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IV. Accounting and Auditing Standards

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This chapter describes the accounting and auditing standards that govern the preparation of external financial reports and the audit of those reports.
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IV. Accounting
and
Auditing Standards
his chapter describes the accounting and auditing standards that
Tgovern the preparation of external financial reports and the audit of
those reports. It comprises 12 sections, as follows:

Part One: Accounting Standards
1 – Introduction – reviews the historical development of Philippine
accounting standards.
2 – Accounting Standards Council (ASC) – outlines the role, com-
position, and activities of the ASC, which is the primary ac-
counting standard setting body.
3 – Accounting Standard Setting Process – describes the accounting
standard setting process.
4 – Statements of Financial Accounting Standards – describes Philip-
pine accounting standards.
5 – Conformity with International Accounting Standards– examines
differences between Philippine accounting standards and IASs.
6 – Public Sector Accounting Standards – discusses developments in
public sector accounting standards.
7 – Taxation Reporting Requirements – reviews the impact of taxa-
tion requirements on financial reporting practices.

Part Two: Auditing Standards
8 – Introduction – describes the historical development of Philippine
auditing standards.
9 – Auditing Standards and Practices Council (ASPC) – outlines the
role, composition, and activities of the ASPC, which is the pri-
mary auditing standard setting body.
10 – Auditing Standards – describes Philippine auditing standards.
11 – Comparison with International Standards on Auditing – exam-
ines differences with International auditing pronouncements.

12 – Issue Synopsis: Accounting and Auditing Standards – summarizes
the issues identified in this chapter.
Part One.
Accounting Standards
1. Introduction
In 1949, PICPA began issuing accounting standards in the form of ac-
counting bulletins—compliance was voluntary. In 1979, the PICPA
83

DIAGNOSTIC STUDY OF ACCOUNTING AND AUDITING PRACTICES IN THE PHILIPPINES
Committee on Accounting Research and Special Studies issued a report
on the state of financial accounting standards and standard setting in
the Philippines. The study revealed weaknesses including the recom-
mendatory nature of standards, an absence of compliance monitoring, a
lack of consultation outside the profession, and a tendency to rely too
heavily on US standards.138 In response to the study’s recommendations,
PICPA created the Accounting Standards Council (ASC) in November
1981 as an independent body to formalize the accounting standard-set-
ting function.

The ASC issued the first Philippine Statement of Financial
Accounting Standards (SFAS) in 1983. SFASs were based upon US ac-
counting standards (as they existed in the 1970s) until 1996. At that
time, the ASC decided to base SFASs on International Accounting Stan-
dards (IASs), rather than updating the standards in line with changes in
the US standards which were considered too complex in the Philippine
context.139 A year later, in 1997, the ASC decided to move totally to IASs.

SFASs are initially formulated as Exposure Drafts (EDs). After an
exposure period of around 6 months, the ASC submits the final draft to
the Board of Accountancy (BOA) for consideration. Once approved by
the BOA, the PRC's final concurrence gives legal authority to the SFAS
and CPA compliance is mandatory.140
2.
Accounting Standards Council (ASC)
The ASC is a nongovernment body. The Council’s main objectives and
functions are to establish and approve accounting standards that will be
generally accepted in the Philippines. These standards are generally
based upon (i) existing Philippine practices, (ii) research or studies un-
dertaken at the direction of the Council Chair, (iii) local and interna-
tional literature, and (iv) promulgations of other standard setting bodies
such as the International Accounting Standards Committee (IASC) and
the US Financial Accounting Standards Board (FASB).141 ASC pro-
nouncements apply to the financial statements of commercial, industrial

138 Alindada, Carlos. 1982. The Need for a Structured Standards-Setting Process. Technical
Paper No. 1. 36th PICPA Annual Convention, La Union. Philippines.
139 World Bank. 1999. Philippines: The Challenge of Economic Recovery. Washington D.C.:
World Bank. pp. 35–36.
140 Calanog, Violeta, Eduardo Roca, and Violeta Vicente. 1997. Philippines. In Ma,
Ronald (Ed.). 1997. Financial Reporting in the Pacific Asia Region. Singapore: World
Scientific Publishing. p. 373.
141 Accounting Standards Council (ASC). 1999. Compilation of Statements of Financial
Accounting Standards Nos. 1 – 29. pp. xi–xii.
84

ACCOUNTING AND AUDITING STANDARDS
or business enterprises—some may also apply to nonprofit organiza-
tions.

