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Conceptual Framework and Accounting Standards by Valix

Conceptual Framework and Accounting Standards by Valix

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3K views93 pages

Conceptual Framework and Accounting Standards by Valix

Conceptual Framework and Accounting Standards by Valix

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chawowo suba
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© © All Rights Reserved
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Conceptual Frathework Accountin \ Standards Conrado T. Valix Jose F. Peralta Christian Aris M. Valix . i SC EAN 2018 FIRST E! iON CONTENTS CHAPTER 1 THE ACCOUNTANCY PROFESSION _ Definition of accounting The accountancy profession — public accounting, private accounting and government accounting Limitation of the practice of public accountancy Accreditation to practice public accountancy Continuing professional development CPD credit units Generally accepted accounting principles Financial Reporting Standards Council Philippine Interpretations Committee International Accounting Standards Committee International Accounting Standards Board International Financial Reporting Interpretations Committee CHAPTER 2 zi CONCEPTUAL FRAMEWORK Financial reporting and assumptions Definition of Conceptual Framework Purpose of Conceptual Framework Scope of Conceptual Framework Objective of financial reporting Limitations of financial reporting Underlying assumptions — going concern, accounting entity, time period and monetary unit CHAPTER 3 CONCEPTUAL FRAMEWORK Quatitative characteristics Fundamental qualitative characteristics Relevance Faithful representation Enhancing qualitative characteristics Comparability Understandability Verifiability Timeliness Cost constraint on useful information CHAPTER 4 CONCEPTUAL FRAMEWORK Elements of financial statements Definition of elements of financial statements Asset recognition principle Liability recognition principle Income recognition principle Expense recognition principle Measurement of elements 61 92 “YF Definition of accounting The Accounting Standards Council provides the following definition: The accounting function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. The Committes on Accounting Terminology of the American Institute of Certified Public Accountants defines accounting as follows: Accounting is the art of recording, classifying ang summarizing in a significant manner and in terms ofmoney, transactions and events which are in part atleast ofa financial] character and interpreting the results thereof. in its Statement of Basic Accounting Theory defines accounting as follows: Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. Important points The following important points made in the definition of accounting should be noted: 4 The definition that has stood the test of time is the definition given by the American Accounting Association. This definition states tl The definition also states that accounting has a number of = components, namely: a. Identifying as the analytical component. b. Measuring as the techi component. c. Communicating as the component. Identifying Not all business activities are accountable, | For example, the hiring of employees, the death of the entity president and the entering into a contract are all business activities but such events are not accountable because they _ cannot be quantified or expressed in terms of a unit of measure. In other words, the i or the measurement of economic resources and economic obligations. . Only economic activities are emphasized and recognized in accounting. Sociological and psychological matters are beyond the province of accounting. —- — j tions External and internal transac red to a8 fransactinns refer! Economic activities of an “ternal and internal which may be classified as nsactions are: Examples of external tral a. Purchase of goods from a supplier b. Borrowing money from a bank c. Sale of goods to a customer d. Payment of salaries to employees Payment of taxes to the government Internal-transactions are the economic activities that-take place entirely-within-the entity. Production and casualty.loss are ex: transactions. ‘ Production is the process by which resources are transformed . j Casualty is any sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily termed as an act of God. . Measuring Thi amples of internal into products. accounting process is If accounting information is to be useful, it must be expressed in terms of a common financial denominator. Financial statements without monetary amounts would be | largely unintelligible or incomprehensible. - | ee enemas is the most common measure of fi ial transactions. « on measure of financial a a Communicating is the process of preparing and distributing a Identifying and measuring are pointless if the information contained in the accounting records cannot be communicated in some form to potential users. Actually, the communicating process is the reason why accounting has been called the “universal language of business”. Implicit in the communication process are the recording, and summarizing-aspects of accounting. fecorains i i; is the process-of-systematically maintai g