actgia3_ch03_Notes-to-FS.ppt
- 1. INTERMEDIATE ACCOUNTING 3: Notes to Financial Statements
- 2. Notes to Financial Statements Notes to financial statements provide narrative description or disaggregation of items presented in the financial statements and information about items that do not qualify for recognition.
- 3. PAS 1, paragraph 113, provides that an entity shall, as far as practicable, present notes in a systematic manner.
- 4. Purpose of Notes to Financial Statements The purpose of notes to financial statements is to provide the necessary disclosures required by Philippine Financial Reporting Standards.
- 5. Specifically, PAS 1, paragraph 112, provides that the notes to financial statements shall: a. Present information about the basis of preparation of the financial statements and the specific accounting policies. b. Disclose the information required by Philippine Financial Reporting Standards that is not presented in the financial statements.
- 6. c. Provide additional information which is not presented in the financial statements but is relevant to an understanding of the financial statements.
- 7. Order of Presenting the Notes PAS 1, paragraph 114, provides that an entity normally presents notes in the following order to assist users understand the financial statements and to compare them with financial statements of other entities: a. Statement of compliance with PFRS
- 8. b. Summary of significant accounting policies used c. Supporting information or computation for line items presented in the FS d. Other disclosure, such contingent liabilities, unrecognized contractual commitments and nonfinancial disclosures.
- 9. Compliance with PFRS PAS 1, paragraph 16, provides that an entity whose financial statements comply with Philippine Financial Reporting Standards shall make an explicit and unreserved statement of such compliance in the notes.
- 10. An entity shall not describe financial statement as complying with PFRS unless they comply with all the requirements of each applicable Philippine Financial Reporting Standard.
- 11. Accounting Policies Specific principles, methods, practices, rules, bases and convention adopted by an entity in preparing and presenting the financial statements. Disclosing the accounting policies helps users interpret and understand the financial statements better.
- 12. Significant Accounting Policies The summary of significant accounting policies shall disclose: 1. The measurement basis used (historical cost and current value) 2. The accounting policies used (PFRS alternatives: FV or amortized cost)
- 13. Disclosure of Estimation Uncertainty Entity shall disclose information about the assumption it makes about the future, and other major sources of uncertainty at the end of the reporting period that have a significant risk resulting in a material adjustment to the carrying amount of assets and liabilities within the next fiscal year. (Par. 125, PAS 1)
- 14. Notes, with respect to those assets and liabilities, include: 1. Nature 2. Carrying amount
- 15. Other Disclosure An entity shall disclose the following (Par. 138, PAS 1): 1. The domicile and legal form, country of incorporation and the address of the registered or principal place of business 2. A description of the nature of its operations and principal activities 3. The name of the parent and the ultimate parent of the group
- 16. Par. 137 of PAS 1 provides that an entity shall disclose the following: 1. The amount of dividends proposed or declared before the FS were authorized for issue but not recognized as distribution during the period and the related amount per share 2. The amount of any cumulative preference dividends not recognized
- 17. Examples of notes to Financial Statements (see pages 93-96 of your textbook) Activity#1 Perfomance Task Based on the 2019 and 2020 Financial Statements of Pharmally Pharmaceutical Company, make a one-page word file critique of its notes to financial statements based on the related topic discussed. (Use one page word file, single space, 12 font size with 1 inch margin for top, bottom, left and right).
- 18. Related Parties Parties are considered related if one party has: 1. The ability to control the other party 2. The ability to exercise significant influence over the other party 3. Joint control over the entity
- 19. Example of Related Parties: 1. Affiliates 2. Associates 3. Venturer 4. Key management personnel 5. Close family members of an individual 6. Individuals 7. Postemployment benefit plans
- 20. Related Party Transaction Related party transaction is a transfer of resources or obligations between related parties, regardless of whether a price is charged.
- 21. Example of Related Party Transaction (Par. 20, PAS 24): 1. Purchase and sale of goods 2. Purchase and sale of property and other asset 3. Rendering or receiving services 4. Leases 5. Transfer of research and development 6. License agreement
- 22. 7. Finance agreements 8. Guarantees and collateral 9. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party
- 23. Related Party Disclosure Related party relationship disclosure is required where control exists irrespective of whether there have been transactions between the related parties. (Par. 12, PAS 24)
- 24. Related Party Transaction Disclosure If there had been transaction between related parties, an entity shall disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the financial statements.
