Early compliance with new accounting standards urged

The Securities and Exchange Commission (SEC) is advising all companies to comply with the guidelines for the transition to the Philippine Accounting Standard (PAS) 39.

Adopted by SEC on December 2004, PAS is the most complex among the new accounting standards as it ensures a systematic transition from the previous accounting standards on financial instruments.

SEC general accountant Roberto Manabat said companies are encouraged to comply with the guidelines to avoid last-minute glitches when PAS 39 becomes effective on the Dec. 31, 2005 year-end reporting.

Covered by the directive are companies that are required to submit interim or quarterly reports to the SEC such as listed companies, a public company with assets of at least P50 million having 200 or more holders, issuers which have sold a class of securities pursuant to a registration, financing companies, pre-need companies, investment houses, brokers and dealers of securities, and universal banks registered as underwriters of securities.

The covered companies which have transactions in financial instruments are required to discuss their conversion plan in their 2005 interim/quarterly reports.

They are required to classify the financial instruments as loans and receivables, held to maturity, available for sale, financial assets at fair value through profit and loss, and financial liabilities at fair value through profit and loss.

Manabat said the classification of financial instruments shall be consistently observed.

Companies which have no financial instruments in their accounts shall briefly indicate such fact in their 2005 quarterly or interim reports.

In their respective conversion plan, the covered companies are required to do the following:

• review all contracts to identify any imbedded derivatives;

• evaluate financial risk exposures relative to the adoption of the standard and the manner of managing the risks;

• develop fair valuation capabilities; and

• assess the impact on financial ratios and loan covenants

The SEC earlier imposed additional requirements on external auditors in line with efforts to strengthen the external auditing process. These include requiring the external auditor to communicate to the audit committee critical accounting policies which require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Prior to finalizing and filing annual reports, audit committees should review the selection, application and disclosure of critical accounting policies, the SEC said.

Consistent with auditing standards, audit committees should be appraised of the evaluative criteria used by management in their selection of the accounting principles and methods. Proactive discussion between the audit committee and the company’s senior management and auditor about critical accounting policies are deemed necessary.

Providing audit committees with information on material accounting alternatives, the SEC said, will minimize the risk that audit committee members will be distracted from material accounting policy matters by the numerous discussions between the auditors and management on the application of accounting principles to relatively small transaction or events.