e if economic busi: i after they have been identified and measured. ‘Classifving is the sorting or grouping-of-similar-and interrelated economic transactions into.their respective classes. “Classifying is accomplished. by.posting tothe ledger. The ledger is aygroup”ofvaccount’s which are systematically categorized into asset accounts, liability accounts, equity — accounts, revenue accounts and expense accounts. Smee is the preparation of financial statements which include the statement of-financial-position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows. Accounting as an information system is an information system that measures business Activities, processes information into reports and communicates the reports to decision makers. A key product of this information system is a set of financial atements — the documents that report financial information about an entity to decision makers. - Financial reports tell us how well an entity is perform ing in terms of profil and loss and where it stands in financial terms. a Overall objective of accounting — The fnonilinforetion a 0b is to srther wee An accountant’s primary task is to supply financigy information so that the statement users could make informed Judgment and better decision. The essence of accounting is decision-usefulness. Investors and other users are interested in financial]. accounting information necessary in making important and significant economic decisions, THE ACCOUNTANCY PROFESSION At present, is the law regulating the i Practice of accountancy in the Philippines, J This law is known as the ¢Philippine Accountancy Act of Bonar. | Accountancy has de: veloped as a profession attaining a status equivalent to that of law and medicine, oes. * In the Philippines, in order to qualify to practice the accountanc ion, a person must Bachelor of ct ountancy and passa very difficult, government examination given by the Board of Accountancy. ‘The Board o| the body authorized | promulgate rules ffecting the practice of the accountancy profession in the Philippines, The Board of Accountancy is responsible for preparing and grading the Philippine CPA examination, a . This computer-based examination is offered twice a year, one in May and another one in October, in authorized testing centers around the country. Limitation of the practice of public accountancy Single practitioners and partnerships for the practice of public accountancy shall be registered certified public accountants in the Philippines. . A certificate/of accreditation shall be issued to certified public accountants in public practice only upon showing in accordance with rules and regulations promulgated by the Board of Accountancy and approved by the Professional Regulation Commission that such registrant has acquired a three years of meaningful experience in any of the areas of public practice including taxation. 3 4 py evolvem enh ay or The Securities and Exchange"Coihmssion shill ndt FeBister any corporation organized for the practice of, public accountancy. © pahneeip + SEL CoP regi Accreditation to practice public accountancy Certified public accountants, firms and partnerships of certified public accountants, including partners and staff members thereof, are required to register with the Board of Accountancy and Professional Regulation Commission for the practice of public accountancy. The Professional Regulation Commission upon favorable recommendation of the Board of Accountancy shall issue the Certificate of Registration to practice public accountancy which shall be valid for 3 years and renewable every 3 years upon payment of required fees. Certified Public.Accountants generally p. ractice their profession in three main areas, namely: a. Public accounting b. Private accounting c. Government accounting. PUBLIC ACCOUNTING The field of public acm ting or public accountancy is com, of indi, tal pee fall accounting firms and large at Public acco nam untants usually offer three kinds of Services, ‘Y Guditing, taxation and . Asa matter of fact, large multinational accounting firms have Separate division for each of these services Auditing ‘@taiting has traditionally been the primary service offered ¥ MOst public accounting practitioners. y auditing is the attest function of independent CPAs. The Bureau of In statements to accor Banks and ot! audit by borrower ternal Revenue requires audited financial mpany the filing of annual income tax return, ther lending institutions fre an independent CPA before gral quently require an ting a loan to the Creditors and Prospective investors place considerable reliance on audited financial statements on making economic decision. . Taxation Taxation service includes the preparation of annual income «tax returns and determination of taw consequences of corte: proposed-business-ent The CPA not-infrequently represents the client in tax investigations. To offer this service effectively and efficiently, the public accountant must be thoroughly familiar with the tax laws and regulations and updated with changes in taxation law and court cases concerned with interpreting taxation law. 8 Management advisory services Management advisory-services have become increasingly important in recent years although audit and tax