The Council comprises eight members (see Table 13) and is funded
on a token basis by the PICPA Foundation. Members serve without
compensation for a renewable term of 2 years. Research activities are
supported by member bodies, predominantly the large accounting firms
and government institutions. The Council’s leadership has not changed
since its inception and other membership changes have been minimal.142
Table 13: Membership of the Accounting Standards Council
Organization Members
Nomination and Appointment
Philippine Institute of
4
Designated by the National Board of
Certified Public
Directors.
Accountants
One of the PICPA board members will
(PICPA)
serve as Chair.
Securities and
1
Nominated by the Commissioner –
Exchange
should be an Associate
Commission (SEC)
Commissioner.
Central Bank of the
1
Nominated by the Governor – should
Philippines (BSP)
be a Deputy Governor.
Board of Accountancy
1
Nominated by the PRC Chair upon the
(BOA)
recommendation of the BOA Chair.
Financial Executives
1
Nominated by the FINEX President –
Institute of the
should be a vice president in own
Philippines
organization.
(FINEX)


The approval of at least five Council members is required to issue
an ED, SFAS, or an Interpretation.143 PICPA has an effective majority on
the Council through its four directly-appointed members together with
the indirectly-appointed BOA member (see p. 50).

In May 2000, the ASC approved the formation of an Interpretations
Committee whose responsibilities include the identification, discussion,
and resolution of emerging issues affecting financial reporting and the
adoption of interpretations that are related to the accounting standards
already adopted by the ASC. The Committee was formally organized in

142 Manabat, Conchita L. 2000. The Philippines Accountancy Profession and Globalization.
www.deloitteap.com
143 Accounting Standards Council (ASC). 1999. Compilation of Statements of Financial
Accounting Standards Nos. 1 – 29. p. xv.
85

DIAGNOSTIC STUDY OF ACCOUNTING AND AUDITING PRACTICES IN THE PHILIPPINES
October 2000 with members from accounting firms, academia, FINEX,
and a member at large.
3.
Accounting Standard Setting Process
The Council’s mechanism for setting standards is similar to that of the
IASB and FASB. First, a task force is established to prepare an Exposure
Draft (ED) in a particular area. Second, the task force prepares the ED
and submits it to the Council for consideration. Third, if approved by
the Council, the ED is disseminated for comment to PICPA members,
FINEX members, and other interested persons and business
organizations. The exposure period must be at least 30 days, but is
usually more than 60 days. Fourth, the task force evaluates comments
and suggestions and recommends revisions to the Council. Fifth, if
approved by the Council, the ED is issued as an SFAS. Sixth, the SFAS is
submitted to the PRC and BOA for approval. Finally, the SFAS is
disseminated to PICPA members, FINEX members, and other interested
parties.144
4. Statements of Financial Accounting Standards (SFASs)
Thirty-four SFASs were effective as of 31 January 2001 (see Table 14).
With respect to the issuance of SFASs, four issues are worthy of atten-
tion. First, the IASC™ holds exclusive copyright over International Ac-
counting Standards™. As such, the ASC has technically infringed Phil-
ippine law by using IASs as the basis for Philippine SFASs, without
prior written permission. The ASC is not alone. It has some illustrious
partners in crime including many other countries and the authors of this
study.
“IASC holds the copyright of its International Accounting Standards,
Exposure Drafts, and other IASC publications in all countries and all
languages. The approved text of International Accounting Standards is
that published in the English language by IASC. All rights are reserved.
No part of IASC publications may be translated, reprinted or repro-
duced or utilized in any form either in whole or in part or by any elec-
tronic, mechanical, or other means, now known or hereafter invented,
including photocopying and recording, or in any information storage
and retrieval system, without the prior express permission of IASC in

