Notes to Financial Statements
➢ Notes to the financial statements provide narrative description or disaggregation of items presented in the financial stateme nts and
information about items that do not quality for recognition.
➢ The main purpose of the notes to financial statements is to provide the necessary disclosures required by Philippine Financia l Reporting
Standards.
➢ PAS 1, paragraph 113, present notes in a systematic manner—the entity shall consider the effect of understandability and comparability of its
financial statements.
Specific purposes – PAS 1, par. 112
1. Present information about the basis of preparation of the financial statements and the specific accounting policies.
2. Disclose the information required by Philippine Financial Reporting Standards 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.
Systematic Order of Presenting the Notes – PAS 1, par. 114
1. Statement of Compliance (with PFRS and others)
PAS 1, par 16 provided that entity whose financial statements comply with PFRS shall make an explicit and unreserved statements of
such compliance. An entity, on the other hand, should not describe the financial statements as complying with PFRS unless they
comply with all requirements of the PFRS.
2. Significant accounting policies used
a. Measurement basis - the basis affects user's analysis of the financial statements
Measurement basis according to Revised Conceptual Framework:
i. Historical Cost
ii. Current Value - includes fair value, value in use, fulfillment value and current cost
b. Accounting policies - specific principles, methods, practices, rules, bases and conventions adopted by an entity in preparing and
presenting financial statements ; management considers whether disclosure would assist users in understanding how transactions,
other events and conditions are reflected in the financial statements.
Additional:
Disclosure of judgments used (PAS1, par. 122)- this disclosure is mandatory
The judgments management has made in the process of applying the entity’s accounting policies and that have the most significant
effect on the amounts recognized in the financial statements.
i. when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other
entities;
ii. whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and
iii. whether the contractual terms of a financial asset give rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
iv. IFRS 12 Disclosure of Interests in Other Entities requires an entity to disclose the judgments it has made in determining whether it
controls another entity
v. IAS 40 Investment Property requires disclosure of the criteria developed by the entity to distinguish investment property from
owner-occupied property and from property held for sale in the ordinary course of business, when classification of the property is
difficult
vi. Whether financial assets are to be measured at fair value or at amortized cost
Disclosure of Estimation Uncertainty (PAS 1, par. 125) - this disclosure is mandatory
An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying
amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes shall include details
a. Nature b. Carrying amount at the end of reporting period
of:
Examples:
i. in the absence of recently observed market prices, future-oriented estimates are necessary to measure the recoverable
amount of classes of property, plant and equipment
ii. the effect of technological obsolescence on inventories
iii. provisions subject to the future outcome of litigation in progress
iv. long-term employee benefit liabilities such as pension obligations
v. These estimates involves assumptions about such items as the risk adjustment to cash flows or discount rates, future
changes in salaries and future changes in prices affecting other costs.
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3. Supporting information or computation for line items presented in the financial statements, in the order in which each statem ent and
each line item is presented
4. Other disclosures, including:(1) contingent liabilities and unrecognized contractual commitments; and (2)non -financial disclosures, e.g. the
entity’s financial risk management objectives and policies.
PAS 1, par. 137, An entity shall disclose in the notes:
a. The amount of dividends proposed or declared before the financial statements were authorized for issue but not recognized as a
distribution to owners during the period, and the related amount per share; and
b. The amount of any cumulative preference dividends not recognized.
PAS 1, par. 138, An entity shall disclose the following, if not disclosed elsewhere in information published with the financi al statements:
a. The domicile and legal form of the entity, its country of incorporation and the address of its registered office (or principal place of
business, if different from the registered office);
b. A description of the nature of the entity’s operations and its principal activities; and
c. The name of the parent and the ultimate parent of the group;
RELATED PARTY DISCLOSURES - PAS 24
Related Party - a person or entity that is related to the entity that is preparing its financial statements (reporting entity).
Parties are related if one party has:
a. The ability to control the other party
Is the power over the investee or the power to govern the financial and operating policies of an entity so as to
obtain benefits. Ownership directly or indirectly of more than 50% of voting power of an entity.
b. The ability to exercise significant influence over the other party
Is the power to participate in the financial and operating policy decision but
not control of those policies. Factors evidencing significant influence:
a. Holds 20% or more of voting power
b. Representation in the Board of Directors
c. Participation in policy-making process
d. Material transactions between the investor and investee
e. Interchange of managerial personnel
f. Provision of essential technical information
c. Joint control over the entity
Is the contractually agreed sharing of control over an economic activity
d. Is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
Examples of Related Parties
1. Affiliates - Entities that directly or indirectly through one or more intermediaries, control or are controlled by or under common
control with the reporting entity.
2. Associates - entity who exercise significant influence
3. Venturer - related to the joint venture
4. Key management personnel - having authority for planning, directing, and controlling the activities of the entity; top-level management
5. Close family members of an individual/key management personnel
6. Individuals/shareholders owning directly or indirectly an interest in the voting power of the reporting entity that gives them significant
influence over the entity and close family members of such individual
7. Postemployment benefit plan for the benefit of employees of an entity, or of any entity that is related to that entity
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.
