THE Securities and Exchange Commission (SEC) has amended financial reporting guidelines in line with the Revised Corporation Code, as well as in preparation for capital market integration with member countries of the Association of Southeast Asian Nations (ASEAN).
“Among the reasons is to incorporate interpretations and clarifications issued thru Financial Reporting Bulletins (and) adjust requirements for issuers and securities registration in preparation for ASEAN capital market integration,” according to a SEC representative.
The amended rules, titled Revised Securities Regulation Code (SRC) Rule 68, were published in a national daily on Thursday.
Salient changes in Rule 68 include the Test of Materiality under Part III, which states that “omissions or misstatements of items shall be material if they could individually or collectively, influence the economic decisions that users make on the basis of the financial statements.”
The amendment states that a misstatement in the financial statement, resulting from a deviation from the prescribed policy, misrepresentation, fraud, or error, will only be material if it “represents 10% or more of the total of related accounts or transactions.”
The previous rule delegated the Test of Materiality to SEC Memorandum Circular No. 8, Series of 2009, titled “Scale of Fines for Non-compliance with the Financial Reporting Requirements of the Commission.”
The new guidelines also changed the application documents for initial accreditations, where a notarized application form must be submitted by the applicant to the commission together with prescribed supporting documents.
“In cases where the applicant previously served as a manager for the audit of the selected AFS (audited financial statement) for evaluation, the applicant shall also submit a certification from the signing partner of the selected AFS that the applicant was part of the audit management team.”
The amended rule added a section for the Registration of Securities Pursuant to the ASEAN Capital Market Integration (ACMI). This states that the registration of securities pursuant to the ACMI Framework will follow Rule 68, subject to the adoption of the International Financial Reporting Standard for the basis of financial statements of foreign companies that look to pursue crossborder offerings or listings in the Philippines.
The SEC also made changes in the Mutual Recognition Policy to recognize the Memorandum of Agreement between and among the commission, Board of Accountancy, Bangko Sentral ng Pilipinas (BSP), and Insurance Commission. This covers auditors supervised by the BSP.
For the section on Operational Requirements, the SEC highlighted the auditor’s responsibility in obtaining information on a client’s compliance or noncompliance with laws or regulations.
The commission added a provision saying: “They shall inquire with the management as to whether there is an ongoing investigation against the company and require the client corporation to inform them.”
Changes in the section on Scope and Limitation of Accreditation state that the commission will subject to the SEC Oversight Assurance Review Inspection Program the accredited auditing firms hired by listed companies, and review portions of the firms’ audit work. It may also subject to the same standards the independent auditors of other companies, as required by the circumstances.
The amended rules also separated the definition of large entities versus public interest entities, whereas the former are those with total assets of more than P350 million, or total liabilities of more than P250 million.
In contrast, public interest entities are those that hold secondary licenses issued by regulatory agencies, and are in the process of filing their financial statements in preparation for the issuance of any class of instruments to the public market.
Other changes include the removal of a provision that directed companies with bank loans of more than P250 million to have an SEC-accredited external auditor; the requirement for entities listed under the SEC’s top 1000 corporations to have SEC-accredited external auditors; and the shortening of the period of reapplication for denied accreditation applications. — Arra B. Francia