Philippines

6 Chapter Accounting

    • International Accounting Standards

       a.   International Accounting Standards Committee (IASC)

       

      The International Accounting Standards Committee (IASC) was formed in 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States of America. Additional sponsoring members were added in subsequent years, and in 1982 the sponsoring "members" of the IASC comprised all of the professional accountancy bodies that were members of the International Federation of Accountants (IFAC).
       
      From its formation in 1973 until a comprehensive reorganization in 2000, the structure for setting International Accounting Standards was known as the International Accounting Standards Committee (IASC).
       
      i.              International Accounting Standards (IAS)
       
      International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.
       
      b.   International Accounting Standards Board (IASB)
       
      The IASB (International Accounting Standards Board) is the independent standard-setting body of the International Financial Reporting Standards (IFRS) Foundation. All meetings of the IASB are held in public and webcast. In fulfilling its standard-setting duties the IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as Discussion Papers and Exposure Drafts, for public comment is an important component. It engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession.
       
      i.             International Financial Reporting Standards (IFRS)
       
      Standards set by the International Accounting Standards Board (the Board) are called IFRS Standards and are used by publicly accountable companies—those listed on a stock exchange and financial institutions, such as banks.  Authoritative interpretations of the Standards, which provide further guidance on how to apply them, are developed by the IFRS Interpretations Committee and called IFRIC® Interpretations.
       
      General Features of the IFRS
       
      1. Fair presentation and compliance with IFRS: Fair presentation requires the faithful representation of the effects of the transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework of IFRS.
       
      2. Going concern: Financial statements are present on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
       
      3. Accrual basis of accounting: An entity shall recognize items as assets, liabilities, equity, income and expenses when they satisfy the definition and recognition criteria for those elements in the Framework of IFRS.
       
      4. Materiality and aggregation: Every material class of similar items has to be presented separately. Items that are of a dissimilar nature or function shall be presented separately unless they are immaterial.
       
      5. Offsetting: Offsetting is generally forbidden in IFRS.However certain standards require offsetting when specific conditions are satisfied (such as in case of the accounting for defined benefit liabilities in IAS 19 and the net presentation of deferred tax liabilities and deferred tax assets in IAS 12)
       
      6. Frequency of reporting: IFRS requires that at least annually a complete set of financial statements is presented. However listed companies generally also publish interim financial statements (for which the accounting is fully IFRS compliant)for which the presentation is in accordance with IAS 34 Interim Financing Reporting.
       
      7. Comparative information: IFRS requires entities to present comparative information in respect of the preceding period for all amounts reported in the current period's financial statements. In addition, comparative information shall also be provided for narrative and descriptive information if it is relevant to understanding the current period's financial statements. The standard IAS 1 also requires an additional statement of financial position (also called a third balance sheet) when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. This for example occurred with the adoption of the revised standard IAS 19 (as of 1 January 2013) or when the new consolidation standards IFRS 10-11-12 were adopted (as of 1 January 2013 or 2014 for companies in the European Union).
       
      8. Consistency of presentation: IFRS requires that the presentation and classification of items in the financial statements is retained from one period to the next unless:
      a. it is apparent, following a significant change in the nature of the entity's operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8; or
      b. an IFRS standard requires a change in presentation.
       

    • Brief History of Accounting Standards in the Philippines

       The Financial Reporting Standards Council (FRSC) was established by the Board of Accountancy (BOA or the Board) in 2006 under the Implementing Rules and Regulations of the Philippine Accountancy of Act of 2004 to assist the Board in carrying out its power and function to promulgate accounting standards in the Philippines. The FRSC’s main function is to establish generally accepted accounting principles in the Philippines.

       

      The FRSC is the successor of the Accounting Standards Council (ASC). The ASC was created in November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to establish generally accepted accounting principles in the Philippines. The FRSC carries on the decision made by the ASC to converge Philippine accounting standards with international accounting standards issued by the International Accounting Standards Board (IASB).
       
