FAR: Notes to Financial Statements
Summary
TLDRIn this Intermediate Accounting 3 lecture, Sir Jiao explains the critical role of notes to financial statements in enhancing statement understandability. He outlines the purpose of these notes, emphasizing the need for additional information not included in the main financial statements. The lecture also covers the order of presenting items in the notes, starting with compliance with PFRS, followed by significant accounting policies, supporting information for line items, and other disclosures like contingent liabilities. The aim is to ensure financial statements are detailed, precise, and easily understood by readers with a reasonable understanding of business affairs.
Takeaways
- 📚 The purpose of notes to financial statements is to provide additional information that enhances the understandability of the financial statements and to report details that do not fit in the main body of the statements.
- 🔍 Notes are used to disclose information that is not quantitatively or qualitatively reported in other components of the financial statements, such as the statement of financial position, income statement, and cash flows.
- 📝 The notes should be presented in a systematic manner, with each item in the financial statements cross-referenced to related information in the notes.
- 📋 The notes should be detailed, precise, complete, and easily understood by readers with a reasonable understanding of business affairs.
- 📖 The objective of financial statements, including notes, is to report material items relevant to users for making informed decisions.
- 🏢 The notes must explicitly disclose the basis of preparation, such as the standards (e.g., PFRS) and accounting policies used in preparing the financial statements.
- 📝 The order of presentation in the notes includes: compliance with PFRS, summary of significant accounting policies, supporting information for line items, and other disclosures like contingent liabilities and non-financial disclosures.
- 📉 The measurement basis used in financial statements, such as historical cost or current cost, should be disclosed as it significantly affects the user's analysis.
- 🔑 Management's judgments that have a significant effect on the amounts recognized in the financial statements should be disclosed, including decisions on measurement and recognition of assets and liabilities.
- 💡 Disclosure of estimation uncertainties, such as contingent assets and liabilities, should inform users about assumptions and risks that could lead to material adjustments in the next financial year.
- 📌 Other disclosures include contingent liabilities, unrecognized contractual commitments, and non-financial information, which should be reported to provide a comprehensive view of the entity's financial situation.
Q & A
What is the primary purpose of notes to financial statements?
-The primary purpose of notes to financial statements is to provide additional information that enhances the understandability of the financial statements and does not fit in the body of the statements.
Why are notes to financial statements important for users making decisions based on financial data?
-Notes to financial statements are important for users because they provide necessary disclosures and detailed information that aids in making relevant decisions, which may not be quantitatively or qualitatively reported in other components of the financial statements.
What should be the first item disclosed in the notes to financial statements according to the script?
-The first item disclosed in the notes to financial statements should be the statement of compliance with the Philippine Financial Reporting Standards (PFRS).
What does the compliance with PFRS mean in the context of financial statements?
-Compliance with PFRS means that the financial statements have been prepared in accordance with all the requirements of each applicable PFRS, ensuring consistency and adherence to the prescribed accounting standards.
Can an entity's financial statements be considered compliant with PFRS if they only follow some of the standards?
-No, an entity's financial statements can only be considered compliant with PFRS if they comply with all requirements of each applicable PFRS, as per the standards set by PAS 1.
Outlines
📚 Introduction to Notes to Financial Statements
The video lecture begins with an introduction to the concept of notes to financial statements as part of the financial reporting process in ACC221, Intermediate Accounting 3. The lecturer, Sir Jiao, aims to explain the purpose of these notes and the order in which items should be presented within them. Notes are essential for providing additional information that doesn't fit in the main financial statements, enhancing their understandability. The lecture also encourages new viewers to like and subscribe for more content.
🔍 Understanding the Role of Notes in Financial Reporting
This paragraph delves into the role of notes to financial statements, emphasizing their function in reporting information not included in the main financial statements, such as the statement of financial position, income statement, and others. The notes are crucial for aiding users in making informed decisions. The lecture highlights the systematic presentation of notes as per the financial reporting standards, which requires cross-referencing each item in the financial statements to related information in the notes.
