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AE221 Notes To Financial Statements: Purpose

The notes to financial statements provide additional narrative descriptions and disclosures to supplement the information presented in the financial statements. They present information on the basis of preparation, accounting policies, supporting computations, judgements, estimates, and other required disclosures. The notes are organized to include a statement of compliance, summary of significant accounting policies, supporting information, and other mandatory disclosures.

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41 views5 pages

AE221 Notes To Financial Statements: Purpose

The notes to financial statements provide additional narrative descriptions and disclosures to supplement the information presented in the financial statements. They present information on the basis of preparation, accounting policies, supporting computations, judgements, estimates, and other required disclosures. The notes are organized to include a statement of compliance, summary of significant accounting policies, supporting information, and other mandatory disclosures.

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Ren Nolasco
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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AE221

NOTES to FINANCIAL STATEMENTS


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
Purpose:
1 Present information about the basis of preparation of financial statements and
the specific accounting policies
2 Disclose the information required by Philippine Financial Reporting Standards(PFRS)
that is not presented in the financial statements
3 Provide additional information which is not presented in the financial statements
but is relevant to an understanding of the financial statements
Order:
A Statement of compliance with PFRS
B Summary of significant accounting policies used
C Supporting information or computation for line items presented in the
financial statements
D Other disclosures, such contingent liabilities unrecognized contractual
commitments and nonfinancial disclosures

A Statement of compliance with PFRS


> make an explicit and unreserved statement of such compliance in the notes

B Summary of significant accounting policies used


Accounting policies - the specific principles, methods, practices, rules, bases and
conventions adopted by an entity in preparing and presenting
financial statements.
The summary should disclose the following:
- a - Measurement basis used
> the basis on which the entity prepares the financial statements significantly
affects the users' analysis
>> historical cost - entry price or entry value
updated by depreciation,amortization, accrual or payment
>> current value
>>> fair value - exit price or exit value
>>> value in use - expect to derive from use of an asset
>>> fulfillment value - expect to transfer in paying liability
>>> current cost - cost at measurement date

- b - Accounting policies used


disclosure will assist users in understanding how transactions, other events
and conditions are reflected in the financial statements
C Disclosure of judgement
> disclose the judgements that management has made in the process of applying
accounting policies and that have significant effect on the amounts recognized
in the financial statements .
*the disclosure of information about judgement is mandatory

D Disclosure of estimation uncertainty


> disclose information about the assumptions it makes about the future and other
major sources 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.
> include the nature and carrying amount of the assets and liabilities

D Other disclosures
- a - The domicile and legal form of the entity, its country of incorporation and
the address
- b - nature of entity's operations and its principal activities
- c - name of parent and ultimate parent of the group
- d- dividends proposed or declared before the f/s were authorized for issue
amount of cumulative preference dividends not recognized

PROBLEM 3-9
1 Adjusting entries
1 Doubtfull accounts 3,000,000
Allowance for doubtful accounts 3,000,000

2 Loss on lawsuit 500,000


Estimated liability(1,500,000-1,000,000) 500,000

2 A shipping vessel of Caroline with carrying amount of P5,000,000 was completely lost at sea
because of a hurricane on February 14, 2022.
The financial statements for 2021 were authorized for issue on March 20, 2022.

There is no need to disclose the factory destroyed in the fire because the event occurred on
March 25, 2022 which is after the issuance of the financial statements for 2021 on
March 20, 2022.
AE221
RELATED PARTIES
CHAPTER 3

Related Parties
Parties are considered to be related if:
- a - The ability to control the other party
> power over the investee
> power to govern the financial and operating policies of an entity so as to
obtain benefits
> ownership directly or indirectly through subsidiaries of more than half of the
voting power of an entity
- b - The ability to exercise significant influence over the other party
> the power to participate in the financial and operating policy decision of an
entity, but not control of those policies
> gained by share ownership of 20% or more
evidence of significant influence
>> representation in board of directors
>> participation in policy making process
>> material transations between investor and investee
>> interchange of managerial personnel
>> provision of essential technical information
- c - Joint control over the entity
contractually agreed sharing of control over an economic activity
Examples of related parties:
-1 - Affiliates
> parent, subsidiary and fellow subsidiaries
*parent owns more than 50%
-2 - Associates
> the entities over which one party exercises significant influence
*owns at least 20%
-3 - Venturers
> joint control of the activities of the joint venture
*the fellow venturers are not related to each other
-4 - Other related parties
> Key management personnel
> close family members of key management personnel
> individuals or shareholders owning at least 20% members
> post employment benefit plan - retirement plan
Related party transaction
transfer of resources or obligations between related parties, regardless of whether
a price is charged

Related party disclosures


disclosure of related party relationships where control exists irrespective of whether
there have been transactions between the related parties.
Disclosures of related party transaction
disclose the nature of the related party relationship as well as information about the
transactions and outstanding balances necessary for an understanding of the
financial statements.
Unrelated parties
- two entities with commong personnel
- normal dealings
- economic dependence
- fellow venturers
A reporting entity is exempted from providing the normal disclosures with government or
other government controlled entities.
The entity will disclose only the name of the government, relationship
and information on nature and amount.

Related party disclosures not required


Intragroup related party transactions and outstanding balances are eliminated in the
preparation of consolidated financial statements.
Pricing policies
Accounting recognition of a transfer of resources is normally based on the price agreed
upon between parties
Methods:
-1 - Uncontrolled price method
-2 - Resale price method
-3 - Cost plus method
-4 - No price method

PROBLEM 3-5
Loans to officers
Dean 1,250,000
Morey 500,000

Key officers' salaries


Dean 750,000
Morey 500,000
Total 3,000,000
AE 221
EVENTS AFTER REPORTING PERIOD
Chapter 3

Types of events after the reporting period


A Adjusting events
1 Settlement of a court case after the reporting period
2 Bankruptcy ofa customer
3 cost of assets purchased or proceeds from assets sold
4 profit sharing or bonus payment
5 discovery of frauds or errors
B Non adjusting events
1 business combination
2 discontinue operations
3 major purchase and disposal of asset
4 fire destruction
5 major ordinary share transactions
6 restructuring
7 abnormally large changes in asset prices and foreign exhange rates
8 contingent liabilities
9 litigation
10 change in tax rate

PROBLEM 3-13
Profit sharing bonus 1,000,000
Doubtful accounts 500,000
Adjusting events 1,500,000

Dividend declared on Jan 31 2022


(3,000,000-1,000,000) 2,000,000
Fire loss on Mar 1 2022 2,500,000
Nonadjusting events 4,500,000

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