services are undoubtedly the mainstay of public accountants The term management advisory services has no precise coverage but is used generally to refer to i Specifically, management advisory services include: a. b. Ge d e f. & Advice on installation of computer system Quality control Installation and modification of accounting system . Budgeting Forward planning and forecasting Design and modification of retirement plans . Advice on mergers and consolidations PRIVATE ACCOUNTING Many Certified Public Accountants are employed in business entities in various capacity as accounting staff, chief accountant, internal auditor and controller. The highest accounting officer inan entity is known as the controller. a The major objective of the private accountant is to assist management in planning and controlling the entity's operati Private accounting includes maintaining the records, producing the financial reports; preparing the budgets and ee sSFSFf ‘The private accountant has also the responsibility for the determination of the various taxes the entity is obliged to pay. : xOVERNMENT ACCOUNTING Government accounting eneompasses aun oce88 analyzing, classifying, summarizing and communica| ‘ng aly transactions involving the receipt and. disposition of government. funds and property. and interpreting 4, results thereof, The focus of government accounting is the custody ang administration of public funds. mn of public fun . Many Certified Public Accountants are employed in many ranches of the government, more particularly: Bureau of Internal Revenue Commission on Audit Department of Budget and Management Securities and Exchange Commission Bangko Sentral ng Pilipinas Ppore CONTINUING PROFESSIONAL DEVELOPMENT (CPD) Republic Act No, 10912 is the law mandating and strengthening the continuing professional development Program for all regulated professions, including-the accountancy profession. All certified public accountants shall abide by the requirements, rules and regulations on continuing professional development to be promulgated by the Board of Accountancy, subject to the approval of the Professional Regulation Commission, in coordination with the accredited national professional organization of certified public accountants or any duly accredited educational institutions. Continuing professional development refers to the inculeatio and acquisition of advanced knowledge, skill, proficiency, atid ethical and moral values: after the initial registration of the Certified Public Accountant for assimilation into professional practice and lifelong learning. Continuing professional development raises and enhances its technical skill and competence of the Certified Public Accountant. 10 CPD credit units The CPD credit units refer to the CPD credit hours required for the renewal of CPA license and accreditation of a CPA to practice the accountancy profession every three years. ‘Under the new BOA Resolution, all Certified Public Accountants regardless of area or sector of practice shall be required to comply with WARSRPrcredtitmn nity in compliance period of three years. However, the initial implementation of the 120 CPD credit units is gradual in the following period: 2017 80 credit units 2018 100 credit units 2019 120 credit units Excess credit units earned shall not be carried over to the next three-year period, except credit units earned for masterak and doctoral-degrees. Iti is to be emphasized abat the Gaccbiatiesgelancisocio nl Development has become-mandatory-for-Certified Public Accountants. es The Continuing Professional Development is required for the renewal of CPA license | and accreditation of CPA to practice the accountancy profession. Exemption from CPD ‘A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65 years. However, this exemption applied only to the renewal of CPA license and not for the purpose of accreditation to practice e the accountancy profession. 1 A 7 ccounting versus auditing In | o a broad sense, accounting embraces auditing. Avaitine : . uditing is one of the areas of accounting specialization In a limited sense, accounting is essentially constructive ;, n financial statements are ae Accounting ceases whe already prepared. On the other hand, auditing is analytical: The work of a, auditor begins when the work of the accountant ends. ‘ After the financial statements are prepared, the auditor will begin to perform the task of auditing. The auditor examines the financial statements to ascertain whether they are in conformity with generally accepteg accounting principles. Accounting versus bookkeeping . Bookkeeping-is procedural and-largely. concerned-with development and-maintenance.of accounting-records. Bookkeeping is the “how” of accounting. ‘ a 4 Accounting is conceptual and is concerned with the-why, 3 reason or justification for-any action adopted. . is Bookkeeping is a procedural element of accounting as arithmetic is a procedural element of mathematics. Accounting versus accountancy the two terms are synonymous because they Broadly speaking, field of accounting theory and practice. both refer to the entire Technically speaking, however accountancy refers to the " profession of accounting practice. particular field of Accounting is used in reference only to a ting an! accountancy such as public accounting, private accoun government accounting. 