entity is capable of controlling
its own economic resources a nd incurring economic obligations.

3
 I
theJfccountin- Pro ession
~ 1ur 11eve1o ·m e nt -o
r:er 1

ranches of Accounting
. • d . ·ded into several branches to b etter se rve the n eeds
Accounting is lVl . : fi rma ti·on nee d s The most frequ~ntJy
ith varymg mo · .
of different users w t· are financial a ccounting, m a n agement
b ch~s of accoun 1ng . .
discusse d ran . tin tax acc ounting and government a c countmg .
accounting, cost accoun g, .
~ l, oo \:. t ~ ·1 "9 .
Financial Accounting ' is the br oades_t branch_ of a c count 1~g,
. on the needs of external users , as d 1sc-.1ssed 1n the prec edmg 1
_focu_s mg_ ·:It .. 1·s· concerned with the r ecognition , measux:[Link] and
section · · b l· · d c han es
[Link] of economic resources, econ~m1~ o 1gations an - g
in economic resources ancl economic obli gations. Th~se, types _of .
information are communicated in a complete set of an enterpnse s financial
s_tatements. Financial accounting assumes that the exte~al users ~av,e
common information needs, i.e.; to evaluate the business entity s
profit_a~ility, [Link] stability. Firiancial accounting s~ould co:r:iform to _
the accounting standards as · developed by_ standard setting bodies . The
main .purpose of the accounting standards is to ensure the. relevance 9:11d
reliability provided to the external users . Although [Link] accounting
generally meets the needs of the external users, ~riternal users also_use ~e
financial s tatements to . evaluate an en tity's performance · and hnanc1al
condition to better perform their planning and control fu_n _c tions.
~ G\~c.i!iM - IY'qfJ~ CUIO Clt-OU)J"o-ho1'1 , ~rt-C<lc1, ~ ~ dge.,i ➔, \Jtl')Clf'te-1 It ~~
Mant\gement Accounting serves the information needs of the
internal users! The m anagers and active owners use accou nting
information in making a nd..~plementing short-term and long-r ange plans
'forthe enterprise. They also ·use accounting information in making routine
and major economic decisions. Because ·the information required by the
management may vary based on thP specific needs a t a particular time, the:
information _p rovided is ·not structured and is not necessarily conforming to
the accounting standards . ..--M<t,0o,J JJ . ~ctva l

Cost Accounting is concerned with the measurement and

recognition of co~t _of ~ervices provided or products manufactured.
Although cost accounting is helpful to a · service entity in the control and
management o~ cost, it is more <?r:4inarily associated with manufacturing
companies · as a tool of both financial accounting and management
accounting.

T_ax Accounting is concerned with the computation of truces and

prepara tion of tax returns submitted to a taxing authority.

. ~overnment A:ccounting . encompasses the process of analyzing,

clc.\.s~ifying, s~m1!1~ing and communicating all transactions involving the
receipt and disposition of government funds and property and interpreting
the results thereof. This is the system adopted by government units and
some government agencies.

4
 Cha ter l - The Devel
the Accountin
The t enn accounting is oftentimes fu
bookkeeping. Bookkeeping r efers onl t con sep. with the t-erm
O
recording phase. Other phases yf one ~hase_ of acco1.:1nting, the
. . d - o accounting mcJud .fy.
_summanz1ng an communicating information d c c 1ass1 1ng,
thereof. · an interpreting the r~sults
. . '•

..f._ jiiscipline, which is very much related t b . .·· . .

from accounting, . is auditing. Aud ·u fi o, ut is d1s~mgu1shable
0
~xamination of the financial state~ ent: ~gnd~ec;;~ : an 1?depencte,:it
accountant for the purpose of rendering an . . Y tha cer~1fied public
r • • f opmion as to e frumess of the
... presentation o the financial statements F" ·a1
; developed internal! within · b . . . inanc1 statements are
: .. . .. . __ .. .. Y a us1ness enterpnse and are considered the
. . representation
_. . of the company's management
• . The same fi1nanc1al ·
: _sta te m e nts prepared by th~ management are provided to external users.
-~ecause there may J;,e conflict between the interest of management and the
mte~e~t. of other users, auditing performs an attest function to lend
~:~d1b1hty to the financial statements. _; .
.. . I . - \.,: • '•• .- -l • t, •./'
w ._,,..,._

Depending on the information needs of other users, there exist other

·branches of a ccounting. Other branches may be developed in the future
based on the changing _business practices and evolving economic activities.

THE DEVELOPMENT OF THE ACCOUNTING PROFESSION

AND THE STANDARD-SETTING PROCESS

Accounting came about because of the need to measure and

_c~mmunicate men's economic a c tivi ties . The _development of a ccounting as
.a discipline is generally credited to an Italian munk narnc::<l Lut:a Fat:iuli,
.who introduced the system of recording business transactions into debit
BJld credit parts . A chapter in his book "Summ~ de Arithmetica, Geom e tria,
Proportioni et Proportionalita," published in 1494, described a method used
by merchants that included most of the steps in_the accounting cycle that
we follow today. The system is now popularly called the double entry
-~<?okkeeping system.