144 Diga, Joselito. 1997. Accounting in the Philippines. Published in Baydoun, Nabil,
Akira Nishimura and Roger Willet (eds). Accounting in the Asia-Pacific Region. Wiley.
p. 201.
86

ACCOUNTING AND AUDITING STANDARDS
writing. This permission is subject to payment of permission fees
and/or royalties to IASC.
The "Hexagon Device," "IAS," "IASC," and "International Accounting
Standards" are Trade Marks of the International Accounting Standards
Committee and should not be used without the prior written approval
of the International Accounting Standards Committee.”
– IASC Copyright and Trademark Notice (2001)145
Second, IASs and IAS-related materials are highly priced – a copy of IAS
1 is available from the IASC for US$48. This is cheap compared to IAS 39
at US$71. In comparison, a full compilation of Philippine SFASs is avail-
able from the National Bookstore for P295 (US$6). In moving to an IAS
basis, there will be a requirement for IAS explanatory and training mate-
rials, every accountancy teacher and CPA should have access to these
materials as a matter of course. IASC’s pricing policy is inconsistent
with its objectives. Moreover, it fails to recognize that the international
community has funded the development of these materials (IASC’s ac-
tivities are financed by professional accountancy bodies and other or-
ganizations on its Board, by IFAC, and by contributions from compa-
nies, financial institutions, accounting firms, and other organizations).

Third, the ASC was initially ahead of the IASC—for instance, SFAS
1 was issued 6 years before the IASC issued its conceptual framework.
However, the ASC now lags behind the IASC on the issuance of compa-
rable standards.

Fourth, when new or revised SFASs are issued, consequential
amendments have not been made to existing SFASs. In 1992, for exam-
ple, SFAS No. 22: Statement of Cash Flows superseded SFAS No. 14: State-
ment of Changes in Financial Position
. However, SFAS No. 19: Summary of
GAAP for the Banking Industry
still refers to the “Statement of Changes in
Financial Position”.146

145 Source: www.iasc.org.uk.

146 Accounting Standards Council (ASC). 1999. Compilation of Statements of Financial
Accounting Standards Nos. 1 – 29. pp. 387–388.
87

DIAGNOSTIC STUDY OF ACCOUNTING AND AUDITING PRACTICES IN THE PHILIPPINES
Table 14: Philippine SFASs as at 31 January 2001147
No. Title
Parentage
Approved Effective

Framework for the Preparation IAS Framework
2000
Jan 2001
and Presentation of Financial
Statements
1
Presentation of Financial
IAS 1
2000
Jan 2001
Statements
[Superseded SFAS 1: Basic
Concepts and Accounting
Principles Underlying Finan-
cial Statements of Business
Enterprises, which reflected
an APB Statement and was
issued in 1983]
2
Summary of Generally Accepted US GAAP
1983
1983
Accounting Principles
(GAAP) on Cash
3
Summary of GAAP on
US GAAP
1983
1983
Receivables
4 Inventories
IAS 2
2000
Jan 2001

[Superseded SFAS 4: Summary
of GAAP on Inventories, which
reflected US GAAP and was
issued in 1983]
5
Summary of GAAP on Liabilities US GAAP
1983
1983
6
Summary of GAAP on Property, US GAAP
1983
1983
Plant and Equipment
(Carried at Historical Cost)
7 Contingencies
and
Subsequent
FASB 5
1983
1983
Events
8
Accounting for the Effects of
IAS 21
1984
1983
Changes in Foreign
Exchange Rates
9
Summary of GAAP on
APB 17
1984
1984
Intangible Assets
10
Summary of GAAP on
FASB 12
1984
1984
Investments

147 Sources:
• Accounting Standards Council (ASC). 1999. Compilation of Statements of
Financial Accounting Standards Nos. 1 – 29.
• Board of Accountancy. 2001. Accomplishment Report for 2000: Professional
Regulation Commission. p. 4.
88

