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    Updates in Financial Reporting Standards Handout2

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    This document discusses Generally Accepted Accounting Principles (GAAP) and provides an overview of its history, importance, core principles, and alternatives. GAAP was established in response to financial crises in the 1920s-1930s to standardize accounting practices and financial reporting. It aims to make reporting consistent, comparable, and transparent. The 10 core GAAP principles include consistency, permanence, materiality, and regularity. Alternatives to GAAP include International Financial Reporting Standards (IFRS), which many countries follow.

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    Updates in Financial Reporting Standards Handout2

    Uploaded by

    christian
    191 views5 pages
    This document discusses Generally Accepted Accounting Principles (GAAP) and provides an overview of its history, importance, core principles, and alternatives. GAAP was established in response to financial crises in the 1920s-1930s to standardize accounting practices and financial reporting. It aims to make reporting consistent, comparable, and transparent. The 10 core GAAP principles include consistency, permanence, materiality, and regularity. Alternatives to GAAP include International Financial Reporting Standards (IFRS), which many countries follow.

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    This document discusses Generally Accepted Accounting Principles (GAAP) and provides an overview of its history, importance, core principles, and alternatives. GAAP was established in response to financial crises in the 1920s-1930s to standardize accounting practices and financial reporting. It aims to make reporting consistent, comparable, and transparent. The 10 core GAAP principles include consistency, permanence, materiality, and regularity. Alternatives to GAAP include International Financial Reporting Standards (IFRS), which many countries follow.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    191 views5 pages

    Updates in Financial Reporting Standards Handout2

    Uploaded by

    christian
    This document discusses Generally Accepted Accounting Principles (GAAP) and provides an overview of its history, importance, core principles, and alternatives. GAAP was established in response to financial crises in the 1920s-1930s to standardize accounting practices and financial reporting. It aims to make reporting consistent, comparable, and transparent. The 10 core GAAP principles include consistency, permanence, materiality, and regularity. Alternatives to GAAP include International Financial Reporting Standards (IFRS), which many countries follow.

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    of 5

    Updates in Financial Reporting Standards

    What is US GAAP?
    GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set of rules and
    procedures designed to govern corporate accounting and financial reporting in the United States
    (US). The US GAAP is a comprehensive set of accounting practices that were developed jointly
    by the Financial Accounting Standards Board (FASB) and the Governmental Accounting
    Standards Board (GASB), so they are applied to governmental and non-profit accounting as well.
    US securities law requires all publicly-traded companies, as well as any company that publicly
    releases financial statements, to follow the GAAP principles and procedures.
    In addition, or as an alternative, are the International Financial Reporting Standards (IFRS)
    established by the International Accounting Standards Board (IASB). The IFRS rules govern
    accounting standards in the European Union, as well as in a number of countries in South America
    and Asia.

    The Core GAAP Principles


    GAAP is set forth in 10 primary principles, as follows:
    1. Principle of consistency: This principle ensures that consistent standards are followed in
    financial reporting from period to period.
    2. Principle of permanent methods: Closely related to the previous principle is that of
    consistent procedures and practices being applied in accounting and financial reporting to
    allow comparison.
    3. Principle of non-compensation: This principle states that all aspects of an organization’s
    performance, whether positive or negative, are to be reported. In other words, it should not
    compensate (offset) a debt with an asset.
    4. Principle of prudence: All reporting of financial data is to be factual, reasonable, and not
    speculative.
    5. Principle of regularity: This principle means that all accountants are to consistently abide
    by the GAAP.
    6. Principle of sincerity: Accountants should perform and report with basic honesty and
    accuracy.
    7. Principle of good faith: Similar to the previous principle, this principle asserts that anyone
    involved in financial reporting is expected to be acting honestly and in good faith.
    8. Principle of materiality: All financial reporting should clearly disclose the organization’s
    genuine financial position.
    9. Principle of continuity: This principle states that all asset valuations in financial reporting
    are based on the assumption that the business or other entity will continue to operate going
    forward.
    10. Principle of periodicity: This principle refers to entities abiding by commonly accepted
    financial reporting periods, such as quarterly or annually.

