Economic Events

The first objective of any accounting system is to identify the economic events that can be expressed in financial terms by the system.

Economic Event – is any event that directly affects the financial position of the company. In other words, this means any business transaction or financial affair of the company.

Financial Position – comprises assets, liabilities and owner’s equity. 

Accounting Principles and Financial Reporting Standards – determine which events should be recorded, when the events should be recorded, and the amount at which they should be measured.

Economic Events can be classified as either external events or internal events.

External Events – involve an exchange between the company and a separate economic entity. Meaning the company receives something in exchange for something else. Examples :  Purchasing of materials for cash. Paying salaries to employees.

Internal Events – directly affect the financial position of the company but don’t involve exchange of transaction with another entity.   Examples: Depreciation of Machinery.  Use of supplies.

The Financial Reporting Standards Council (FRSC)

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)...read more

Source: PICPA-FRSC

Professional Organizations of CPAs

The Philippine Institute of Certified Public Accountants (P I C P A)

The Philippine Institute of Certified Accountants or PICPA is the accredited professional organization (APO) of CPAs by the Professional Regulation Commission (PRC) and has been awarded twice as PRC most outstanding APO from among other professional organizations. PICPA was founded in November 1929 by a group of illustrious pioneers in the accounting profession: Enrique Caguiat, Santiago de la Cruz, Francisco Dalupan, Jaime Hernandez, Felipe Ollada, Ramon del Rosario, Antonio Sanchez, Jose Torres, Artemio Tulio, Clemente Uson and Jesus Zulueta. W. W. Larkin, holder of CPA Certificate No. 1, was its first president.

The group set forth the following objectives:

• To promote and maintain high professional and ethical standards among accountants;
• To advance the science of accounting;
• To develop and improve accountancy education;
• To encourage cordial relations among accountants, and
• To protect the Certificate of Certified Public Accountant granted by the Republic of the Philippines. 

Over the years, PICPA has been sustaining its accreditation with PRC ...read more 

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PICPA also functions as the policy making body of the following accounting organizations which function as its implementing arms:

• ACPAPP -  Association of CPAs in Public Practice

• ACPACI  -  Association of CPAs in Commerce and Industry

• ACPAE   -  Association of CPAs in Education

• GACPA  -  Government Association of CPAs

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The professional organizations for Management Accounting fields are as follows:

• PAMA -  Philippine Association of Management Accountants

• PIMA - Philippine Institute of Management Accounting

Business Activities

Classification as to Business Core Operations

Activities of the organization depends with the industry it belongs. Different industries have their own sets of industrial core activities, the three most common of which are the following:

• Servicing

The primary product this business sells is the "services" it offers. 

In order to earn, those in this business renders services to its clients for a fee. 

• Merchandising

The primary product of this business is the "merchandise" items it sells.

This business in order to earn, the entity buys goods and adds markup or profit to the cost of goods then sells them to the customers.  In short, they are involve in buy-and-sell of merchandise.   

• Manufacturing

The primary product for this business is the goods they produce or manufacture.

This business buys raw materials then converts them into finished goods then sells them to customers at a selling price. 

Note that in the conduct of business, the entity must be viewed as a separate entity which means their transactions and activities are separate and distinct from that of the owners.

Classification as to Cash Transactions

Though various industries exist but the following economic activities are mutual to all:

• Operating activities

The Operating Activities are those business transactions which generates revenue for the organization. These include expenses incurred to produce revenues...read more 

• Investing activities

The Investing Activities are those transactions which involve acquisition and disposal of assets other then inventory, which are necessary in the business operations...read more

• Financing activities

The Financing Activities are those transactions between the entity and its owners or creditors...read more

Professional Behavior

Following are excerpt from the IFAC Code regarding "Professional Behavior"

Professional Behavior 

150.1 The principle of professional behavior imposes an obligation on  all professional accountants to comply with relevant laws and regulations and avoid any action that  the professional accountant  knows  or should know may discredit the profession. This includes actions that a reasonable and informed third party,  weighing all the specific facts and circumstances available  to the professional accountant at that  time, would  be likely to conclude adversely affects the good reputation of the profession. 