As business practices were later developed based on the infl'-!ences

of the economic and political environment in a particular area, a ccounting
· and reporting practices also developed. There were countries where
business enterprises conducted transactions following the dictates of the
government. As such accounting practices and financial reporting were
limited to those which were based on rules and regulations. There were
countries where business enterprises conducted transactions based on -the
free enterprise system, where there was minimum government intervention.
Accounting practices in these countries were developed because of the need
to protect the interest of public investors. It was in the second group of
countries where sound accounting theories flourished. With their economic
ascendancy and commercial leadership, the United States of America and
the !!nited Kingdom became the pioneers in the development of accounting

5
 e r- 1 ·= The-De ve lo
ment-0 the-Accountin Pro ession -· · -7\1
· h h a re still prevalent in busines s practices today (Epstein, et. \
_tn~~ones,. w 1c _ . 7
I al. 2004) • ~-:i
Around · the world , differing national traditions, legal systems,;,
·tal markets and business practices led to the development of different·}
cap1
financial •
reporting practices. Each country communicates · 1 reports ~.
fimanc1a
based on the accounting principles in the particular country. ~owever, the;
evolution - of mul_tinational comp~nies led to t~e condu_ct of internati~n al'l;
business operations across -national borders. Business trct?sactions ·
became complicated, and goods , . services and capital inves tments were.,~
. transferred worldwide. • Thus, there wa s a need to bring .i,nto common basis1
the system· of measurement and communication of economic activities:~
This n eed ·was rec~gniied and acted upon by the accounting profession'
through the creation of the International Acco-µ,~_ti_ng -~~~9,~_d_s_Co~tt.e~}
(IASC)
.... . . 1913.-
... ·-~· -in 1\
I • -~

From the date of its organization up to 2001, the IAS Committee :

developed~ -~~! o(_~nifo~gl.9p~ accounting sta,ndards, called .!~!ernati~pa(
-~ ~~ounti~g_St_~_cl_ards (IAS)', and promoted the use and application of these·
standards. . .·

The IAS Committee was reconstituted in 2001 as the International.

Accounting Standards Board (IASB) . Immediaitely after its reconstitution,
the IASB took the initiative to undertake a n improvements project in the .
light of queries and criticis~~ raised in relation to the IAS by securities
regulators , professional accountants, and other interested parties. The
(>bjectives of the improvements project · were to · redµce · or eliminate
alternatives, redundancies·. and conflicts within the IAS , to deal with some
convergence issues, and to make other improvements.

The a ccounting standards that originated from the works of the 1A$a
Committee, even if improved or revised by the IAS Board, are known as;
Inte rnational Accounting Standards . The standards that originated from
the works . of IAS . Board are called International Financial Reporting ·
Standards (IFRSs) . Collectively, however, IFRS include the following:

(a) the specific International ~inancial Reporting Standards;

(b ) the interpretations made • by the International Financial '

-', pi..,,\ i \)()l t-.t
Reporting Interpretations Committee (IFRIC, the body that
AC,l:,()V"n'"9 interprets the works of the IASB); l P~~\C'
S-\-0<' oortkt., (
the International Accounting Standards; and

the interpretations made by the Standing Interpretations •

Committee (SIC, the body that interpreted the works of the .
IAS Committee).
- -., 1.1pc;la\d
l1.r-r.. f\

fc 1" f rt\t - l\1 ,,, c.,· o_K~ . ~ (c,lC~~ s'lt{v-·--<-,.,._~,J

• (r11l'll\ r,,(.l,l \ ui~,
1
LC\,iJ {'"l 6
 Chapter l - The Development of the Accou_nting Pr_ofessJon

At tne present time, the IASB still issues new stm,dnrd~ nnd rn,qor
amendments to the existing IFRSs. The ovcralJ o bjective is to m : hic-·vr
c:9_mparability of financial information within an entity over time and n mong
entities. Thus, the IASB considers eliminatin~ or reduc ing c hoic es of
;ccounting treatment for like transactions. Also, the IASB has been Able
to address the needs of the u_sers of financia l sta tements of small nn<I
' tnedium -entities, private entities and non- publicly accountable entities.

The Standard Setting Process Adopted by the IASB

The lASB is under the governance of the JFRS Foundation, which is

an independent, not-for-profit private sector organization. The lfi'RS
· Foundation's principal objectives are as ·foJlows 1 :

-
CT
,.. (a) to develop· a single set of high quality, understandable,
..,. enforceable and glo_bally accepted international financial
reporting standards (through the JASS);
(b) to promote the u se and rigorous application of those
standards;
'
I'
{c) t0 tak(" Acc0ttnt of th(" financial reporting nee-ds of e me-rging
economies and small and medium -sized entities; and
(d) to promote and facilitate adoption of IFRSs , being standards
and interpretations issued by the IASB, through the
-.. convergence of nationaJ accounting standards and JFRS.
A
:... One of the primary functions of the IFRS Foundation is to govern
and oversee the activities of its standard-setting body, which is the IASB.
Its trustees safeguard the independence of the lASB - and ensure the
financing of the organization.