📝 The Structure and Content of Financial Statement Notes
The lecture continues by outlining the structure and content of notes to financial statements. It discusses the necessity of presenting an explicit statement of compliance with the Philippine Financial Reporting Standards (PFRS) and the importance of disclosing significant accounting policies used in the preparation of financial statements. The paragraph also touches on the need for providing additional information relevant to understanding the financial statements and the order of presentation for items in the notes.
📌 Chronological Order of Disclosures in Financial Statement Notes
This section of the lecture focuses on the chronological order of disclosures that should be presented in the notes to financial statements. It identifies four general components: compliance with PFRS, summary of significant accounting policies, supporting information for line items, and other disclosures such as contingent liabilities. The lecture explains the rationale behind this order and the importance of maintaining a systematic approach to note preparation, while also acknowledging that deviations may occur when necessary.
🏢 Detailed Explanation of Disclosures in Financial Statements
The paragraph provides a detailed explanation of the types of disclosures that should be included in the notes to financial statements. It discusses the explicit statement of compliance with PFRS, the summary of significant accounting policies, and the importance of disclosing the measurement basis used in financial statement preparation. The lecture also covers the disclosure of estimation uncertainties and the need for management to consider the impact of their judgments on the financial statements.
📑 Examples of Disclosures and the Importance of Note Preparation
The final paragraph of the lecture provides examples of specific disclosures that should be made in the notes to financial statements, such as the measurement basis for inventories and property, plant, and equipment. It also discusses the importance of supporting information for line items and other disclosures like contingent liabilities and non-financial commitments.
Mindmap
Keywords
💡Financial Statements
💡Notes to Financial Statements
💡Accounting Policies
💡Measurement Basis
💡Disclosure
💡Compliance
💡Line Items
💡Estimates and Judgments
💡Contingent Liabilities
💡Non-Financial Disclosures
Highlights
Introduction to the lecture on notes to financial statements in ACC221 Intermediate Accounting 3.
Objective to understand the purpose of notes to financial statements and their order of presentation.
Notes to financial statements provide additional information to enhance understandability.
Explanation of how notes report information not fitting in the main financial statements.
Requirement for notes to be detailed, precise, complete, and easily understood.
Notes should be presented systematically and cross-referenced with the main financial statements.
Purpose of notes to provide necessary disclosures as required by PFRS.
Details on the disclosure of the basis of preparation and accounting policies in notes.
Order of presentation in notes: compliance with PFRS, accounting policies, supporting information, and other disclosures.
Chronological arrangement of disclosures to assist users in understanding and comparing financial statements.
Explanation of the need for systematic preparation of notes even if the order varies.
Importance of explicit and unreserved compliance statement with PFRS in notes.
Summary of significant accounting policies and their impact on financial statement preparation.
Disclosure of measurement basis used in financial statements, such as historical cost.
Requirement to disclose judgments made in applying accounting policies with significant effects.
Disclosure of estimation uncertainties and their potential material adjustments to asset and liability amounts.
Supporting information for line items in financial statements, providing detailed breakdowns.
Other disclosures include contingent liabilities, unrecognized contractual commitments, and non-financial disclosures.
Examples of how to disclose contingent liabilities and their associated conditions and probabilities.
Instructions for students to comment the order of disclosures and engage with the lecture content.
Conclusion summarizing the importance of understanding the preparation and purpose of financial statement notes.
