(Intermediate Accounting 3)

LECTURE AID

2020

ZEUS VERNON B. MILLAN

Chapter 7 Notes – Part 1
Related standards:
PAS 1 Presentation of Financial Statements
PAS 8 Accounting Policies, Changes in Estimates and Errors
PAS 10 Events after the Reporting Period

Learning Objectives
• State the relationship of the notes with the other components of a
complete set of financial statements.
• Define the following and give examples: (1) Change in accounting policy,
(2) Change in accounting estimate, and (3) Error.
• Differentiate between the accounting treatments of the following: change
in accounting policy, change in accounting estimate, and correction of
prior period error.
• Define events after the reporting period.

• State the accounting requirements for events after the reporting period.
INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)
Order of presentation of disclosures in the Notes

1. Statement of compliance with PFRSs;

2. Summary of significant accounting policies applied;

3. Supporting information for items presented in the other financial

statements; and

4. Other disclosures.

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
Objective and Scope of PAS 8

• PAS 8 prescribes the criteria for selecting, applying, and

changing accounting policies and the accounting and

disclosure of changes in accounting policies, changes in
accounting estimates and correction of prior period
errors.

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
Accounting policies

• Accounting policies are the specific principles,

bases, conventions, rules and practices applied
by an entity in preparing and presenting
financial statements. These are the relevant
PFRSs adopted by an entity in preparing and
presenting its financial statements

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

PFRSs

• Philippine Financial Reporting Standards (PFRSs) are

Standards and Interpretations adopted by the Financial

Reporting Standards Council (FRSC). They comprise the
following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
INTERMEDIATE ACCTG 3 (By: Zeus
Vernon B. Millan)
INTERMEDIATE ACCTG 3 (By: Zeus
Vernon B. Millan)
• When it is difficult to distinguish a change in accounting

policy from a change in accounting estimate, the change is

treated as a change in an accounting estimate.

• An entity shall change an accounting policy only if the

change:
1. is required by a PFRS; or
2. results to a more relevant and reliable information
about an entity’s financial position, performance, and
cash flows. INTERMEDIATE ACCTG 3 (By: Zeus
Vernon B. Millan)
Examples of changes in accounting policy
1. Change from FIFO cost formula for inventories to the Average cost
formula.
2. Change in method of recognizing revenue from long-term
construction contracts.
3. Change to a new policy resulting from the requirement of a new
PFRS.
4. Change of financial reporting framework such as from PFRS for
SMEs to compliance with full PFRSs.
5. Initial adoption of the revaluation model for property, plant, and
equipment and intangible assets.
6. Change from the cost model to the fair value model of measuring
investment property.
7. Change in business model for classifying
INTERMEDIATE ACCTG 3 (By:financial
Vernon B. Millan)
Zeus assets resulting to
Examples of changes in accounting estimate

1. Change in depreciation or amortization methods

2. Change in estimated useful lives of depreciable assets

3. Change in estimated residual values of depreciable assets

4. Change in required allowances for impairment losses and

uncollectible accounts

5. Changes in fair values less cost to sell on non-current assets held for

sale and biological assets

6. Changes in currency exchange rates for foreign currency

denominated cash and receivables

INTERMEDIATE ACCTG 3 (By: Zeus
Vernon B. Millan)
Errors

• Errors include the effects of:

1. Mathematical mistakes
2. Mistakes in applying accounting policies
3. Oversights or misinterpretations of facts; and
4. Fraud

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
Counterbalancing vs. Non-counterbalancing
errors
1. Counterbalancing errors are errors which, if remained

uncorrected, are automatically corrected or offset in the next

accounting period. Their effect on the financial statements
automatically reverses (counterbalance) in the next accounting
period.

2. Non-counterbalancing errors are errors which, if remained

uncorrected, are not automatically corrected or offset in the next

accounting period.

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
Relationships between accounts

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

Events after the Reporting Period

• Events after the reporting period are “those events, favorable

or unfavorable, that occur between the end of the reporting

period and the date that the financial statements are
authorized for issue.” (PAS 10)

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
Two types of events after the reporting period

1. Adjusting events after the reporting period – are those that

provide evidence of conditions that existed at the end of the

reporting period.

2. Non-adjusting events after the reporting period – those that are

indicative of conditions that arose after the reporting period

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
Date of authorization of the financial statements

• This date is the date when management authorizes the financial

statements for issue regardless of whether such authorization for

issue is for further approval or for final issuance to users.

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
Examples of adjusting events:
1. The settlement after the reporting period of a court case that
confirms that the entity has a present obligation at the end of
reporting period.

2. The receipt of information after the reporting period indicating that

an asset was impaired at the end of reporting period. For example:
i. The bankruptcy of a customer that occurs after the reporting
period may indicate that the carrying amount of a trade
receivable at the end of reporting period is impaired.
ii. The sale of inventories after the reporting period may give
evidence to their net realizable value at the end of reporting
period

3. The determination after the reporting period of the cost of asset

purchased, or the proceeds from asset sold, before the end of
reporting period.

4. The discovery of fraud or errors that indicate that the financial

INTERMEDIATE ACCTG 3 (By: Zeus
statements are incorrect. Vernon B. Millan)
Examples of non-adjusting events normally
requiring disclosures:
1. Changes in fair values, foreign exchange rates, interest rates or market
prices after the reporting period.
2. Casualty losses (e.g., fire, storm, or earthquake) occurring after the
reporting period but before the financial statements were authorized for
issue.
3. Litigation arising solely from events occurring after the reporting period.

4. Major ordinary share transactions and potential ordinary share

transactions after the reporting period.
5. Major business combination after the reporting period.

6. Announcing a plan to discontinue an operation after the reporting

period.
7. Declaration of dividends after the reporting period
INTERMEDIATE ACCTG 3 (By: Zeus
Vernon B. Millan)
Disclosures

• Date of authorization for issue

• Adjusting events

• Material Non-adjusting events

INTERMEDIATE ACCTG 3 (By: Zeus

Vernon B. Millan)
 APPLICATION OF
CONCEPTS
PROBLEM 7: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

 END

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)