INTERMEDIATE ACCOUNTING III (AE 17)

LEARNING MATERIAL

UNIT NUMBER/ HEADING: NOTES TO FINANCIAL STATEMENTS

LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Identify the nature of notes to financial statements
b. Determine the purpose of notes to financial statements
c. Illustrate the order of presenting notes to financial statements
d. Enumerate and discuss the requirement for the disclosure of
judgment and estimation uncertainty

Presentation of Content

DEFINITON AND BASIC PRINCIPLES

 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
 It is used to report information that does not fit into the body of the
statements in order to enhance the understandability of the
statements
 It provides additional information and help clarify the items
presented in the financial statement
 PAS 1, paragraph 113, provides that an entity shall, as far as
practicable, present notes in a systematic manner
 It shall be highly detailed, precise, complete and easily understood
by a reader who was a reasonable understanding of business affairs
and is willing to study the financial statements.

PURPOSE OF NOTES TO FINANCIAL STATEMENTS

 Its purpose is “to provide the necessary disclosures required by PFRS.”
 Specifically, PAS 1, provides that the notes to financial statements
shall:
 Present information about the basis of preparation of the
financial statements and the specific accounting policies used
 Disclose the information required by PFRS that is not
presented in the financial statements
 Provide additional information which is not presented in the
financial statements but is relevant to an understanding of
the financial statements

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ORDER OF PRESENTING THE NOTES
1. Statement of compliance with PFRS
 PAS 1, paragraph 6, provides that an entity whose financial
statements comply with PFRS shall make an explicit and
unreserved statement of such compliance in the notes
 An entity shall not describe financial statements as complying
with PFRS unless they comply with all the requirements of each
applicable PFRS

2. Summary of significant accounting policies used

 Accounting policies are defined as the specific principles,
methods, practices, rules, bases and conventions adopted by an
entity in preparing and presenting financial statements
 Accounting standards set out the required recognition and
measurement principles that an entity shall follow in preparing
its financial statements, and shall often prescribe the accounting
policy to be adopted

3. Supporting information or computation for line items presented in the

financial statements
4. Other disclosures, such contingent liabilities, unrecognized contractual
commitments and nonfinancial disclosures

SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies shall disclose the following:
a. The measurement basis used in preparing the financial statements
o This includes historical cost, current cost, realizable value and
present value.
o It is important for an entity to inform users of the measurement
basis used in the financial statements because the basis on
which the entity prepares the financial statements significantly
affects the users’ analysis

b. The accounting policies used that are relevant to an understanding

of the financial statements
o This is especially useful to users when those policies are selected
from alternatives allowed in PFRS
o In deciding whether a particular accounting policy should be
disclosed, management shall consider whether the disclosure
would assist users in understanding how transactions, other
events and conditions are reflected in the financial statements.

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DISCLOSURE OF JUDGMENT
 PAS 1, par. 122, provides that an entity shall disclose in the summary
of significant accounting policies the judgments that management has
made in the process of applying accounting policies and that have a
significant effect on the amounts recognized in the financial statements
 Specifically, management makes judgment in determining the
following:
 Whether financial assets are to be measured at fair value or at
amortized cost
 Whether substantially all the significant risks and rewards of
ownership of the leased asset are transferred to the lessee
 Whether in substance particular sales of goods are product
financing arrangement and therefore do not give rise to revenue

DISCLOSURE OF ESTIMATION UNCERTAINTY

 An entity shall disclose information about assumptions it makes about
the future, and other major source of uncertainty at the end of
reporting period that have a significant risk of resulting in a material
adjustment to the carrying amount of assets and liabilities within the
next financial year
 With respect to those assets and liabilities, the notes shall include the
nature and carrying amount of the assets and liabilities at the end of
reporting period

OTHER DISCLOSURES
 PAS 1, par. 138, provides that an entity shall disclose the following:
a. The domicile and legal form of the entity, its country of incorporation
and the address of the registered office or principal place of business
b. A description of the nature of the entity’s operations and its principal
activities
c. The name of the parent and the ultimate parent of the group
 Paragraph 137 provides that an entity shall disclose the following:
a. The amount of dividends proposed or declared before the financial
statements were authorized for issue but not recognized as
distribution during the period and the related amount per share
b. The amount of any cumulative preference dividends not recognized