150.2 In marketing and promoting themselves and their work, professional accountants  shall  not bring the profession into disrepute. Professional accountants shall be honest and truthful and not: 

(a) Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or 

(b) Make disparaging references or unsubstantiated comparisons to the work of others.

Source :  http://www.ifac.org/publications-resources/2012-handbook-code-ethics-professional-accountants

Basic Professional Values and Ethics

Accounting is not just a course but a profession.

Characteristics distinguishing a profession:

• Mastery of a particular intellectual skill, acquired by training and education;
• Adherence by its members to a common code of values and conduct established by its administering body, including maintaining an outlook which is essentially objective; and
• Acceptance of a duty to society as a whole.

To ensure the highest quality of performance and to maintain public confidence in the profession, PICPA has adopted the IFAC Code of Ethics(with certain modifications).

The code mentions the accountants' responsibility to the public, as follows:

• Independent auditors should help maintain the integrity and efficiency of financial statements.

• Financial executives contribute to the efficient and effective use of the organization’s resources.

• Internal auditors provide assurance about sound internal control system which enhances the reliability of the external financial information of the employer.

• Tax experts help to establish confidence and efficiency, and the fair application of the tax system.

• Management consultants have a responsibility toward the public interest in advocating sound management decision-making.

According to the code, a professional accountant  shall comply with the following fundamental
principles:

(a) Integrity – to  be straightforward and honest in all professional and business relationships.

(b) Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.

(c) Professional Competence and Due Care – to  maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques  and  act diligently and in accordance with applicable technical and professional standards.

(d) Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore,  not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties.

(e) Professional Behavior – to comply with relevant laws and regulations and avoid any action that discredits the profession.

Note: Click the links for detailed discussion.

References :
IFAC Code
PICPA New Code of Ethics for CPAs

The classical notion of stewardship

Stewardship means custodianship or being a keeper.

In accounting, classical notion of stewardship applies to the valuation and the stewardship role.

Valuation 

This gives emphasis on how accounting measures the value of the firm.  

This would mean that whatever is the condition of the economy, the firm's value can still be accounted and known.   

When the markets are perfect and complete, the assets and the changes in the book value of owner's equity can be measured at their market value. 

While, when the markets are not perfect and complete, accounting can still be used to approximate the change in the value of the entity.

Stewardship

Essentially, accounting is an information-provider or data-provider. Accounting is an steward of economic and financial information about the entity.

Basically, the economic information obtained from accounting and financial databases are used for monitoring businesses and provides information on how the management performs and where the business is going.

Useful information are presented thru financial statements and internal financial reports.  From these statements and reports, business owners and managers can gauge and measures the operational performance of the business as a whole.  The information provided by accounting are indicators of performances of the people inside the organization.


In short, Stewardship of the firm affects the value of the firm. Accounting information is used to assess, monitor and control the activities of the entity.

Degree of Development of the Capital Markets

Differences in the degree of development of the capital markets in countries and their effect on the development and use of generally accepted international principles of accounting.

A capital market maybe equity-oriented or debt-equity oriented. 

A capital market is known as equity-oriented when organizations turn to the stock market as their main source of capital. 

While, a capital market is known as debt-oriented when companies depend on bank financing as their primary source of capital.

The degree of development and orientation of capital markets whether debt or equity has a significant effect both in substance and form or financial reporting.

Globalization impacts financial reporting.  Accounting has to keep up with drafting new accounting rules for financial instruments.   

The globalization of capital markets intensified the need to harmonize financial reporting requirements. 

Along with the internalization of markets and international business dealings and globalization of capital markets, there's a need of global standardization of accounting and auditing standards and practices.      

Linkage of Tax Laws and Accounting Principles Requirements

Taxation laws are oftentimes in conflict with reporting in accounting. There are temporary and permanent differences between tax reporting and financial reporting which results to discrepancy in the amount of financial accounting income and taxable income.

For example, the gain on life insurance and unrealized gain on trading securities are included in financial accounting reporting but not included in tax reporting because such items are exempt from taxation under tax laws.

Another example, some expenses like allowance provision for uncollectible accounts, product warranty and representation expenses are limited or not allowed in the preparation of income tax returns but are recognized in the preparation of financial statements.