      The FRSC consists of a Chairman and members who are appointed by the BOA and include representatives from the Board of Accountancy (BOA), Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), Financial Executives Institute of the Philippines (FINEX), Commission on Audit (COA) and Philippine Institute of Certified Public Accountants (PICPA). The FRSC has full discretion in developing and pursuing the technical agenda for setting accounting standards in the Philippines. Financial support is received principally from the PICPA Foundation.
       
      The FRSC monitors the technical activities of the IASB and invites comments on exposure drafts of proposed IFRSs as these are issued by the IASB. When finalized, these are adopted as Philippine Financial Reporting Standards (PFRSs). The FRSC similarly monitors issuances of the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, which it adopts as Philippine Interpretations–IFRIC. PFRSs and Philippine Interpretations–IFRIC approved for adoption are submitted to the BOA and PRC for approval.
       
      The FRSC formed the Philippine Interpretations Committee (PIC) in August 2006 to assist the FRSC in establishing and improving financial reporting standards in the Philippines. The role of the PIC is principally to issue implementation guidance on PFRSs. The PIC members are appointed by the FRSC and include accountants in public practice, the academe and regulatory bodies and users of financial statements. The PIC replaced the Interpretations Committee created by the ASC in 2000.

    • Adoption of International Accounting Standards as Philippine Generally Accepted Accounting Principles

       In 1996, the Accounting Standards Council (ASC) started to adopt the International Accounting Standards (IAS). Before this, the generally accepted accounting principles were based mainly on US-based accounting standards. It was in 1997 when the ASC moved to the adopt the IAS.

       

      In 2005, the ASC completed adoption of the IFRSs issued by the International Accounting Standards Board (IASB) and the revised versions of previously adopted IASs. The ASC also changed the designation of the accounting standards it issues to Philippine Accounting Standard (PAS) and Philippine Financial Reporting Standard (PFRS) to correspond to the adopted IASs and IFRSs, respectively. Accounting standards based on pre-2005 versions of the IASs were updated and reissued as PAS.
       
      a.   Overview of Regulation of Accounting Standards in the Philippines
      The international accounting and auditing standards were fully adopted in the Philippines by 2005. The International Federation of Accountants Code of Professional Ethics was fully adopted.  Revisions of the Accountancy Law in 2004 mandated an acceptable level of continuing professional education and quality control review before a certified public accountant (CPA) could renew his or her accreditation with the Board of Accountancy. Before auditors or audit firms were allowed to audit companies that fell under the rules of various regulatory bodies, these bodies―the Securities and Exchange Commission, Bangko Sentral ng Pilipinas, and Office of the Insurance Commissioner―required accreditation of CPAs under their rules.  The Philippine Institute of Certified Public Accountants (PICPA) was designated the authorized professional organization, and all CPAs were legally required to become members of PICPA.  The Securities and Exchange Commission took initial steps to review financial statements for compliance with accounting and regulatory rules.
       
      The Accounting Standards Council which was created in 1981 was replaced with the Financial Reporting Standards Council (FRSC) which was created by virtue of Sec 9 (A) of Republic Act No. 9298. This body is accountable to the Professional Regulatory Commission (PRC) Board of Accountancy (BOA).
       
      b.   Pertinent Provisions of the Securities Regulation Code of the Philippines
      Companies that have paid-up capital of P50,000 (approximately US $977) and above and that are registered with the SEC are required to file annually with the SEC their most recent financial statements certified by an independent public accountant (CPA).
       
      The Securities Regulation Code (SRC) prescribes the powers and functions of the SEC and provides regulations for companies which have issued securities. Section 68 of the SRC on Special Accounting Rules gives the SEC the authority to make, amend, and rescind accounting rules and regulations as may be necessary to carry out the provisions of the SRC. The following are issued to implement the law:
       
      - SRC Rule 68, Rules and Regulations Covering Form and Content of Financial Statements, is applicable in general to all corporations registered with the SEC. It requires that financial statements filed with the SEC be prepared in accordance with the generally accepted principles (GAAP) in the Philippines.
       
      - SRC Rule 68.1 is applicable to:
       1. Publicly-held companies
          -listed companies and companies that have sold securities pursuant to a registration with the SEC
       
       2. Public Companies
          - companies with assets in excess of P50 million (approximately US $976,563) and having 200 or more shareholders (each holding at least 100 equity shares).
       