Examples of RPT, PAS 24, par. 20:
7. transfers under finance arrangements (including loans and equity contributions
1. purchases or sales of goods (finished or unfinished);
in cash or in kind);
2. purchases or sales of property and other assets;
8.
provision of guarantees or collateral;
3. rendering or receiving of services;
9. commitments to do something if a particular event occurs or does not occur
4. leases;
in the future, including executory contracts (recognized and unrecognized); and
5. transfers of research and development;
10. settlement of liabilities on behalf of the entity or by the entity on behalf of
6. transfers under license agreements;
that related party.
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DISCLOSURES, REQUIRED
➢ PAS 24, paragraph 12, requires disclosures of related party relationships where control exists irrespective of whether there have been
transactions between the related parties.
➢ PAS 24, paragraph 16, paragraph 16, provides that an entity shall disclose key management personnel compensation in total and for each of
the following categories:
a. Short-term employee benefits
b. Postemployment benefits, for example, retirement pensions
c. Other long-term benefits
d. Termination benefits
e. Share-based payment transactions, for example, share options
➢ PAS 24, paragraph 17, provides that if there have been transactions with related parties, an entity shall disclose the nature of the related
party relationship as well as information about the transaction and outstanding balances necessary for an understanding of the financial
statements.
a. The amount of the transaction
b. The amount of outstanding balance, terms, and conditions, whether secured or unsecured, and nature of consideration to be provided
in the settlement
c. The allowance for doubtful accounts related to the outstanding balance
d. The expense recognized during the period in respect of doubtful accounts due from related parties.
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.
Note: The entity is required to disclose the relationship and transaction but not the name of the related party, unless it is a major related party.
DISCLOSURES, NOT REQUIRED
• PAS 24, paragraph 3, requires disclosure of related party transactions and outstanding balances in the separate financial statements of a
parent, subsidiary, associate or venture.
• However, paragraph 4 provides that intragroup-related party transactions and outstanding balances are eliminated in the preparation of
consolidated financial statements of the group.
Transactions with Government-related parties
A reporting entity is exempted from providing the normal disclosures for transactions with:
a. A government that has control, joint control or significant influence of the entity
b. Other entities controlled, jointly controlled or significantly influenced by the same government.
In applying this exemption, the entity is required to disclose only the following:
a. The name of the government and the nature of the relationship with the reporting entity
b. The information of the nature and amount “individually” significant transaction with the government
Purpose of Related Party Disclosures
• Related party relationships are a normal feature of commerce and business
• A related party relationship could have an effect on the profit or loss and financial position of an entity. Related parties may enter into
transactions that unrelated parties would not.
• The profit or loss and financial position 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.
For these reasons, knowledge of an entity’s transactions, outstanding balances, including commitments, and relationships with related parties may
affect assessments of its operations by users of financial statements, including assessments of the risks and opportunities facing the entity.
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EVENTS AFTER THE REPORTING PERIOD - PAS 10
Events after the reporting period/Subsequent Events are those events, favorable and unfavorable, that occur between the end of the
reporting period and the date when the financial statements are authorized for issue.
Two types of events can be identified:
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 are those that are indicative of conditions that arose after the reporting period
Only requires disclosure to the notes to financial statements
Authorization of the Financial Statements for Issue
• The process involved in authorizing the financial statements for issue will vary depending upon the management structure, statutory
requirements and procedures followed in preparing and finalizing the financial statements.
• In some cases, an entity is required to submit its financial statements to its shareholders for approval after the financial statements have
been issued. In such cases, the financial statements are authorized for issue on the date of issue, not the date when shareholders approve
the financial statements.
• In some cases, the management of an entity is required to issue its financial statements to a supervisory board (made up solely of nonexecutives) for approval. In such cases, the financial statements are authorized for issue when the management authorizes them for issue to
the supervisory board.
• Events after the reporting period include all events up to the date when the financial statements are authorized for issue, even if those
events occur after the public announcement of profit or of other selected financial information
Disclosures
• If non-adjusting events after the reporting period are material, non- disclosure could influence the economic decisions that users make
on the basis of the financial statements. Accordingly, an entity shall disclose the following for each material category of non-adjusting
event after the reporting period:
– the nature of the event; and
– an estimate of its financial effect, or a statement that such an estimate cannot be made.
• An entity shall disclose the date when the financial statements were authorized for issue and who gave that authorization. If the
entity’s owners or others have the power to amend the financial statements after issue, the entity shall disclose that fact.
Going-concern Disclosure
• An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either
that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.
• Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going
concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that the
Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the
original basis of accounting.
• PAS 1 specifies required disclosures if:
– the financial statements are not prepared on a going concern basis; or
– management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s
ability to continue as a going concern. The events or conditions requiring disclosure may arise after the reporting period.
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