The IASB is the independent standard-setting body of the IFRS

·· Foundation. At present, the IASB has !_5 members, all of whom work full-
time for the development and publication of IFRSs. The JASB follows a due
process in the development of financial reporting standards. The due
process involves interested individuals and organizations around the world
and comprises the following stages: 2

,(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; and
(6) after the standard is issued.

In addressing users ' demand for better quaJity information, the lASB
identifies an issue i~em to its agenda after considering the relevance of

: [Link] (the official website of the IFRS Foundat ion)

[Link]

7
 ; --
ment O the ~ t in g Profession
'et:rJI--
t.:=:-JTClh~et -:~
De~
ve
~l~o>.J!J.!!!:.W:.~~ ~ =
d h liability of the information that could be
' information to the use_rs _an .t -~~ce is available, and the possibility of
provided, whether existing gw
increasing convergence.
· · added to the IASB 's project agenda, the lASB
Once an item 1s .· . · 'th h.
decides whether to conduct the pr<:)ject alone . or Jomtl! w1 ~ot. er
standard-setter. A working group is then established, which may include
members of staff from other accounting standard-setters. . I
~

The discussion of the working group is contained ~ a disc~ssion \

paper (although not mandatory) :hat·includ~s a com_p reh~s1ve ove~~w of' .
.the 'issue, possible approaches m addressing the issue; the preh~nary
views of its authors or the IASB and an invitation to _comm~nt. The 1ss;ue ·
being discussed may result from a re·search project be~g carried by
· another standard setter or it may be an active agenda can:ied out ?Y
~he .
IASB. If the issu~ otiginates from another standard setter, the publication
of the discussion paper requires a simple majority vote of ~e IAS~
members . The discussion of all technical issues takes place m public 1
sessions (public meetings, public hearings and public round -tables) where ·
que~tions and answers session are conducted. ·

The IASB considers comments received on discussion paper, results 1

ff research and recommendations, and suggestions by the IFRS .
. :-ry Ccuncil, working groups and accounting standard setters and also .
su~estions arising from public education sessions. An exposure draft is .
.developed and voted upon.

The exp0sure draft is the I;\SB's main vehicle to consult the

_interested public. An exposun~ draft is a proposed standard or a proposed
amendment to a standard. The comment period for major projects is
usually 120 days, and for IFRIC Interpretations is usually 60 days, but may
be less in urgent cas~s. ·

The 'IASB makes rev1s1ons on the draft after considering. the

comments on the exposure draft . . When deemed necessary, a second
exposure draft is developed and published, following the same process
described above. Upon reaching conclusion on the issues covered in the
exposure draft, the pre-ballot IFRS is · sent to selected parties for review;
after which, a near final draft is posted on the JASB's website. Balloting,
which_ is circularizing the near final reporting standard to the IASB's .
members requires individual final review and approval of the draft. The
approved pronouncement is posted to the IASB 's limited access website for
an initial period of about ten days, after which the draft is freely available
online. ,• •

. After iss~ance of art IFRS, the IASB holds regular meetings with
~nter,ested ~arties to address some unanticipated issues relating to
impleme~tati~n. The IASB may initiate studies in the light of its review of
the application of the standard, changes in the financial reporting

8
 . Chapter l - The Development of the Accounting Profession

environment and regulatory requirements and comments received about

the quality of the IFRS. Such studies [Link] result in items being added to
, the JASB's agenda.

The IFRSs are principle-based rather than procedure-based. The

International Financial Reporting Interp.r etations Committee (JFRIC) was
o.r;ganized to interpret specific issues when, the standards do not include
specific authoritative guidance. The IFRJC succeeded the Standing·
.· Jnt~rpretations Committee (SIC) and consists of 14_voting members who act
independently and are not representing any organization or association.

'
.,T he Standard Setting Process in. the Philippines

. ·Before 1981, the Philippines did not have a formal process for the
\ development of accounting practices. Accounting principles then were
patterned 'from what were found in actual business practices, mostly based
on the accounting practices and principles developed by the United States
of America. It was only in late 1981, when the Philippine Institute of
c 'e rtified Public Accountants (PICPA) organized the Accounting Standards
<;::ouncil that formalized the standard setting process in the Philippines.
'
The Accou~ting _Standards Council (ASC) was formed on _!".l_o vernber
18,._J981 to study the accounting standard-setting process . in the
. Philippines. The main function of' the ASC yvas to establish and improve
g~[Link] accepted · accoun~!TTg p_rinciples in the Philippines. The
accounting stari'dards develc:>p_e d by the A,S C were known as the Statements
of
Finm~ial Accounti.:i·g Standards (SFAS). These st~mci::irrls [Link] [Link] nn
existing practices · in the Philippines, research and studies undertaken by
the council, available national and [Link]:J [Link] literaiures,
statements by then International Accounting Standards Committee, and
the Financial Accounting Standards Board of America.
.., .
I ' •
The ASC was composed of eight rri,embers, representing the following
organizations: __./PICPA, Securities, and Exchange Commission, Bangko
Sentral ng Pilipinas, Bo·ard of Accountancy, and Financial Executives of the
Philippines. The members were selected by these organizations based on
some degree of recognition for technical expertise.