    History of GAAP
    Generally Accepted Accounting Principles were eventually established primarily as a response to
    the Stock Market Crash of 1929 and the subsequent Great Depression, which were believed to be
    at least partially caused by less than forthright financial reporting practices by some publicly-
    traded companies. The federal government began working with professional accounting groups to
    establish standards and practices for consistent and accurate financial reporting.
    Generally Accepted Accounting Principles began to be established with legislation such as the
    Securities Act of 1933 and the Securities Exchange Act of 1934.
    The GAAP has gradually evolved, based on established concepts and standards, as well as on best
    practices that have come to be commonly accepted across different industries.

    Why is GAAP Important?


    Generally Accepted Accounting Principles make financial reporting standardized and transparent,
    using commonly accepted terms, practices, and procedures. The consistency of presentation of
    financial reports that results from GAAP makes it easy for investors and other interested parties
    (such as a board of directors) to more easily comprehend financial statements and compare the
    financial statements of one company with those of another company.
    GAAP also seeks to make non-profit and governmental entities more accountable by requiring
    them to clearly and honestly report their finances.
    In short, GAAP is designed to ensure a consistent presentation of financial statements, making it
    easier for people to read and comprehend the information contained in the statements.

    Applications in Financial Analysis


    For financial analysts performing valuation work and financial modeling, it’s important to have a
    solid understanding of accounting principles. While this is important, financial models focus more
    on cash flow and economic value, which is not significantly impacted by accounting principles
    (other than for the calculation of cash taxes).

    Alternatives to GAAP
    GAAP is the set of standards and practices that are followed in the United States, but what about
    other countries? Outside the US, the alternative in most countries is the International Financial
    Reporting Standards (IFRS), which is regulated by the International Accounting Standards Board
    (IASB). While the two systems have different principles, rules, and guidelines, IFRS and GAAP
    have been working towards merging the two systems.

    What is IFRS?
    IFRS is short for International Financial Reporting Standards. IFRS is the international accounting
    framework within which to properly organize and report financial information. It is derived from
    the pronouncements of the London-based International Accounting Standards Board (IASB). It is
    currently the required accounting framework in more than 120 countries. IFRS requires businesses
    to report their financial results and financial position using the same rules; this means that, barring
    any fraudulent manipulation, there is considerable uniformity in the financial reporting of all
    businesses using IFRS, which makes it easier to compare and contrast their financial results.
    IFRS is used primarily by businesses reporting their financial results anywhere in the world except
    the United States. Generally Accepted Accounting Principles, or GAAP, is the accounting
    framework used in the United States. GAAP is much more rules-based than IFRS. IFRS focuses
    more on general principles than GAAP, which makes the IFRS body of work much smaller,
    cleaner, and easier to understand than GAAP.
    The Differences Between GAAP and IFRS
    There are several working groups that are gradually reducing the differences between the GAAP
    and IFRS accounting frameworks, so eventually there should be minor differences in the reported
    results of a business if it switches between the two frameworks. There is a stated intent to
    eventually merge GAAP into IFRS, but this has not yet occurred.
    There will be a reduced cost for companies once the two accounting frameworks are more closely
    aligned, since they will not have to pay to have their financial statements restated to show results
    under the other framework in cases where they need to report their results in locations where the
    other framework is required.

    The Philippine Accounting Professions


    The Philippine public accounting practices originated in the 1700s, but it was on March 17, 1923,
    when the accounting profession was formally recognized by the Philippine government. Such
    formalization served as an initial move toward the growing accountancy profession in the country,
    and was written through Republic Act (RA) 3105. Through such Act, the Board of Accountancy
    was created and vested with the authority to issue certificates to qualified applicants. Such
    certificate serves as a tangible proof of passing the rigorous process of being a CPA, which
    includes passing the CPA board exam, among others; it is a symbol of years of hard work and
    perseverance, and finally, a fruit of one’s labor.
    Through the years of development in the accounting profession, several changes have occurred
    with RA 3105. Some of the many changes in the 1923 law include: (1) the CPA examination scope;
    (2) the qualification to apply; and (3) the rating required to pass.