ACCOUNTING AND AUDITING STANDARDS
No. Title
Parentage
Approved Effective
11
The Equity Method of
APB 18
1984
1984
Accounting for Investments
in Common Stock
11A Deferral of the Effective Date of … 1986
1986
SFAS 11, The Equity Method
of Accounting for
Investments in Common
Stock
12
Revaluation of Property, Plant … 1985
1985
and Equipment Through
Appraisal
13
Net Income or Loss for the
IAS 8
2000
Jan 2001
Period, Fundamental Errors
and Changes in Accounting
Policies

[Superseded SFAS 13: Reporting
the Effects of Disposal of a
Segment of a Business and of
Extraordinary Items and Prior
Period Adjustments on the
Results of Operations of an
Enterprise, which was based
upon APB 30 and FASB 16, and
was issued in 1985]
15
Disclosure of Accounting
APB 22
1986
Sep 1986
Policies
16
Related Party Disclosures
FASB 57
1986
Jun 1987
17
Accounting Changes
APB 20
1987
Dec 1987
18
Summary of GAAP on
US GAAP
1987
Dec 1987
Stockholder's Equity
19
Summary of GAAP for the
US GAAP
1987
Dec 1988
Banking Industry
19A Accounting for Investments in FASB 115
2000
Oct 2001
Debt and Marketable
Securities of Banks (An
amendment of SFAS No. 19)
20
Accounting for Business
APB Opinion
1991 Jul
1991
Combinations
No. 16 & IAS
22
21
Summary of GAAP on the
FASB Section
1991 Jun
1991
Consolidation of Financial
C51 & IAS 3
Statements
22
Statement of Cash Flows
FASB No. 95
1992
Jun 1993
89

DIAGNOSTIC STUDY OF ACCOUNTING AND AUDITING PRACTICES IN THE PHILIPPINES
No. Title
Parentage
Approved Effective
23
Accounting for Income Taxes
FASB No. 109
1994
Jan 1995
24
Retirement Benefit Costs
IAS 19
1996
Dec 1997
25
Borrowing Costs
IAS 23
1996
Dec 1997
26
Construction Contracts
IAS 11
1996
Dec 1998
27
Accounting and Reporting for FASB 60 &
1997 Dec
1998
the Non-Life Insurance
FASB 113
Industry
28
Revenue
IAS 18
1997
Jan 1998
29
Earnings Per Share
IAS 33
1998
Jan 1998
30
Interim Financial Reporting
IAS 34
2000
Jan 2001
31
Segment Reporting
IAS 14
2000
Jan 2001

IAS = International Accounting Standard; APB = Accounting Principles Board;
GAAP = generally accepted accounting principles; FASB = Financial
Accounting Standards Board; SFAS = Statement of Financial Accounting
Standard;
5.
Conformity with International Accounting Standards
Until 1996, the ASC based most SFASs upon US accounting standards.
Starting in 1996, the ASC issued IAS-based SFASs. Four considerations
influenced this move. First, there was existing support for IASs by Phil-
ippine organizations: (i) The BOA supports IASC standards by its im-
plementation of GATS with respect to accountancy services; and (ii) As a
member organization of the IASC, PICPA is committed to supporting
IASC’s work and to using its best endeavors to foster compliance with IASs.
Second, the increasing globalization of business and cross-border financing
has heightened interest in a common language for financial reporting. More
and more Philippine companies are now seeking capital abroad and going to
countries other than the US, such as Hong Kong, China; Singapore; and
Europe, where IASs have increasing acceptability. Third, the IASC
completed a compatibility and improvements project, which was aimed at
reducing accounting policy choices in IASs. Fourth, IASs are being
increasingly recognized.148

Consequently, the ASC is reviewing IASs to identify changes that
may be required in current accounting and disclosure requirements.
While existing ASC standards are broadly consistent with their equiva-

148 Narayan, Francis B., Ted Godden, Barry Reid, and Maria Rosa Ortega. 2000.
Financial Management and Governance Issues in Selected Developing Member Countries: A
Study of Cambodia, People’s Republic of China, Mongolia, Pakistan, Papua New Guinea,
Uzbekistan, and Viet Nam
. ADB. pp. 18–24.
90

ACCOUNTING AND AUDITING STANDARDS
lent IASs, there are differences in detailed accounting and disclosure re-
quirements. Subject to any modifications that may be required by Phil-
ippine regulatory requirements or deemed necessary by the ASC, the
final ASC standards will be the same IASs.