· From the date it ~as organized, the ASC had been very active in the
promulgation, development, and revisions of accounting standards in the
Philippines. In so doing, the ASC had been aware of advancements in
business practices and information system throughout the world.

Although the IASC was created in 1973, earlter than the

organization of the ASC, it was only in 1997 that our ASC made a decision
to move fully to the Interr:iational Accounting Standards (IAS), although
some statements of financial accounting standards adopted by the ASC
even before 1997 had already been based on the IAS The ob· ti. f h
· ~ec ves o t e

- .
9
 --- the
--- - --- - ------
Accountin

harmonizing the Philippine accounting standards witt1 h

International Accounting Standards were as follows: t e I

(a) to develop, in the public interest, a single set of high quality,

understandable and enforceable accounting standards that
require high quality, transparent and comparable J
informatio~ .in financial statements and other financial !
reporting to help participants in the ·various capital markets ·
and other l,lsers of the information to make economic '
decisions;

{b) to promote · the use and rigorous application of those

standards; and
'•
/

(c) to work the convergence of Philippine accounting standards .

with International Financial Reporting s ·t andards (IFRS}, ,.
issued by the IASB and its predecessor, the IASC. ~
'
From 1997 to 2000, the ASC developed accounting ·standards that ·
were already based on IAS. The Philippines' transition to IAS formally :
started in 2001 when it adopted most of the standards that had been ··
developed by the IASC. The ASC set the year 2005 for the full adoption of ·
the International Accounting Standards in the Philippines. However, even i
before the Philippines had made full adoption of the IASs, improved and i
revised IASs and IFRSs have been ~eveloped and promulgated.

The ASC was succeeded by the Financial Reporting Standards

Council (FRSC}, which was established in 2006 by the Board of
Ac-c-ountancy. The Board of Accountn..,cy is the body that regulates the .
practice of accountancy in the Philippines. The FRSC continued the ,
function of the ASC of [Link] .accepted accounting principles ~
in the Philippines. It carries on · the decision of the ASC to conv~rge !
Philippine accounting standards with the International Financial Reporting ;
Standards. ·

. Under the Implementing Rules and Regulations of the Philippine

Accountancy Act (Republic Act 929.8), the FRSC shall be composed of a
chairman and 14 members representing the following organizations: Board
of Accountancy, Securities and Exchange Commission, Bangko Sentral ng
Pilipinas, Bureau · of Internal Revenue, Financial Executives of_ the
Philippines, Commission on Audit, and, the accredited professional '
organization of CPAs in the Philippines (which is presently the Philippine
Institute of Certified Public Accountants or PICPA) .

The FRSC formed the Philippine Interpretations Committee (PlC} .in

November 2006 to assist the former in establishing and improving financial 1
reporting standards in the Philippines . The PIC issues implementatio?· i
guidelines on Philippine Financial Reporting Standards.

10
 Chapter l - The Development of the Accounting Profession

Similar to IFRSs, the PFRSs consist of:

I,

· (a) the specific ·Philippine Financial Reporting Sta ndards (PFRS),.

which are a dopted from the IFRSs;

~) ·'· the ·Philippine Accounting Standards (PAS}, which are

adopted from the· IASs; and · ..· .. -··

(c) the Philippine Interpretations, which are adopted from the

interpretations of the IFRIC and the SIC and the
interpretations of the PIC.

' ' The PFRSs set out the recognition, measurement, presentation, and
disclosure requirements dealing with transactions and even ts that are
,important in general purpose financial transactions. They may also set out
such requirements for transactions and events that arise mainly in specific
industries. The PFRS are the bases of the discussion in this textbook.

PFRSs are developed through a due process that involves members

..of PICPA, financial executives, regulatory authorities·, m embers of the
academe and other interested individuals and organizations. Due process
for projects, normally, but not necessarily involves the following steps
(Preface to PFRSs, paragraph 19):

(a) consideration of pronouncement of IASB;

(b) formation of a task force, when deemed n ecessary, t o give

advice to the FRSC;

(c) issuing for comment an exposure d raft approved by a

majority of the FRSC members; comment period will be at
least 60 days, unless a s horter period (not less t han 30 days)
is considered appropriate by the FRSC;

(d) consideration of all comments received within the comment

period and, when appropriate, preparing a comment letter to
the IASB; and

(e) approval of a standard or an interpretation by a majo rity of

the FRSC members.

