FAR 1 Introduction to IFRS

ACCOUNTANCY DEPARTMENT OF ATENEO DE ZAMBOANGA UNIVERSITY ARMEE JAY L. CRESMUNDO | JASPER ANDREW C. ADJARANI | KELVIN J. CULAJARA FOURTH EDITION, 2016

OUTLINE OF CONTENTS Outline Contents

1.1 1.2 1.3 1.4 1.5 1.6 1.7

About the authors Preface Definition of accounting Basic purpose of accounting The International Financial Reporting Standards (IFRS) The International Accounting Standards Board (IASB) Standard-setting due process The Philippine Financial Reporting Standards (PFRS) Accounting standard setting bodies and other relevant organizations Quizzer

ABOUT THE AUTHORS

ARMEE JAY L. CRESMUNDO obtained his license as a certified public accountant on October 2010. Immediately after passing the board exam, he served as an associate in SyCip Gorres Velayo, and Company (SGV & Co.) where he rendered audit services to manufacturing, service, telecommunications, and airline corporations. He obtained his degree in accounting from Ateneo de Zamboanga University where he was conferred the honors of magna cum laude. He is currently finishing his master’s degree in accountancy in De La Salle University.

Currently, Armee Jay is a chairperson for Accountancy and Business Management (ABM) track of the senior high school of AdZU. Prior to this, he served as an instructor of the accountancy department of AdZU teaching financial accounting, cost accounting, and auditing, among others.

JASPER ANDREW C. ADJARANI is a certified public accountant who ranked 17th in the October 2014 CPA licensure examination. He graduated from Ateneo de Zamboanga University with a distinction of summa cum laude. He is currently finishing his master’s degree in business administration in the same institution.

Jasper is currently a part-time accountant of Alejandro Cabading Accounting Firm where he is heavily exposed to financial statements preparation and tax compliance services. He is also the current assistant chairperson for integrative courses of the accountancy department of AdZU. He handles classes in advanced accounting, cost accounting, and accounting for partnerships and corporations.

KELVIN J. CULAJARA is a certified public accountant who obtained his license on October 2014.

He graduated from the Ateneo de Zamboanga University with a distinction of cum laude.

Currently, he is finishing his bachelor of laws degree from Xavier University (in consortium with AdZU).

Kelvin worked as a part-time associate of Florivel De Jesus Accounting Firm where he was heavily exposed on tax resolution cases and accounting controls analysis and design for small and medium-sized enterprises. He also served as an assistant instructor of AdZU handling classes in financial accounting, cost accounting, taxation, and management consultancy.

PREFACE

This school year marks the integrative courses’ fourth (4th) anniversary ever since the accountancy department has launched its first integrative courses batch last 2013. In a span of four (4) years, the department has tirelessly revised its various modules, crafted and modified sets of practice problems, and edited its written lectures, only for the purpose of embossing the Ateneo as a national powerhouse of excellent accounting education.

True enough, the department has yielded much results from its first batch by enlisting a sixty four percent (64%) passing rate for a batch of seventy five (75) CPA board exam takers (the most number of October takers ever recorded in the history of AdZU). On the next year, AdZU was officially recognized by the Board of Accountancy as the sixth (6th) top performing accounting school in the Philippines after batch 2014 garnered a batch rate of ninety five percent (95%). While the department is yet to see the over-all results for batch 2015, but we envision to continue and improve on the legacy put in place for us. This all-new integrative module on financial accounting and reporting is a result of that collective aspiration.

Needless to say, this integrative module seeks to provide a comprehensive and annotatable reference for graduating accounting students. We realize the power of note-taking in integrative courses, and so we deliberately designed this layout with wide side spaces to make it much more convenient for the students to write and comment on.

This integrative module is not, in anyway, an exhaustive reference for students to fully depend on. What this module provides is mere emphasis of the more important and salient points over a particular discussion. The problems and cases in this module are also not exhaustive, but we can say that collectively, the test items and problem sets in this module are quite representative of a whole block of discussion, as long as financial accounting and reporting is concerned. We highly recommend the students to use various reference materials, corroborate various information gathered from these references, and use this module to streamline those pieces of information into more cohesive and digestible “takeaways�.

We have also managed to include mini-cases in our discussions in this module because we believe that the field of financial accounting and reporting is not just quantitative, but also circumstantial.

We fervently hope that the all-new arrangements and additions in this module would help the students achieve their wildest dreams of not only topping the CPA board exam in the future, but also succeeding in life after the boards.

All the best!

AJHAY, JASPER, AND KELVIN

1.1 Definition of Accounting Accounting is the process of identifying (process of analyzing events and transactions to determine whether or not they will be recognized in the books), measuring (process of assigning numbers, normally in monetary terms, to the economic transactions and events), and communicating (process of transforming economic data into useful accounting information such as financial statements and other accounting reports for dissemination to users) economic information to permit informed judgment and decisions by users of information.