- 25. Minimum disclosure to include: 1. The amount of the transaction 2. The amount of the outstanding balance, terms and condition whether secured or unsecured, and the nature of the consideration to be provided in settlement 3. The allowance for doubtful accounts related to the outstanding balance 4. The expense recognized during the period in respect of doubtful accounts due from related parties
- 26. Key Management Personnel Compensation (Par. 16, PAS 24) An entity shall disclose key management personnel compensation in total and for each of the following categories: 1. Short-term employee benefits 2. Postemployment benefits (retirement pensions) 3. Other long-term benefits
- 27. 4. Termination benefits 5. Share based payment transactions (share options)
- 28. Unrelated Parties Unrelated Parties include the following: 1. Two entities simply because they have a director or a key management personnel in common 2. Providers of finance, trade unions, public utilities and government agencies in the course of their normal dealings with an entity by virtue only of those dealings
- 29. 3. A single customer, supplier, franchisor or general agent with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence 4. Two venturers simply because they share joint control over a joint venture
- 30. Transaction with Government-Related Entities Exempt from normal disclosures for transactions with: 1. A government that has control, joint control or significant influence over the entity
- 31. 2. Other entities controlled, jointly controlled or significant influenced by the same government
- 32. But still has to disclose only: 1. The name of the government and the nature of the relationship with the reporting entity 2. The information on the nature and the amount of each individually significant transaction with the government
- 33. Related Party Transaction Disclosure not Required Related party transactions and outstanding balance disclosure is required for separate financial statement of a parent, subsidiary, associate or venturer. (Par. 12, PAS 24)
- 34. Intragroup related party transactions and outstanding balance disclosure are eliminated in the preparation of consolidated financial statements of the group. (Par. 4, PAS 24)
- 35. Pricing Policies Price for unrelated parties is an arm's length price. Price methods between related parties: 1. Uncontrolled price method 2. Resale price method 3. Cost plus method 4. No price method
- 36. Events After Reporting Period Events after the reporting period are those events, whether favorable or unfavorable, that occur between the end of reporting period and the date on which the financial statements are authorize for issue. Subsequent events may require adjustment or disclosure.
- 37. Types of Events After Reporting Period 1. Adjusting events after the reporting period 2. Nonadjusting events after the reporting period
- 38. Examples of Adjusting Events 1. Settlement after the reporting period of a court case because it confirms that the entity already had a present obligation at the end of the reporting period 2. Bankruptcy of a customer which occurs after the reporting period
- 39. 3. Sale of inventories after the reporting period may give evidence about the net realizable value at reporting date 4. The determination after the reporting period of the cost of assets purchased or the proceeds from assets sold before the end of reporting period
- 40. 5. The determination after the reporting period of the profit sharing or bonus payment if the entity has the present obligation at the end of reporting period to make such payment 6. The discovery of fraud or errors that show the financial statements were incorrect
- 41. Examples of Nonadjusting Events 1. Business combination after the reporting period 2. Plan to discontinue an operation 3. Major purchase and disposal of asset or expropriation of major asset by government
- 42. 4. Destruction of a major production plant by a fire after the reporting period 5. Major ordinary share transactions and potential ordinary share transactions after the reporting period 6. Announcing or commencing the implementation of a major restructuring
- 43. 7. Abnormally large changes after the reporting period in asset prices or foreign exchange rates 8. Entering into significant commitments or contingent liabilities, for example, by issuing guarantees 9. Commencing major litigation arising solely from events that occurred after the reporting period
- 44. 10. Change in tax rate enacted or announced after end the reporting period that has a significant effect on current and deferred tax asset and liability
- 45. Financial Statements Authorized for Issue It occurs when the BOD reviews the financial statements and authorizes them for issue, (and not on the date when the shareholders approve the financial statement)
- 46. References: Valix, C., Peralta, J., Valix, C.A. (2020). Intermediate Accounting Volume 3. Manila City, Phils. GIC Enterprises & Co., Inc. Valix, C., Peralta, J., Valix, C.A. (2020). Conceptual Framework and Accounting Standards. Manila City, Phils. GIC Enterprises & Co., Inc.