Another important matter to consider is the historical development in 1994, the Committee on Accounting Procedure issued A.R.B. No. 23 stating that the amount of income tax expense for the year shown in the income statement many not be the amount currently payable for income taxes.

Therefore, when preparing ITRs, the tax laws must be observed while when preparing reports for financial accounting purposes, applicable accounting and reporting standards must be applied.

Consequently, preparers of financial reports usually make a reconciliation of tax and accounting reports.

Why accounting practices differ from one country to another

Countries have their own unique economic conditions, commercial trading systems and procedures, distinct sets of political policies, and legal procedures and systems, hence, a country has its own way of implementation accounting practices and there are no two systems are exactly alike. 

Although the same basic principles are followed, accounting practices differ from one country to another and they are due to the following:

• Political and economic ties with other countries
• Standing of the accounting  profession
• Coverage of a Conceptual Framework 
• Quality of accounting education
• Nature of reporting systems
• Forms of business entities
• Type of capital markets
• Manner of legal system
• Level of enforcement
• Level of inflation and deflation 

Accounting variations among countries

1.7.1     Why practices differ from one country to another even though the same set of basic principles is followed

Countries have their own unique economic conditions, commercial trading systems and procedures, distinct sets of political policies, and legal procedures and systems, hence, a country has its own way of implementation accounting practices and there are no two systems are exactly alike...read more

1.7.2      The linkage of tax laws and accounting principles requirements for enterprises in certain countries

Taxation laws are oftentimes in conflict with reporting in accounting. There are temporary and permanent differences between tax reporting and financial reporting which results to discrepancy in the amount of financial accounting income and taxable income...read more

1.7.3           Differences in the degree of development of the capital markets in countries and their effect on the development and use of generally accepted international principles of accounting

A capital market maybe equity-oriented or debt-equity oriented. 

A capital market is known as equity-oriented when organizations turn to the stock market as their main source of capital. 

While, a capital market is known as debt-oriented when companies depend on bank financing as their primary source of capital...read more

=============Additional Related Topics

Harmonization of Accounting Standards through the International Accounting Standards Board (IASB)



Benefits of Global Accounting Standards

Internalization of markets and reporting

Markets now are coming from all over the over the world because of globalization.

Exchange of transactions and business dealings are now done anywhere and everywhere ignoring global barriers and constraints.

Especially now that almost everything can be transacted online via world wide web or internet.

With the internalization of markets, some businesses are raising capital and trade internationally with the intention of increasing the liquidity of their organizations.

Managing for financials and economics of the businesses became complicated because of various practices, different currencies, dissimilar tax laws and distinct political policies in different countries. Hence, one has to study these factors and the risks they bring in order to engage in business globally.
 
Now that everything is boundary-less, so is accounting.  Accounting regulatory bodies requires accounting practitioners to keep abreast with updates, interpretation and practice of International Accounting and Auditing Standards.

This is to assure greater confidence and reliability on the accounting information to be used by global investors so they can make a more rational and better business and investments decisions.

The rise of the group of companies and the need for consolidated accounts

Since the end of World War II, rapid growth of domestic and multinational corporations in various countries was observed.

Noticeably, with the global inclinations of business, organizations not just build new facilities and infrastructures but also most previously separate entities combine or group themselves together. Hence, there were several business combinations here and there.

Thus, the evolution of Business Combination accounting practices.

Combinations of businesses may be done thru merger or consolidation.

Business combination is said to be merger when one company takes over all the business operations of other entities, thus dissolving the latter's organizations. 

While in consolidation, a new corporation is formed to take over the assets and operations of two or more separate entities, and those previously separate entities are dissolved.  

Business combination is believed to be the most complex and somewhat controversial areas of accounting because it involves accounting the financial transactions of huge businesses which may unfold management fiascos, empirical fortunes and executive brilliance. But, accounting business combinations is also interesting because each business involved in a business combination is unique and must be assessed and evaluated in its economic substance regardless of its legal form.

Financial reports for these business combinations are prepared into consolidated financial reports which are derived from consolidated accounts.

Note that these consolidated accounts are what almost matters to the investors in evaluating the entity's profit or loss, financial condition and the share in the business aside from the dividends.