1.2 Basic Purpose of Accounting The basic purpose of accounting is to provide quantitative financial information about economic activities intended to be useful in making economic decisions.

The two types of accounting information as to users’ needs are: 

General purpose – designed to meet the common needs of most financial statement users.

It is governed by GAAP represented by the IFRSs.



Special purpose – designed to meet the specific needs of particular financial statement users. This is provided by other types of accounting other than financial accounting.

1.3 International Financial Reporting Standards (IFRS) IFRS is a set of standards promulgated by the International Accounting Standards Board (IASB), an international standard-setting body based in London, United Kingdom. The IASB places emphasis on developing standards based on sound, clearly-stated principles, on which interpretations may be required (sometimes referred to as principles-based standards). This contrasts with sets of standards, like US GAAP, the national accounting standards of the United States, which contain significantly more application guidance. These standards are sometimes referred to as rules-based standards, but that is really a misnomer as US standards also are based on principles—they just contain more application guidance (or “rules”).

IFRS also generally do not provide “bright lines” in distinguishing between circumstances in which different accounting requirements are specified. This reduces the chances of ‘structuring’ transactions to achieve particular accounting effects.

IFRS, which were initially called International Accounting Standards (IAS), are gaining acceptance worldwide. A major breakthrough came in 2002 when the European Union (EU) adopted legislation that required listed companies in Europe to apply IFRS in their consolidated financial statements. The legislation came into effect in 2005 and applies to more than 8,000 companies in 30 countries, including France, Germany, Italy, Spain, and the United Kingdom.

The adoption of IFRS in Europe means that IFRS have replaced national accounting standards and requirements as the basis for preparing and presenting group financial statements for listed companies in Europe.

Outside Europe, many other countries also have been moving to IFRS. By 2005, IFRS had become mandatory in many countries in Africa, Asia, and Latin America. In addition, countries such as Australia, Hong Kong, New Zealand, Philippines, and Singapore have adopted national accounting standards that mirror IFRS. According to estimates, currently more than 100 countries require or permit IFRS in preparing and presenting financial statements, and many other countries are expected to adopt or apply IFRS in the coming years. In the period

2011–2012 several major players such as Canada and India are expected to adopt IFRS. In October 2002, FASB and IASB entered into a Memorandum of Understanding (the Norwalk Agreement), whereby they formalized their commitment to the convergence of US GAAP and IFRSs.

1.4 The International Accounting Standards Board (IASB) From 1973 until 2001, the body in charge of setting the international standards was the International Accounting Standards Committee (IASC). The principal significance of IASC was to encourage national accounting standard setters around the world to improve and harmonize national accounting standards. Its objectives, as stated in its Constitution, were 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 and observance



Work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements

During its existence, IASC issued 41 numbered Standards, known as International Accounting Standards (IAS), as well as a Framework for the Preparation and Presentation of Financial Statements. While some of the Standards issued by the IASC have been withdrawn, many are still in force. In addition, some of the Interpretations issued by the IASC’s interpretive body, the Standing Interpretations Committee (SIC), are still in force.

In 2001, fundamental changes were made to strengthen the independence, legitimacy, and quality of the international accounting standard-setting process. In particular, the IASC Board was replaced by the International Accounting Standards Board (IASB) as the body in charge of setting the international standards.

The interpretive body of the IASC (SIC) was replaced in 2002 by the International Financial Reporting Interpretations Committee (IFRIC). The latest name of this interpretive arm of the IASB is IFRS Interpretations Committee (which until March 31, 2010 was named International Financial Reporting Interpretations Committee (IFRIC)).

The name of the organization that comprises both the IASB and its Trustees is the IFRS Foundation. The objectives of the IFRS Foundation, as stated in its Constitution, are 

To develop, in the public interest, a single set of high-quality, understandable, and enforceable global accepted financial reporting standards based on clearly articulated principles that require high-quality, transparent, and comparable information in financial statements and other financial reporting to help investors and other participants in the various capital markets of the world and other users of the information to make economic decisions.



To promote the use and rigorous application of those standards.



In fulfilling the objectives associated with 1 and 2, to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.



To promote and facilitate adoption of IFRS through convergence of national accounting standards and IFRS.

At its first meeting in 2001, IASB adopted all outstanding IAS issued by the IASC as its own

Standards. Those IAS continue to be in force to the extent that they are not amended or withdrawn by the IASB. New Standards issued by IASB are known as IFRS. When referring collectively to IFRS, that term includes both IAS and IFRS.