To this date, the FRSC is continuously monitoring the revisio ns of

and the amendments to the IFRS s to ensure _thA t improvements in t he
IFRSs are being made effective in the Philippines.

_ Other than the FRSC, the Board of Accountancy will closely mon·t
1
the implementation of the Philippine Financial Reporting Standards . or

11
 -,-------:------
irJ. - The Develo
-
the Accountin Pro ession
- -

THE CONCEPTUAL FRAMEWORK

FOR FINANCIAL REPORTING3

The fFRS~ are based on the Conceptual Framework for Financial

Reporting, which addresses the concepts underlying the inform'ation
p resented in general purpose financial statements. The EUrpose of the
Conceptual Framewqrk is to facilitate the con s istent and logicalJ ormula tion ,
of PFRSs. The Con ceptual Framework also provides a basis· for the
·use of'
Tudgment in resolving accou nting iss:ues. (Preface ·to PFRS, paragraph 6). /.
' .
The original Con ceptual Framework (entitled Framework for the'
Presentation of [Link] Statements) was initially developed and adopted by:
the IASC in 1989 . It was later . readopted qy the IASB in 2001. The ASC
originally approved the ·Framework in January 2000 and the editorial
changes ·made in 2005. Based on the IASB's working with th e Framework '
and the IFRSs, the' IASB is currently in the process of updating the
conceptual framework, in phases. The n ew Conceptual Fram~work covers..
four chapters, and at th is time, only two ch.a pters have been completed by
1
the IASB .
,.
Chapter Title Status i
1 The · Objective of General Purpose Published
Financial Reporting
2 The Rep orting Entity In process
3 Qualitative Characteristics of . Useful Published
F inancial Information
4 The 1989 Framework: The Remaining Published;
Text based on
original
.Framework;
still under
review.

· The Conceptual Framework, however, is not an accounting

stan dard . In case of conflict between a PFRS and the Conceptual
Framework, th e requirements of the specific PFRS shall prevail.

The Conceptual Framework defines the objective of financial

statemen ts, enum era tes and explains the qualitative characteristics of
accounting information, identifies the elements of financial statements and .
provides the general criteria for their recognition and discusses the
concepts of capital and the con cepts of capital maintenance.

3
This chapter provides a brief discussion of the Conceptual Framework for Financial .\
Reporting. A thorough and more detailed discussion is provided in Chapter 2 of
Intermediate Accounting, Volume 3.

12
 Chapter l - The Development of the Accounting Profession..

Objective of ..Financial Statements

.. . As discu_sse~ in the earlier part of this chapter, the financial

· · ~ta~ei:nents prov_1de information_ that enables the users to make economic
dec1s1ons. Specifically, the fin~cial statements provide information on the
1
'. _repor~ng ·en:e_rpris_e's financial · position, performance··: and . changes in-
financial pos1ti0n. The financial statements . are prepared based on ·the
, . assumption that users have common informa'tion needs. To provide such
~type of information, a complete set of financial statements includes the
~ following:
. .
a statement of financial position (conventionally caJled the
balance sheet),
a statement of ~omprehensive income (to broaden the.
information formerly presented ih an income statement),
(3) a statement of cash flows,
(4) a statement of changes in equity and
i. is) the notes to the financial statements, which explain the
accounting policies and other information which_cannot be::
appropriately presented 011 the face of the financial
statements. ·

The Conceptual Framework considers the existing and potential

investors , lenders and . other creditors as the primary users to whom the
_ general-purpose financial reports are directed.

Use of the Accrual Basis

The financial statements are based the accrual basis of accounting.

The accrual basis recognizes the effects of the transactions when the
transactions occur., rather than whe n cash is i;eceived or paid . The accrual
basis provides a guide in the recognition of revenues and expenses.
Revenues are recor ded when earnecl, that is, generally when goods are sold
orwhen servi~es are perfonned·:-' IAS 18 Revenue provides guidance on the
timing of recognition of revenue for goods sold, services rendered and for
[Link] others to. use enterprise resources.

~XQe~s_e s ~re recorded wl}_e!}jnc_urre~ '. not necessariJy when cash is

paid. - Expenses are recognized based on the appropriate expense
recognition principle:

(a) associating cause and effect,

(b) systematic and rational alJocation and
(c) immediate recognition.

When expe nses are recognized during the same period that the
related revenue is recorded, associating cause and effect is applied .

13
 -- -- -- - - --- - - - - - - -·-····--------· -·--·-
a ter 1 - The Develo ment o the Accountin

xamples of expense items recorded ·using this principle are warranty

expense, sales commission ·and cost of goods sold.
' .

When expenditures cannot be related to revenue of the period but

can be · attributed to the period benefited, such expense is recognized in
profit or loss using systematic and rational allocation. Depreciation
amortization of intangible assets, insurance expense and rent expense ar~
examples of such expenses . .