      SRC Rule 68.1 requires:
       1. Covered corporations to include in their financial statements certain disclosures in addition to those required under Philippine GAAP
       2. A three-year comparative period and mandatory unqualified opinion by the external auditor.
       3. Compliance with the interim financial reporting rules.
       
      The SRC Rules categorically state that the financial statements are primarily the responsibility of the management of the reporting company. Consolidated financial statements are required to be filed in accordance with existing GAAP.
       
       
       
       
       
      c.   (SEC) Memorandum Circular No. 3 Series of 2011. Guidelines on the Implementation of PFRS 9 (Financial Instruments: Recognition and Measurement)
       
      In May 2010, the Commission adopted as part of its rules the original PFRS 9 that contains requirements on financial assets. Thereafter, in January 2011, the revised PFRS 9 covering both financial assets and financial liabilities were adopted by the Commission. These standards are based on two IFRS 9 issued by the IASB in 2009 and 2010, respectively. The titles "PFRS 9 (2009)" and "PFRS 9 (2010)" shall therefore be used for purposes of these Guidelines.
       
      As stated in the notices issued by the Commission, PFRS 9 shall apply to financial statements for annual periods beginning on or after 1 January 2013. The covered entities are, however, given the option to adopt the standard earlier than the said date. Although PFRS 9 (2009) was superseded by PFRS 9 (2010), an entity may elect to apply PFRS 9 (2009) for annual periods beginning before 1 January 2013. If an entity, however, opts to early adopt PFRS 9 (2010), it shall apply the requirements of this standard in its entirety.
       
      d. Application of Accounting Standards to Small and Medium Enterprises (SMEs)
       
       
      Small and medium enterprises were given some relief by the ASC from new financial reporting standards. There are a significant Standards Council from new financial reporting standards. Initially, the new international accounting standards that became effective in 2005 were intended to be applicable to all reporting entities required to file financial statements in accordance with Philippine GAAP. In 2005, the IASB developed accounting standards suitable for entities that do not have public accountability, referred to as non-publicly accountable entities (NPAEs).
       
      For their 2005 financial statements, NPAES are given the option not to apply the new IAS but to use the accounting standards effective in 2004. This option is not available to the following:
       
      - An entity required to file financial statements under SRC Rule 68.1
      - An entity in the process of filing its financial statements for the purpose of issuing any class of instruments in a public market
      - An entity that holds assets in a fiduciary capacity for a broad group of outsiders (e.g., a bank, an investment house, a finance company, an insurance company, a securities broker/dealer, a mutual fund and a pre-need company);
      - An entity that is a public utility or a similar entity that provides an essential public service
      - An entity that is economically significant (i.e., with total assets of more than P250 million (approximately US $4.9 million) or total liabilities of more than P150 million (approximately US $2.9 million));
      - An entity that is considered by its primary regulator to have public accountability
       
      Covered corporations (as SMEs):
      ·         Have total assets of between P3 million and P350 million or total liabilities of between P3 million and P250 million;
      ·         Are not required to file financial statements under SRC Rule 68.1;
      ·         Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market;
      ·         Are not holders of secondary licenses issued by a regulatory agency, such as banks, investment houses, finance companies, insurance companies, securities broker/dealers, mutual funds and pre-need companies; and
      ·         Are not public utilities
       
       

    • Recent Updates on Accounting Regulations in the Philippines

       a.    Accreditation of Certified Public Accountants (CPAs) in commerce and industry

      Due to persistent demand from the various stakeholders, PRC and BoA isssued Resolution No. 2016-115 extending the deadline for the filing of the application for accreditation for CPAs in Commerce and Industry to December 31, 2016. The deadline was previously set on April 30, 2016 pursuant to BoA Resolution 2016-68.

       
      In addition the new resolution provided the following:
       
      1. The period of the Financial Statement that shall be covered by the requirement of the submission of the Certificate of Compilation Services is now December 31, 2016 and subsequent periods
      2. The gross sales threshold of the covered companies/persons that shall be subject to the requirements of the pertinent resolutions shall be adjusted after consultations with the affected stakeholders.