CHAPTER 3

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.

- Used to report info that doesn’t fit into the body of the statements in order to enhance the
understandability of the statements.

- (a) Present info about basis of prep of financial statements and specific acctng policies, (b)
Disclose info required by PFRS not presented in the financial statements, (c) Provide additional info not
presented in FS but relevant to understand FS.

 Notes provide additional info and help clarify the items presented in the financial statements.
 An entity shall, as far as practicable, present notes in a systematic manner.
- Purpose: To provide the necessary disclosures

Normal Presentation of Notes: (a) Statement of Compliance with PFRS, (b) Summary of significant acctng
policies used, (c) Supporting info/computations for line items presented in the FS, (d) Other disclosures

 Entities shall make an explicit and unreserved statement of such compliance in the notes.

Accounting Policies – Specific principles, methods, practices, rules, bases and conventions adopted by
an entity in preparing and presenting financial statements.

Significant Accounting Policies Shall Disclose FF:

(a) Measurement Basis

 Basis on which the entity prepares the FS significantly affects the users’ analysis.
 Historical cost and current value (fair value, Fulfillment value, Value in use, Current value) .

(b) Accounting Policies

 Management shall consider if disclosure would assist users to understand how transactions, other
events and conditions are reflected in FS.

Disclosure of Judgment

 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 FS.

Disclosure of Estimation Uncertainty

 An entity shall disclose info about assumptions it makes about the future, and other major
sources of uncertainty at the end of reporting period that have a significant risk if resulting in a
material adjustment to the carrying amount of assets and liabilities w/in the next financial year
 Notes shall include nature and carrying amount.

Other Disclosures
 - Disclose: (a) Domicile and legal form of the entity, country of incorporation, address of
registered office. (b) Description of entity’s operations and principal activities, (c) Name of parent,
ultimate parent of group.

- Disclose: (a) Amount of dividends proposed/declared before FS were authorized for issue but
not recognized as distribution during the period and the related amount per share, (b) Amount of any
cumulative preference dividends not recognized.

 Retained earnings are appropriated to the extent of the cost of the treasury shares.

Related Party – If one party has: (a) Ability to control the other party, (b) Ability to exercise significant
influence over the other party, (c) Joint control over the entity.

Control – Power over the investee/the power to govern the financial and operating policies of an entity
so as to obtain benefits.

- Ownership directly/indirectly through subsidiaries of more than half of the voting power of
entity.

Significant Influence – Power to participate in the financial and operating policy decision of an entity,
but not control of those policies.

Joint Control – Contractually agreed sharing of control over an economic activity.

Examples of Related Parties:

(a) Affiliates

(b) Associates – Entities over which one party exercises significant influence.

- Includes subsidiaries of the associate.

(c) Venturer in a joint venture.

(d) Key Management Personnel – Persons with authority and responsible for planning, directing and
controlling entity’s activities.

(e) Close Family Member of an Individual

(f) Individuals owning direct or indirectly an interest in the voting power if the reporting entity that
gives them significant influence over the entity, and close family members of such individuals.

(g) Postemployment Benefit Plans – For benefit of entity’s employees, or of any entity that is related
party to the entity.

Related Party Transaction – Transfer of resources or obligations between related parties, regardless
whether a price is charged.

- Ex: Purchase and sale of goods, property, and other asset, Rendering/receiving services, leases,
License agreement.

Related Party Disclosures

  Required where control exists irrespective of whether there have been transactions between the
related parties.
 Relationships between parents and subsidiaries shall be disclosed regardless of whether there
have been transactions between those related parties.
 If neither the entity’s parent nor ultimate controlling party produces FS available for public use,
the next most senior parent’s name shall also be disclosed.

Transactions with Government-Related Parties

 Entity is exempted from providing the normal disclosures for transactions with: (a) Government
with control, joint control/significant influence over entity. (b) Other entities controlled, jointly
controlled, or significantly influenced by the same gov’t.

In applying exemption, disclose only: (a) Govt’s name and nature of relationship with entity, (b) Info on
nature and amount of each “individually” significant transaction with the government.

 Intragroup related party transactions and outstanding balances are eliminated in the preparation
of consolidated financial statements of the group.

Pricing Policies

 Accounting recognition of a transfer of resources is normally based on the price agreed upon
between the parties

1. Uncontrolled Price Method – Sets price by reference to comparable goods sold in an economically
comparable market to a buyer unrelated to the seller.

2. Resale Price Method – Often used where goods are transferred between related parties before a
sale to an independent party is made.

- Reduces resale price by a margin, representing an amount from which the reseller would seek
to recover costs and make an appropriate profit.

3. Cost Plus Method – Seeks to add an appropriate markup to the supplier’s cost.

4. No Price Method – No price is charged, as in the case of free provision of management services and
the extension of free credit on a debt.

Events After Reporting Period – Events, whether (un)favorable, that occur between the end of
reporting period and the date on which the FS are authorized for issue.

- Subsequent Events. May require: (a) adjustment, (b) disclosure

Types of Events after Reporting Period

(a) Adjusting Events – Provide evidence of conditions that exist at the end of reporting period.

(b) Nonadjusting Events – Those indicative of conditions that arise after the end of reporting period.
  It is appropriate to adjust the FS for all events that offer clarity concerning the conditions that
existed at the end of reporting period and that occur prior to the date the FS are authorized for
issue.
 Entity must adjust amounts recognized in the FS for adjusting events that provide evidence of
conditions that existed at the end of reporting period.

Financial Statements Authorized for Issue

-When board of directors reviews that financial statements and authorizes them issue.

 In cases where an entity is required to submit its FS to the shareholders for approval after the FS
have been issued, FS are authorized for issue on the date by the board of directors and not on
the date where shareholders approve the FS.

Disclosure of Date of Authorization for Issue

 Entity shall disclose the date when the FS are authorized for issue and who gave the
authorization.
 It is important for users to know when the FS are authorized for issue because the FS do not
reflect events after this date.