. If the expenditure cannot be related to specific revenue rior to period

benefited, the cost _has to be assessed whether it will still provide economic
beneµts. If •the .·e xpenditure does not provide future economic benefits or
the future benefit is uncertain or the amount is too immaterial to warrant
deferral, the expenditure is imm~diately recognized as· expense. Expenses
of this type include research and development expense, advertising expense
and some administrative expenses. .- ·
. .
The accrual basis provides more complete information than does the
cash basis accounting. Under the accrual basis, entities report in the
statement of financial position a~sets and iiabilities that result from
recognition of income . and expenses · not collected or paid during the
reporting period. Reporting accounts receivable, unearned income, .
accounts payable, prepaid expenses and accrued expenses results in more
complete . information and helps users predict future cash flows of the
enterprise.

Underlying Assumption - Going Concern _ e,ot\~tUAi~ •f ~ .!,v..1in«f

b p tl.ttA_~Of'(
Financial statements are prepared based on the going concern
assumption. Entities are presumed-to continue operation s in the future .
unless there are indications to the contrary. If the going concern
assumption is not valid, because the company plans to liquidate its
operations, or there is no other alternative except to liquidate, or it intends
to curtail materially its operations, that fact will have to be stated in the
financial statements and the basis for the presentation of the financial
statements shall likewise be described.
- c:JJ:te,lcut, ~ ""°~
to fu
Qualitative Characteristics of Accounting Information

The qualitative characteristics of accounting information are the

attributes that make the information presented in the financial statements
useful to users. The Conceptual Framework classifies the qualitative
characteristics into (a) fundamental qualitative characteristics and (b)
enhancing qualitative characteristics .

14
 Chapter l - The Development of the Accounting Profession

Fund a mental Qualitative Characteristics

a. Relevance

Relevant information should bear on the economic decisions

to be made by th~ users. Relevant information ipfluences the
judgment and evaluation of the user. Relevant information
possesses three qualities: confirmatory value (or feedback ualue),
predictive value and materiality. The quality of information that
confirms earlier expectatiop i_s its confirmatory value. The predictive
value of an information, on the other hand, enables its users to
ry-iake forecasts and plan their future actions . The third
characteristic, which is materiality, provides a threshold or cutoff
point for recognition . Thus, an item or ·a - transaction may not be
a ccorded its theoretical treatment if the amount involved is not large
enough, or the nature of the item is not significant enough, to
influence the decision or evaluation of the user.

b. Faithful Representation

An information is faithfully represented when it depicts the

actual events or effects of events and not merely their legal form .
Faithful representation is the quality of being honest to the users. It
has three components:

(a) completeness,
(b) neutrality, and
(c-) freedom from error.

Information presented on the financial statements shall not

be limited to information expressed in quantifiable form. A GQrpplete
depiction shall include all information necessary for a user to
understand the phen_o meno~ being depicted. This may also
require explanations of facts about the quality and nature of the
items and the process used to arrive at the amount presented on the
face of the financial statements. Such explanations and other
disclosures are generally presented in the notes to the financial
statements .

Neutral information is imparti~ and _is not biased towards

the particular needs or desires of specific users . · It is not
manipulated to induce a particular decision or evaluation by the
users.

Freedom from error means that the process used to produce

the information has been carefully selected and appropriately
applied. It does not necessarily mean that the information is
accurate in all respects . The u se of estimates does not reduce the
quality of information if the amount is described clearly a s being an

15
 ------
ter 1 - The Development of the Accounting Profession

estimate a nd the ~ature and limitations of the estimating process

are clearly explained.

-Enhancing Qualitative
a.
Characteristics

Comparability
.

Comparable information3aples users to identify similarities _

and differe~<;:es_pe~een ..~Jferent sets. of economic circumstfillccs.
The· presentation of cpmparable information requires the consistent
adoption of accounting policies. However, in circumstances that
warrant _a change in accounting policies or a change in the manner
of presentation of financial -information, the entity is required to
make a restatement of prior period financial information (unless it is
impracticable to do s_o) and to disclose in the notes to the financial
statements the nature of the change and the effects of the change in
· financial statement elements.

b. Verifiability / ~a\,,\.·~

Verifiability means reaching consensus if another

knowledgeable and independent observers .use the same
measurement process. Quantified information, however, need not
be a single amount if it involves estimation~ a range of possible '
amounts and the related possibilities can also be verified (based on
par. QC26, Conceptual Framework.). Verification ~an be direct_ or
indirect. Direct verification applies direct observation, as counting
cash; while indirect verification means redoing the process of
measurement.

c. Timeliness
Timely information is provided early enough for the users to
use it as a basis for making decision.

d. Understandability
Understandable financial information is presen;ed using
forms and terminologies that are adapt~d to the users ranlge of
d rstandability depends not on y on
understanding. However, . un e al the ·quality of the users.
the quality of the info1:171at10~. but s~non understanding complex
Users should exercise d1bgence 1 ble degree of knowledge of
information and sho~ld posse_s~ ~ rea~~n:Ome instances, users may
accounting and business a~tiv1ties. d tand complex financial
seek the aid of an adviser to un ers
in formation.