Transcripts
hello guys good day
welcome to another video lecture in
acc221
intermediate accounting 3. i am your
lecturer for this course sir jiao and in
this particular video lecture
we will be discussing another component
of your financial statements
which is your notes to financial
statements
so the objective of our lecture for
today
is to know the purpose
of the notes to financial statements and
to identify the order of the
presentation
of the items to be reported into your
notes to
financial statements all right so by the
way if you're new to my channel
please don't forget to hit the like
button and
subscribe my channel alright so let's
start
[Music]
we have here um the concept of
statement or your notes to financial
statement
so this item of your financial statement
contain
information in addition to that
presented in the statement of financial
position
income statement statement of
comprehensive income statement of
changes and equity and
cash flows so in other words notes to
financial statements are used to report
information
that does not fit in the body of
statements in order to enhance
the understandability of the statements
so as we all know there are several
information that is required by a user
of a financial statement in order for
them to be aided
in making relevant decisions so there
are items which are not reported
in other components of your financial
statements
quantitatively or qualitatively
so all of these information which are
not
um disclosed in the face of the
financial statements
from the items like statement of
financial position
comprehensive income changes and equity
and cash flows
will be reported statement or note to
financial statements so
notes provides additional information
and help clarify
the items presented in the financial
statements
as the standard on the presentation
financial statement provides
that an entity shall as far as
practicable
present notes in a systematic manner
all right so each item in the face of
the statement of financial position
income statement stated of comprehensive
income statement of changes and equity
and statement of cash flows shall be
cross-referenced to any
related information in the notes so
later guys we will
um be discussing what are the contents
of your note 2 financial statements and
how
it could corroborate with the inputs
that be
that that that obviously
is reported in your other financial
statements
so the notes of financial statement
shall be highly detailed
precise complete and easily
understood by a reader who has a
reasonable understanding
of business affairs and is willing to
study
the financial statements okay so
again um as much as possible
the standard has provided that this fs
should be understandable no
to any user of a financial statement
that is willing to study the
financial statements okay so generally
the objective of
your financial statement guys is to
report other items
which are material to be
um material to the users of the
financial statement in order for them to
really
generate a more relevant decision
based from the financial statements all
right so
the purpose of notes to financial
statement is to provide the necessary
disclosures
required by the pfrs specifically
the standard pass one paragraph one one
two provides that the notes to the
financial statements
shall letter a present information about
the basis of preparation of the
financial statements
and the basic accounting policies used
meaning it is in the statement of an
uh it is in the notes to financial
statements where
the accountant will disclose on what
are these standards which are
used in the preparation of the financial
statements
so obviously in the philippines the
preparation of the financial statements
should be in accordance with pfrs so in
this case
the notes would the notes should
explicitly
um disclose what are the standards no or
specific accounting policies used
that is used in you know preparation of
the financial statements
letter b disclose the information
required by the pfrs
that is not presented in the financial
statement so as mentioned
notes to financial statements will be
disclosing to the users
all those relevant informations which
are not presented in other components of
your
financial statements may it be
quantitative or qualitative information
and letter c the purpose of your
financial statement is to
ah notes to financial statement is to
provide additional information
which is not presented in the financial
statement but is relevant
to an understanding of the financial
statements okay so let's proceed this
time with the order of the presentation
of the items to be reported in the notes
so there is a chronological arrangement
of the disclosures to be presented into
your
noto financial statement so paragraph
114
of past one presentation standards of
your financial statements
provides that an entity normally
presents notes in the following order
to assist users understand the financial
statements and to compare them
with financial statements of other
entities so there are four
general components that is to be
reported into your notes to financial
statements and they are reported into
this chronological order number one is
the statement of compliance with the
pfrs
number two or letter b summary of
significant accounting policy policies
that is used in the preparation of your
financial statements letter c supporting
information or computation for line
items presented in the financial
statements
so for example guys as we all know that
let us say
in your statement of financial position
we report
items per line item so that means we
report
um different accounts in a long
basis so for example cash and cash
