(Intermediate Accounting 3)

2022
NOTES TO FINANCIAL
STATEMENTS
Notes to Financial Statements
• Provides narrative description or disaggregation of

items presented in the financial statements and

information about items that do not qualify for
recognition. – Contingent Liability – Notes to FS
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

Cash and Cash Equivalents – 5M
COH, CIB, PCF, RF = 5M

1. Other disclosures.
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
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
Measurement basis – historical cost, fair value,
present value, NRV

• Accounting policies – alternatives PFRS

• Inventory – LIFO, FIFO, WA
• PPE – Depreciation – Straight Line, SYD, DD.
Disclosure of Judgment - mandatory

• Entity shall disclose in the summary of

significant accounting policies the judgments

that management has made in the process of
applying accounting policies.
Sample of Notes to FS

• Note 1 – Compliance with PFRS

Sample of Notes to FS

• Note 2 – Significant Accounting Policies

Sample of Notes to FS

• Note 3 - Inventories
Sample of Notes to FS – 2022 Jan 2023

• Note 4 – Contingent Liability

• January 2023 ---- Adjusting event

• Loss on Lawsuit – 2M
• Est liability on L o L – 2M
Related standards:

PAS 24 Related Party

Disclosures
Objective and Scope of PAS 24

• PAS 24 prescribes the necessary disclosures regarding

related party relationships and transactions, outstanding

balances and commitments between an entity and its
related parties.
Core principle
• The financial position and profit or loss of an entity may be

affected by a related party relationship even if related party

transactions do not occur. The mere existence of the
relationship may be sufficient to affect the transactions of the
entity with other parties.

• Necessary disclosures, therefore, should be provided to draw

users’ attention to the possible effects of such relationships

and transactions on the financial statements presented.
Related parties

• A related party is “a person or entity that is related to the

reporting entity that is preparing its financial statements.” (PAS 24)

• Examples of related parties:

1. Investor and investee relationship where control, joint

control or significant influence exists.
2. Key management personnel
3. Close family member
4. Post-employment benefit plan
Definition of terms
• Control – an investor controls an investee when the investor is
exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its
power over the investee.
• Significant influence is the power to participate in the financial
and operating policy decisions of an entity, but is not control over
those policies. Significant influence may be gained by share
ownership, statute or agreement.
• Joint control is the contractually agreed sharing of control over an
economic activity.
Definition of terms - continuation
• Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the
entity, directly or indirectly, including any director (whether executive or
otherwise) of that entity.

• Close members of the family of an individual

a. the individual’s domestic partner and children;
b. children of the individual’s domestic partner; and
c. dependents of the individual or the individual’s domestic partner.

• A related party transaction is a transfer of resources, services or

obligations between a reporting entity and a related party, regardless of
whether a price is charged.
Unrelated parties
• The following are not related parties:

1. Two entities simply because they have a director in common.

2. Two venturers simply because they share joint control over a joint
venture.
3. Providers of finance, trade unions, public utilities, and departments
and agencies of a government that does not control, jointly control
or significantly influence the reporting entity, simply by virtue of
their normal dealings with an entity.
4. A customer, supplier, franchisor, distributor or general agent with
whom an entity transacts a significant volume of business, simply
by virtue of the resulting economic dependence.
Disclosure

1. Parent-subsidiary relationship regardless of whether there have been

transactions between them.
2. Key management personnel compensation broken down into the
following categories SPOTS and loans to key management personnel.
3. Related party transactions – nature of transaction and outstanding
balances

• Disclosures that related party transactions were made on terms equivalent

to those that prevail in arm’s length transactions are made only if such
terms can be substantiated.
 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)

• 2022 Jan 1 – Dec 31, 2022 ------- March 31, 2023

• Jan 1, 2023- March 31, 2023
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. RECORDING 2022 – change FEB
2023

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

indicative of conditions that arose after the reporting period

3. 2022 ---- Feb 2023 ----- march 31, 2023

 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.
Contingent Liability
2022 ----- January 31, 2023 ------ March 31, 2023 (ISSUANCE)
1. 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. Inventories 15K ----- Jan P9K
2. The determination after the reporting period of the cost of asset
purchased, or the proceeds from asset sold, before the end of
reporting period.

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

statements are incorrect.
Examples of non-adjusting events normally
requiring disclosures:
2022 ----- 2023
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. Jan 2023 --- Disclosure
3. Litigation arising solely from events occurring after the reporting
period. January 31, 2023
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
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. 2023 ---- Disclosure
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
• Explain how each of the items should be treated in the
financial statements for the year ended Dec 31, 20x5.
Disclosures

• Date of authorization for issue

• Adjusting events

• Material Non-adjusting events