16
 Chapter l - The Development of the Accounting Profession

Elements of Financial Statements

The financial effects of the activities undertaken by th ·

· h . e enterpn se
are presented m t .e financial
. statements based on cert,,; ~n groupings • or
f h
classes o c aractenstics; called the elements of financial state t Th
.al men s . e
f fl1nanc1 statements
·e_ 1ements o/< . _ .are--assets
. __ , _liabiliti
. ·es ,__equ1·ty , income
· -an d
e';pense~./. The first three . - assets, liabilities and equity, are ·elements
directly related to financial position, while the last two - income and
expenses are the elements that are directly related to performance.

Elements of Financial Position ·.. .,,.

a. Assets . \)II' .

These are the r~sources controlled by the entity as a result of

past events and from which future eco~omic benefits are expected
to flow to the enterprise. These resources include fmancial assets
such a s cash, receivables, or debt and equity securities of other
enterp'1ses held by the entity as investments. They also include
non-financial assets,' such as inventory, property, plant and
equipment, and intangible assets.

b.
------
Liabilities
---- .
A liability is a present obligation of an enterprise arising from
past eve11ts, the settlement of, which is expected to result in an
outflow from the entity of economic resources embodying economic
benefits. Liabilities include financial liabilities , such as notes and
accounts payable, long-term debts and other contracts requiring the
entity to make cash payments at .a future date . They also inciude
non-financial liabilities, such a s deferred revenues for which goods
or services are to be delivered in the future.

c. Equity v ·
Equity is the residual int~rest in the asset~ of the entity after
deducting all its liabilities._ This 1s measured as the excess of assets
over liabilities.

Elements of Performance,

d. Income

Income is increases in economic benefits during an

accounting period in the form of inflows or enhancements of assets
or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
Income encompasses both revenues and gains. The distinction
between revenues and gains is based on the nature of the a c tivity

1 '7
, 'lflt eC
11..:.-:..:T
- --::-:-::--:-- ----:-;--~~
t h~e~ D~e:£

th t gives rise to income.

--- - --
ve~l~O~[!!:!~~~~~ ~==L...:...,;:....:.,L--=-.:;;..=...:;.:::;..=

Revenues arise from _major or £ e~tral ,

~vities of tl:?,e _e~te!"Prise while gains arise from incidental ,.
:~tivitie~. ~bus, revenue "is earned from ·sale: of gqods or .servi~es or
by allowing others to use e1:l~erprise resources·. Gains arise from
incidental disposal of assets of the •enterprise and from activities ,
other than sale· of goods ·and services in the normal course of
business.

e. Expenses

Expenses · are ~rea~-~.LID--~c9P:_o~c~-~nefits ~~g the .,

reportil}g _period µi the form of outflows · or depfetion of assets or
incurrence bf liabilities that result in decrel\Ses in eqiiity, other than I
those relating to distributions to equity participants. Expenses
~~}ude.-also -losses, which arise from incidel)tal activitie$ of the
enterprise.

Recognition Principles

The Conceptual Framework identifies two general criteria for the

recognition of financial statement elements. They are as follows:

(1) It is _probable that there is an inflow or outflow of economic •

benefits; and
(2) The element has a cost or value that could be reliably
.ll;),easure~

Ap asset is ,recognized when it is probable that there is an inflow of

economic benefits · and it has a c9st or v~ue that couid be reliably
measured. Similar r~cognition criteria are applicable to· income. Following
the same thought, a liability is recognized when it is probable that there is '
an outflow of eCOJ}.OlJliC_benefits and the outflow of economic'oenefits has. a '
valu£tJia.1 - co~_ ~e_1e)i~~ly_~~~~red. Similar recognition criteria are
applied to recognition of expenses.

The process of rec_o gnition requires assigning a value to the financial

statement element. This process is called measurement. The Conceptual
Framework identifies four measurement bases:

(1) ..historical cost, which is the cost of acquisition;

(2) current ~ost (or [air .valueJ, which is the amount of cash or
cash equivalents that would have to be paid if the same
asset or an equivalent asset is acquired currently;

(3) regljmhfe value, which is the asset's disposal value reduced '
by disposal costs, or the liabilities' settlement amount
including settling costs; and t~j [Link] io CAI' •~ , ~
(4) present value, which is the discounted future cash flows.

