(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
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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.

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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.

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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

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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

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• 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.

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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 financial assets resulting to
reclassification between financial asset categories.

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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

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Errors

• Errors include the effects of:

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

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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.

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Relationships between accounts

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 APPLICATION OF CONCEPTS

PROBLEM 2: FOR CLASSROOM DISCUSSION

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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)

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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

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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.

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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
statements are incorrect.
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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

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Disclosures

• Date of authorization for issue

• Adjusting events
• Material Non-adjusting events

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 APPLICATION OF CONCEPTS

PROBLEM 7: FOR CLASSROOM DISCUSSION

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

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 END

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