12 GeeSSsSsSa{E_E_—hlmlmltC—(i‘i‘iO™OCOCOOCOC~™ Financial accounting versus managerial accounting e ansactions and the eventual preparation of financial statements. Financial accounting focuses on general purpose reports known as financial statements intendet external users. Financial accounting is the area of accounting that emphasizes reporting to ereditors and investors. .— oo". Managerial accounting is the accumulation and preparation of financial reports for-internal-users-only. In other words, managerial accounting is the area of accounting that emphasizes developing accounting information foruse within an entity. ° GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ot Accounting has evolved through time changing with the niceds ; me ; of society. As new types of transactions occur in trade and commerce, accountants develop rules and procedures for recording them. These accounting rules, procedures and-practices came to be known as generally accepted.accounting principles or simply GAAP. ‘The principles have developed on the basis of experience, reason, custom, usage and practical necessity. «roy Generally accepted accounting principles represent the rules, procedures, practice and standards=followed in the preparation and presentation of financial-statements. Generally accepted accounting principles are like laws that must be followed in financial reporting. ‘The process of establishing GAAP is a political process which incorporates political actions of various interested user groups as well as professional judgment, logic and research. 13, a PO r Purpose of accounting standards j ards is to ide ‘The overall puxpose of accounting standarde is to ide pi Proper accounting practices for the p Presentation of financial statements. ‘standin, . = ate a common under: gs Accounting standards cre: statement, between preparers and users of finan’ particularly the measurement of assets and liabilities. A set of high-quality accounting standards is a necessity to ensure comparability and uniformity in financial statements based on'the same financial information. FINANCIAL REPORTING STANDARDS COUNCIL, In the Philippines, the development of generally accepted accounting principles is formalized initially through the creation of the Accounting Standards Council or ASC. The Financial Reporting Standar Is Council or FRSC now replaces the Accounting Standards Council. The FRSC is the accounting standard setting body created by the Professional Regulation Commission upon recommendation of the Board of Accountancy to assist the Board of Accountancy in carrying out its powers and functions provided under R.A. Act No. 9298. oe < The main function is to establish and improve accounting standards that will be generally accepted in the Philippines. The accounting standards promulgated by the Financial Reporting Standards Council-constitute the="highest hierarchy" of generally accepted accounting principles in the Philippines. The approved statements of the FRSC are known as Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards or PFRS, 14 Composition of FRSC Board of Accountancy = Securities and Exchange Commission Bangko Sentral ng Pilipinas Bureau of Internal Revenue Commission on Audit Major organization of preparers and users of financial statements — Financial Executives Institute of the Philippines or FINEX ‘Accredited national professional organization of CPAs: s Public Practice Commerce and Industry Academe or Education Government Total The Chairman and members of the FRSC shall have a term Pegi pacer ay ne Any member of the ASC shall not be disqualified from being appointed to the FRSC. Philippine Interpretations Committee ‘The Philippine Interpretations Committee or PIC was formed i and has replaced the by. the FRSC i Ini pretations. Commitee, IC formed by the Accounting Stan¢ oun ay 2000. The role of the PIC.is to prepare interpretations of PFRS for approval-by the FRSC and to = ‘idance on it i rting issues not-specifically addressed in current -PFRS. In other words, interpretations are intended to give authoritalive guidance on issues that are likely to receive divergent_or unacceptable tasatme because the standards fo not provide specific and clearcut rules and guidelines. The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations Committee or IFRIC which has already replaced the Standing Interpretations Committee or SIC. I Ieo 03 20 80 15 INTERNATIONAL ACCOUNTING STANDARDS COMyy is an independent priv body, wi oF Taso fj private sector body, with the objective og achieving-uniformity im the accountin reporting’around the world: a It was formed in June 1973 through an agreement made professional accountancy bodies from Australia, Canaq, France, Germany, Japan, Mexico, the Netherlands, thy United Kingdom and Ireland, and the United States of America. The IASC is headquartered in London, Uniteg Kingdom. Objectives of IASC a. To formulate and publish in the public interest accounting | standards to be observed in the presentation of financial _ statements and to promote their worldwide acceptance q ni and observance. -

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