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Notes TO Financial Statements
Accountancy (BSA2)
Quezon City University
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NOTES TO FINANCIAL
STATEMENTS
Provide additional details and explanations for items in financial statements. Include information beyond the main financial statements to enhance understanding. Encouraged to be presented systematically (PAS 1, paragraph 113).
PURPOSE OF NOTES TO FINANCIAL STATEMENTS
Comply with Philippine Financial Reporting Standards. Present basis of preparation and accounting policies. Disclose required information not in financial statements. Offer relevant supplementary information for understanding.
ORDER OF PRESENTING NOTES (PAS 1, paragraph 114):
Statement of compliance with PFRS: Explicitly declare compliance with Philippine Financial Reporting Standards (PAS 1, paragraph 16).
Summary of significant accounting policies: Describe specific principles, methods, and
practices used in financial statement preparation.
Supporting information or computations for line items in financial statements.
Other disclosures: Include contingent liabilities, unrecognized contractual commitments, and nonfinancial disclosures.
Flexibility in item order is allowed, but systematic presentation should be maintained.
COMPLIANCE WITH PFRS
Per PAS 1, paragraph 16, entities complying with Philippine Financial Reporting Standards must explicitly state this compliance in the notes.
An entity cannot claim compliance with PFRS unless they adhere to all requirements of applicable Philippine Financial Reporting Standards.
ACCOUNTING POLICIES
Defined as specific principles, methods, and practices. Accounting standards prescribe recognition and
measurement principles and often specify required accounting policies.
DISCLOSURE OF MEASUREMENT BASIS
Important to inform users about the measurement basis used (historical cost or current value).
Current value includes fair value, value in use, fulfillment value, and current cost.
DISCLOSURE OF ACCOUNTING POLICIES
Consider whether disclosing a specific policy would help users understand how transactions are reflected in financial statements.
Especially useful when choosing among alternatives allowed in Philippine Financial Reporting Standards.
DISCLOSURE OF JUDGMENT
Required by PAS 1, paragraph 122.
Disclose significant management judgments affecting amounts
recognized in financial statements.
Examples include judgment on asset measurement (fair value or amortized cost) and recognizing revenue from certain sales arrangements.
DISCLOSURE OF ESTIMATION UNCERTAINTY (PAS 1, paragraph 125):
Entity must disclose assumptions about the future and significant sources of uncertainty at the end of the reporting period.
These uncertainties should have a significant risk of causing material adjustments to asset and liability values within the next financial year.
Mandatory disclosure, including the nature and carrying amount of assets and liabilities affected.
Other Disclosures (PAS 1, paragraphs 137 and 138):
Disclose domicile, legal form, country of incorporation, and address of registered office or principal place of business.
Joint Control Joint control is the contractually agreed sharing of control over an economic activity.
EXAMPLES OF RELATED PARTIES
Affiliates: Parent companies, subsidiaries, and fellow subsidiaries. If an investor owns over 60% of an investee, they are the parent, and the investee is the subsidiary. Subsidiaries are related to their parent, and fellow subsidiaries of one parent are also related to each other.
Associates: Entities over which one party exercises significant influence. If an investor owns at least 20% of the investee, they are considered associates. Associates are related to the investor. Includes subsidiaries of the associate.
Venturers Related to joint ventures because they have joint control over joint venture activities.
Unlike fellow subsidiaries, fellow venturers are not related to each other.
Other Related Parties:
- Key Management Personnel
Individuals in managerial positions like president, vice-president, and CEO, responsible for controlling entity activities.
- Close Family Members of Key Management Personnel
Includes spouses, children, children of the spouse, and dependents of the individual or spouse.
- Individuals or Shareholders Owning at least 20% of the Reporting Entity
Close family members of such individuals are also related to the reporting entity.
- Postemployment Benefit Plans for Employees:
Typically funded by entity contributions and managed by a trustee.
Trust funds related to the reporting entity.