1.5 Standard-setting Due Process As part of its due process in developing new or revised Standards, the Board publishes an Exposure Draft of the proposed Standard for public comment in order to obtain the views of all interested parties.

It also publishes a “Basis for Conclusions” to its Exposure Drafts and Standards to explain how it reached its conclusions and to give background information. When one or more Board members disagree with a Standard, the Board publishes those dissenting opinions with the Standard.

To obtain advice on major projects, the Board often forms advisory committees or other specialist groups and may also hold public hearings and conduct field tests on proposed Standards.

1.6 Philippine Financial Reporting Standards (PFRS) The Generally Accepted Accounting Principles (GAAP) in the Philippines is represented by the Philippine Financial Reporting Standards (PFRSs).

PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise: 

Philippine Financial Reporting Standards (PFRS)



Philippine Accounting Standards (PAS)



Interpretations

PFRSs are accompanied by guidance to assist entities in applying their requirements. Guidance that is an integral part of the PFRSs is mandatory while guidance that is not an integral part of the PFRSs does not contain requirements for financial statements.

In the absence of a Standard or Interpretation that specifically applies to a transaction, management must use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable: 

Requirements and guidance in PFRSs dealing with similar and related issues



Conceptual Framework



Most recent pronouncements of other standard-setting bodies

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Other accounting literature and accepted industry practices

1.7 Accounting Standard Setting Bodies and Other Relevant Organizations 

Financial Reporting Standards Council (FRSC) - formerly known as Accounting Standards Council (ASC), the official accounting standard setting body in the Philippines created under

RA 9298 by the PRC upon recommendation of BOA. It is composed of 15 individuals with 1 chairperson and 14 members. 

Philippine Interpretations Committee (PIC) - committee formed by the ASC, the predecessor of FRSC, with the role of reviewing interpretations prepared by IFRIC for approval and adoption of FRSC.



Board of Accountancy (BOA) - professional regulatory board created under RA 9298 to supervise the registration, licensure and practice of accountancy in the Philippines. It is composed of a chairperson and 6 members appointed by the President of the Philippines



Securities and Exchange Commission (SEC)

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International Organization of Securities Commission (IOSCO)

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Bureau of Internal Revenue (BIR)

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Bangko Sentral ng Pilipinas (BSP)

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Cooperative Development Authority (CDA)

QUIZZER 1.

It refers to the process of incorporating the effects of an accountable event in the statement of financial position or the statement of profit or loss and other comprehensive income through a journal entry.

A. Realization B. Recognition C. Derecognition D. Posting

2.

These are events involving an entity and an external party.

A. External events B. Internal events C. Life events D. Transactions

3.

These are events which do not involve an external party.

A. External events B. Internal events C. Life events D. transactions

4.

It is the accounting process of assigning numbers, commonly in monetary terms, to the economic transactions and events.

A. Analyzing B. Measuring C. Classifying D. Interpreting

5.

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.

6.

Accounting provides which type of information?

A. Quantitative B. Qualitative C. Financial information D. All of these

7.

It is the branch of accounting that focuses on the general purpose reports of financial position and operating results known as financial statements.

A. Financial accounting B. Managerial accounting C. Auditing D. Taxation

8.

General purpose financial statements are A. Those statements that cater to the common and specific needs of a wide range of external users.

B. Those statements that cater to the common needs of a wide range of external users and internal users.

C. Those statements that cater to the common needs of a limited range of external users.

D. Those statements that cater to the common needs of a wide range of external users.

9.

External users are those A. Who do have the authority to demand financial reports tailored to their specific needs.

B. Who do not have the authority to demand financial reports tailored to their common needs.

C. Who do not have the authority to demand financial reports tailored to their specific needs.

D. Who belong to countries other than the domicile country of the reporting entity.

10. The primary objective of financial reporting A. To provide information about economic resources, claims to these resources, and changes in them.

B. To provide information useful for investment and credit decisions.

C. To provide information useful in predicting future cash flows.

D. All of these 11. The practice of accountancy in the Philippines is regulated under A. RA 9892 B. RA 9298 C. RA 8992 D. RH Bill

12. Philippine Financial Reporting Standards (PFRSs) consist of A. PFRSs B. PASs C. Interpretations D. All of these 13. It is the official accounting standard setting body in the Philippines. It is composed of a chairperson and 14 members.

A. Financial Reporting Standards Committee (FRSC) B. Financial Reporting Standards Council (FRSC) C. Accounting Standards Committee (ASC) D. Accounting Standards Council (ASC) 14. PFRSs are adopted from the standards issued by A. IASC B. IASCF C. IASB D. FASB 15. Financial reporting standards continuously change primarily in response to A. User needs B. Political influence C. Government regulations D. Changes in social environments