    (1) The CPA examination scope. Back in 1923, the scope of the CPA board exam consisted of
    only four subjects, namely, Theory of Accounts, Practical Accounting, Auditing and
    Commercial Law. Today, the theoretical and computational parts are already combined in
    related subjects. The CPA board exam is now composed of six subjects, namely, Financial
    Accounting and Reporting, Advanced Financial Accounting and Reporting, Management
    Advisory Services, Audit, Taxation and Regulatory Framework for Business Transactions.
    (2) The qualification to apply. Today, in order to qualify as a CPA board examinee, the
    applicant must be a Filipino citizen; of good moral character; with a Bachelor of Science
    degree in Accountancy; must not have been convicted of any criminal offense involving
    moral turpitude; and with no minimum age requirement. Back in 1923, an applicant must
    be over 21 years of age, and there was nothing explicitly requiring a bachelor’s degree in
    accountancy.
    (3) The rating required to pass. Back in 1923, a general average rating of 75 percent or over
    meant a passing rate. Today, in addition to the general average of 75 percent, the applicant
    must not have had any grade below 65 percent in any subject.
    From only having 43 registered accountants in 1923, the number of Certified Public Accountants
    has increased to hundreds of thousands. With the world’s growing need to understanding the
    language of business comes the increasing demand, as well, for accountants who are expected to
    know and give sense of the figures in the financial statements. The Philippine law on accountancy
    recognizes the importance of accountants in nation-building and its development. The revisions in
    the accountancy law prove how the accounting profession continues to develop and move forward,
    and more revisions are expected in the future.
    The Philippine Institute of Certified Public Accountants (PICPA)
    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.

    The PICPA Organization Structure


    PICPA is a registered non-stock corporation with Geographical divisions, regions and chapters all
    over the country. Geographical Areas, Regions and Chapters do not have juridical personality
    separate and distinct from each other or from the national office. The PICPA organization consists
    of the National Office (supported by a national secretariat), the geographical area, regions, the
    chapters and the general membership.
    The National Office is under the management of officers elected by the members of the Board
    themselves; headed by the President, the Executive Vice President, the Vice President for
    Commerce and Industry, Education, Government and Public Practice, the Vice President for
    Operations, the Secretary, the Assistant Secretary, the Treasurer and the Assistant Treasurer. The
    composition of the Board are twenty one (21) from the nine (9) regions and four (4) from the
    sectors. Regional directors are elected regionally; four (4) from Metro Manila and two each from
    each of the remaining regions. Sectoral directors are voted nationally, one coming from each
    sector. The President is elected annually but rotated among the regional directors from Metro
    Manila, Luzon, Visayas and Mindanao and to the extent practicable, among the four sectors of the
    profession.
    The PICPA recognizes the four (4) sectors by which a CPA may be in practice: namely, Public
    Practice, Commerce and Industry, Education / Academe and Government. The PICPA endeavors
    to have equal sectoral representations in all its offices from the National Office to its chapters and
    affiliates. Each Regional Unit elects four (4) Regional Sectoral Representatives who are tasked
    with the professional development of each particular sector through participation in an accredited
    Continuing Professional Education program. The Geographical Area Office and Regional
    Councils are under uniform rules prescribed by the National Board Board of Directors.
    References:
    Accounting tools: Accounting CPE Courses and Books, IFRS Definition, December 21, 2020,
    Retrieved from: https://www.accountingtools.com/articles/what-is-ifrs.html
    David, Christine Bernadette C. Accountancy then and now, March 18, 2018, Business Mirror,
    Retrieved from: https://businessmirror.com.ph/2018/03/18/accountancy-then-and-
    now/#:~:text=The%20Philippine%20public%20accounting%20practices,recognized%20by
    %20the%20Philippine%20government.&text=Through%20such%20Act%2C%20the%20B
    oard,issue%20certificates%20to%20qualified%20applicants.
    GAAP: A commonly recognized set of rules and procedures governing corporate accounting and
    financial reporting, Retrieved from
    https://corporatefinanceinstitute.com/resources/knowledge/accounting/gaap/#:~:text=Histo
    ry%20of%20GAAP,by%20some%20publicly%2Dtraded%20companies.
    Philippine Institute of Certified Public Accountants: The National Organization of Certified
    Public Accountants, Retrieved from:
    http://www.picpa.com.ph/content.html?article=History&page=About

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