The close conformity of Philippine accounting standards with IAS
is not surprising, given the IAS and US GAAP influence over their devel-
opment. However, a recent study identified three sources of differ-
ence.149, 150 First, Philippine accounting may differ from that required by
IAS because of the absence of specific Philippine rules in the following
areas:
• the setting up of provisions in the con-
IAS 22.31
text of business combinations accounted
for as acquisitions
• impairment of assets
IAS 36
• treatment of research and development
IAS 38.42–38.45
costs
• accounting for leases
IAS 17
• accounting for employee benefits other
IAS 19.52
than pensions
• the discounting of provisions
IAS 37.45
• accounting for an issuer’s financial
IAS 32.18–32.23
instruments
• the requirement for annual impairment
IAS 22.56; IAS 38.99
tests when the depreciable lives of
goodwill or intangible assets exceed 20
years


Second, there are no specific Philippine rules requiring disclosures of:
• the fair value of financial assets and
IAS 32.77
liabilities


149 Source: Nobes, Christopher W. (Ed.). 2001. GAAP 2000: A Survey of National
Accounting Rules in 53 Countries: PriceWaterhouseCoopers.
150 The following information has been updated for recent Philippine issuances,
including: SFAS No. 31 Segment Reporting. However, it does not reflect recent IAS
issuances, which include: IAS 39 Financial Instruments: Recognition and Measurement;
IAS 40 Investment Property; and IAS 41 Agriculture.
91

DIAGNOSTIC STUDY OF ACCOUNTING AND AUDITING PRACTICES IN THE PHILIPPINES
Third, there are inconsistencies between Philippine and IAS rules that
could lead to differences for many enterprises in certain areas. Under
Philippine rules:
• pre-operating costs, set-up costs and le-
IAS 38.57
gal costs of a new company can be capi-
talized if there are no discernible future
benefits
• tangible fixed assets can be revalued but
IAS 16
do not need to be continually kept up-
to-date (An IAS 16-based ED will be issued
soon)
• directors set provisions on the basis of
IAS 37.14
probability of outflows of resources,
rather than there needing to be an
obligation
• pension obligation calculations can use a
IAS 19.64–19.78
choice of actuarial methods, and gener-
ally use a long-run discount rate
• past service costs must be amortized
IAS 19.96
even if they are vested

IASs are often criticized for allowing financial statement preparers sig-
nificant latitude in accounting policy choices. The preceding analysis did
not highlight that, in some cases, Philippine SFASs offer more choices
than IASs. For instance, when revaluing assets, SFASs allow three addi-
tional alternatives of treating revaluation surpluses.151
6.
Public Sector Accounting Standards
In 1996, the Public Sector Committee (PSC) of IFAC initiated a project
to prepare a set of International Public Sector Accounting Standards
(IPSASs). The benefits of improved governmental financial reporting
and the corresponding improvement in transparency were recognized by
international and regional organizations, including ADB, World Bank,
IMF, and UNDP, all of which provided funding for the public sector ac-
counting standards project.

151 Fajardo, Consolacion L. March 2000. Revaluation of Property, Plant and
Equipment: A Comparison between IASC and ASC Standards. Accounting Times.
52(2). pp. 16–18.
92

Document Outline

  • IV. Accounting and Auditing Standards
    • Part One. Accounting Standards
      • 1. Introduction
      • 2. Accounting Standards Council (ASC)
      • 3. Accounting Standard Setting Process
      • 4. Statements of Financial Accounting Standards (SFASs)
      • 5. Conformity with International Accounting Standards
      • 6. Public Sector Accounting Standards
      • 7. Taxation Reporting Requirements
    • Part Two. Auditing Standards
      • 8. Introduction
      • 9. Auditing Standards and Practices Council (ASPC)
      • 10. Auditing Standards
      • 11. Comparison with International Standards on Auditing
      • 12. Issue Synopsis: Accounting and Auditing Standards

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