18
 ' ' ' I • •
Chapter l - The D l
eve 0 Rment_gf_ the [Link]..§sion

The Conceptual Fran1cwork docs not . .

measureinent basis for the recognition of ·f , [Link] flny portJ<; ulnr
does it require the use of 8 partic pat icu 1ar tnancial clements nor
circumstance Thu h fi 1
. u ar measurement basis for A portfculor
. t , f d'f~ s, t c inancml statements prepared for un entity is u
mix urc o 1 ,erent n1easuren1cnt bases. ·

The Conc epts of Capital and Capital Maintenan c.J

.. !he [Link] Framework identifies two concepts of capital: the

financial capital concept and the physica.l capital concept. Under the
· _fi_n anci~~ conce?t of capital, ~apital is synonymous with net assets of the
~EJ<:_rpr.ise. · T~1s. concept does not re9~-~e the adoption of a specific
~~-~~~re!!)ept__1:?as1s. Thus, _c ~sh and some financial assets are measured at
.!~r _v~ue (current cost), while property, plant and - equipment and
mtangi~le assets, depending on the accounting policy adopted by the
ent~rpnse, ~~y_J;>~- i::n~_~s_ql"ecLl.tsing_ [Link] cost ..Dr .revalued amount
j_~h1c h considers fair value at the d_a te _o f revaluation). The_ physical
~~c~pt~ ~ r · capital defines capital as the operating capacity of the
enterpris e and requires the use of the current cost as measurement bas is
.[Link] enterprise's assets and ,liabilities. ·

The capital maintenance concept measures profit as the amount of

capital thatthe enterprise can d istribute to its owners and be as well off at
:the end of the period as it was at the beginning. Thus, profit is the net
change in capital after excluding the effects of transactions with owners.

The financial capital maintenance concept measures profit as the

excess of the financial amount of net assets al the end of the period over
.the financial amount of net assets at the beginning of the period, after
deducting contributions from owners and adding back distributions to
owners.
The physic al capital maintenance concept measures profit as the
excess of the productive capacity of the enterpri se at the end of the period
o-ver the productive capacity at the beginning of the period, measured in
terms of current cost, after excluding the effec ts of transactions with
owners.

The selection of the appropriate concept of capital is based on the

perceived needs of the users. If the users ar·c primarily concerned with the
maintenance of nominal invested capital (or purc hasing power of invested
capital, the financial capital concept shall be applied. If the users are
primarily concerned with the operating capability of the enterprise, a
physical concept of c apital s hall be used.
 -
Cha ter 1 - The Develo
Pro ession

CHA~ER SUMMARY

❖ ~cco1:1nting is a measurement and information system that

~dentifie~, . measures, records, and . communicates quantitative
mformation about an eco~omic_entity that owners and prospective
owner~,. managers, creditor~ and prospective creditors, taxing
au~onties, r~gulatory agencies and other decision makers use as
basis for making economic decisions.

❖. The users of accountinginformation are classified either as external-

users or inteJ?1al users and either as direct .users or indirect users.
The Conceptual Framework for Financial Reporting identifies the
present and potential investors, creditors and lenders as the
primary external users 9f firiarn;:ial statements.

❖ Accounting is divided into two broad branches: Financial

AcC:ounting and Managerial Accounting. Financial Accounting
[Link] general-purpose financial statements mainly for external,
while Managerial Accounting provides special . purpose reports
mainly for specific information needs of the internal users.

❖ There are other branches of accounting such as Cost Accounting,

Tax Accounting, and Government Accounting, __ __

❖ Auditing, a related but separate discipline, deals with an

independent examination of an enterprise's financial statements for
the purpose· of rendering an opinion as to the fairness by which
these financial statep,ents are prese.1ted.

❖ The Board of Accountancy regulates the professional practice of

Accountancy in the Philippines.

❖ The Accounting Standards Council, which was created in 1981 , was

the original accounting standard setting body in the Philippines.
The Accounting Standards Council performed its function of
establishing generally accepted accounting principles from 1981 up
to the date it was succeeded by the Financial Reporting Standards
Council in 2006.

❖ The Financial Reporting Standards Council was established by the

Board of Accountancy under the Implementing Rules and
Regulations of the Philippine Accountancy Act of 2004. Th~ _FR~C
carries on the decision made by the ASC to converge Ph1hppme
accounting standards with the In temational Financial Reporting
Standards (IFRSs) issued by the International Accounting Stand~rds
Board. The FRSC formed the Ph_ilippine Interpretations Committee
for the latter to issue implementation guidance on the Philippine
Financial Reporting Standards.

25
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· : -Th~ i,-;;~elo ment o the Accountin

,err_l:...:=-2.L~~::.=~~:...;::;..;;;_.c...;;...;;..~L-.:...;:._c..,;;;-=c.=....;;.~::..=....::...;:::....::..:..;:..;i_=--=--=.1..:.~~~
1

The Philippine ·Financial Reporting Standards (PFRSs) are based on

the Conceptual .Framework for Financial Reporting. The Conceptual
Frame~ork sets ·out the cqncepts that underlie the preparation and
presentation of fmancial · statements for external users. The
Conceptual Framework covers the following scope: the objective of
financial statements; the qualitative characteristics of financial
information; the definition, recognition and measurement of the
elements of financial statements; and the concept of capital and
capital. maintenance. . A new chapter ·is to. be included in the
Conceptual Framework for the discussion of reporting entity. This
· chapter, however, has not yet been completed at this time.