RELATED PARTY
TRANSACTIONS
Transfer of resources or obligations between related parties, regardless of whether a price is charged.
Examples per PAS 24, paragraph 20:
- Purchase and sale of goods.
- Purchase and sale of property and other assets.
- Rendering or receiving services.
- Leases.
- Transfer of research and development.
- License agreements.
- Finance arrangements (loans, equity contributions).
- Guarantees and collateral.
- Settlement of liabilities on behalf of the entity or by the entity on behalf of another party.
Related Party Disclosures:
Requirement (PAS 24, paragraph 12):
Disclosure of related party relationships even if no transactions occurred.
Parent-subsidiary relationships must be disclosed regardless of transactions. Disclose the name of the entity's parent and, if different, the ultimate controlling party.
If neither the parent nor ultimate controlling party produces public financial statements, disclose the name of the next most senior parent that does.
DISCLOSURES OF RELATED PARTY TRANSACTIONS
Per PAS 24, paragraph 17: Disclose nature of related party relationship. Provide transaction information for understanding financial statements.
Minimum disclosures include: a. Transaction amount. b. Outstanding balance details (terms, conditions, secured/unsecured, nature of settlement consideration). c. Allowance for doubtful accounts related to outstanding balance. d. Expense recognized during the period for doubtful accounts from related parties.
Disclosure of arm's length transaction terms only if substantiated.
transaction with the government.
RELATED PARTY DISCLOSURES NOT REQUIRED
Per PAS 24, paragraph 3: Disclosure of related party transactions and outstanding balances is required in the separate financial statements of a parent, subsidiary, associate, or venturer.
Paragraph 4 specifies that intragroup related party transactions and balances are eliminated when preparing consolidated financial statements for the group.
PRICING POLICIES
Accounting recognition of resource transfers is typically based on agreed- upon prices.
Prices between unrelated parties are arm's length, but related parties may have flexibility in pricing.
Methods used for pricing related party transactions:
- Uncontrolled Price Method: Sets the price based on
comparable goods sold in an economically comparable market to an unrelated buyer.
Resale Price Method: Used when goods transfer from related parties before selling to an independent party. Reduces the resale price by a margin for cost recovery and profit.
Cost Plus Method: Adds an appropriate markup to the supplier's cost.
No Price Method: No actual price charged, such as in free provision of management services or extending free credit on a debt.
EVENTS AFTER THE REPORTING PERIOD
Events after the reporting period are those events, whether favorable or unfavorable, occurring between the end of the reporting period and the date when financial statements are authorized for issue.
TYPES OF EVENTS AFTER THE REPORTING PERIOD
A. Adjusting Events: These events provide evidence of
conditions existing at the end of the reporting period. B. Nonadjusting Events: These events indicate conditions arising after the reporting period.
ADJUSTING EVENTS
Settlement of a Court Case: Confirms a present obligation at the end of the reporting period.
Bankruptcy of a Customer: Occurs after the reporting period but relates to a condition at the end of the reporting period.
Determination of Asset Costs or Proceeds: Decided after the reporting period for assets purchased or sold before the end of the reporting period.
Profit Sharing or Bonus Payment Determination: If there's a present obligation at the end of the reporting period for such payments.
Discovery of Fraud or Errors: Reveals that the financial statements were incorrect.
NONADJUSTING EVENTS
Business combination occurring after the reporting period.
Decision to discontinue an operation made after the reporting period.
Major purchase, disposal of assets, or asset expropriation by the government after the reporting period.
Destruction of a significant production plant due to fire after the reporting period.
Major ordinary share transactions, including potential transactions, happening after the reporting period.
Announcement or initiation of a major restructuring after the reporting period.
Significant and abnormal changes in asset prices or foreign exchange rates occurring after the reporting period.
Entry into significant commitments or contingent liabilities, such as issuing guarantees, after the reporting period.
Commencement of major litigation arising solely from
Notes TO Financial Statements
Course: Accountancy (BSA2)
University: Quezon City University
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