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From Where We Sit

New financial reporting framework for cooperatives

Ramilito L. Nañola Ramilito L. Nañola

In September 2015, the Cooperative Development Authority (CDA) issued a memorandum circular covering the Philippine Financial Reporting Framework for Cooperatives (Reporting Framework). This Reporting Framework, which will only be effective for financial statements ending on December 31, 2016, is based largely (except for certain accounting treatments incorporated or revised by CDA which it deemed distinct and unique for cooperatives) on the Philippine Financial Reporting Standards for Small and Medium-Sized Enterprises (PFRS for SMES).

CDA is a regulatory agency entirely separate from the Securities and Exchange Commission (SEC) but it has similar functions; it has administrative and control oversight over all cooperatives in the country, while the SEC exercises this oversight over all stock and non-stock corporations.

Prior to the issuance of this Reporting Framework, CDA prescribed the Standard Chart of Accounts (SCA) for Cooperatives. The basic purpose in prescribing the SCA is to provide guidelines on the use of account titles for the preparation of financial statements to be used by all types of cooperatives. Thus, in the absence of more robust and detailed guidelines, the cooperatives turned to the PFRS issued by the Board of Accountancy (BOA) and the SEC. This situation created more confusion and lack of uniformity of financial reporting among cooperatives, as some follow the SCA while others prescribe to the PFRS or PFRS for SMEs. Consequently, their accountants and external auditors also took different positions relative to the adoption of the financial reporting and framework of their clients, resulting in inconsistent financial reporting among cooperatives.

Thus, this new Reporting Framework is a big step forward for CDA as it addresses the issue of uniformity of applications of financial reporting standards for the different types of cooperatives. To facilitate faster and wider adoption and to ensure compliance with the new Reporting Framework, the CDA has already conducted numerous seminars, mostly in c oordination with the Philippine Institute of Certified Public Accountants.

CDA did not fully adopt all the provisions under PFRS or PFRS for SMEs since the Philippine Cooperative Code of 2008, following universally accepted cooperative principles, specifically provides for treatment of certain accounts, which are unique and peculiar to cooperatives.

For example, under CDA reporting framework, the interest income for cooperatives with lending operations is only recognized when earned and received during the period, which is different from the accrual method of PFRS. The reason for recognizing interest income only when earned and received is for the cooperatives to avoid declaring dividends (as required by CDA Law) out of interest that have not yet been collected. Another difference between the two reporting frameworks is the recognition of the effects of the prior period adjustments. Under the CDA reporting framework, the prior period adjustment should be taken up in the current year. PFRS provides for adjustment to the pertinent accounting year. The CDA reporting framework is practical in the sense that cooperatives may find it difficult to recover dividends that were already paid in prior years (assuming the prior period errors pertain to additional losses). Also, it is only the cooperatives that have to present in their financial statements the allocation of statutory reserves (also referred to as statutory funds) in the distribution of net surplus. Under CDA rules, all earnings during the period shall be returned to members as patronage refund for the loan availed of or allocated to various statutory accounts such as: (a) Reserved fund; (b) Education and training fund; (c) Community development Fund, and (d) Optional fund.

BOA, however, reproached CDA when it ran in Accounting Updates (philcpa.org) on September 30, 2015, an article entitled, “Is CDA publishing its own Financial Reporting Standards?” BOA maintains that it was not consulted in the promulgation of the CDA reporting framework and thus, it was not able to comment on and select which accounting standards the accountants and external auditors should use in reporting the transactions and in auditing the records of cooperatives.

It seems CDA has taken the position that it is a regulator that has a separate mandate from the SEC and BOA and cooperatives should adopt the new Reporting Framework. CDA, however, has to be alert as this Reporting Framework, which is based on PFRS for SMEs, has to be dynamic, flexible and active to be able to adjust to the amendments and developments in PFRS for SMEs.

Ramil Nañola is a Partner, Audit & Assurance of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.

As published in The Manila Times, dated 22 June 2016