equivalents
so in that line item alone there are
other accounts that is included in that
one line item
so in this supporting information or
computation for line items
so whatever is the component of that
cash and cash equivalent
whatever is the details of that cash and
cash equivalents
will be reported in these components at
note 2 financial statements so for
example your cash and cash equivalents
includes an aggregate amount of 1
million
but as a user of the financial statement
or a reader of a financial statement
we need to have a detailed information
as to
where that 1 million pesos coming from
or what is the details of that 1 million
so in the notes to financial statement
we will report for example
um cash in bank 500 000
petit cash fund 200 000 um revolving
fund for 300 000
that makes it a million so in that sense
the users of the financial statement
will now have more information on
detailed
um data as to what is presented
say new hang statement of financial
position and other
components of your financial statements
and letter d
other disclosures such as contingent
liabilities
and recognized contractual commitments
and non-financial disclosures
so again these four should be
chronologically arranged in order
number one statement of compliance with
pfrs
followed by the summary of significant
accounting policies used
and followed by supporting information
or competition for line items
presented in the financial statements
and lastly
other disclosures such as contingent
liabilities
unrecognized contractual commitments and
non-financial
disclosures all right now in some
circumstances
it may be necessary to or
it may be necessary or desirable
to vary the order of specific items
within the notes
however the entity must retain
systematic
and structure of the notes as far as
practicable
where this order may not be followed
but it should always be considered by
the preparers of the financial
statements
that these notes to financial statements
should be prepared systematically all
right
but it is suggested since um the
standard has
you know explicitly stated the order of
the contents of your notes to financial
statements
then therefore must um might as well
follow
the order in the preparation of our
notes to financial statements but
that does not actually hinder preparers
to
somehow deviate with that order of
presenting the notes to financial
statements as long as
it is presented systematically as far as
practicable all right so let's let us
discuss
um each of these um
notes that will be disclosed disclosed
notes to financial statement so the
first
disclosure is the compliance with pfrs
so as we all know guys that the
preparation of your financial statement
should always be in
accordance with the pfrs so the first
order or the first item that will really
be disclosed into your notes to
financial step
notes to financial statements is really
the explicit
statement that the entity has followed
the
pfrs in preparing
its financial statements all right so
past one paragraph 16 provides that an
entity
whose financial statements comply with
pfrs
shall make an explicit and unreserved
statement of such compliance in the
notes so again if the entity has
prepared their fs
strictly in compliance with pfrs so they
would really state that for example
abc company has prepared their financial
statements in accordance with pfrs
an explicit and unreserved statement of
such compliance
an entity shall not describe financial
statements as complying with pfrs
unless they comply with all requirements
of each applicable
pfrs all right so it means
that compliance with pfrs is
compliance with every standards provided
provided by this framework all right so
it doesn't mean that you have just
followed a particular standard
um by the pfrs you may now
um considered compliant with pfrs
according to the standard
you are compliant with pfrs if all of
the provisions of this framework are
followed
no are observed in the preparation of
these financial statements
so the first item that will be disclosed
freely into your notes of financial
statement
is the statement of compliance with pfrs
all right so the second one guys is the
summary of significant accounting
policies used so obviously
no there are several accounting policies
that is used in the preparation of your
financial statements
so accounting policies these are the
specific principles
methods practices rules bases and
conventions adopted by the entity
in preparing inp and presenting
financial
statements so accounting standards set
out the required recognition
and measurement principles that an
entity shall follow
in preparing its financial statements
and shall
often prescribe the accounting policies
to be
adopted so for example um significant
accounting policies used are
the measurement basis so for example
whether the entity used historical cost
current
cost or whatever measurement basis that
is used in
preparation of your financial statement
so for example in
accounting for the inventories whether
the entity has used
weighted average method first in first
out or last in first out
so that will be properly disclosed in
under accounting
policies all right so all other
important items
um including the measurement basis and
the accounting policies
should be disclosed in the financial
statements which are again
relevant to an understanding of
your financial statement all right
so let's proceed this time with the
disclosure of measurement basis
so as what i have mentioned earlier it
is important for an
entity to inform users of measurement
basis used
in the financial statements because the
basis on which the entity prepares the
financial statement
is significantly affecting the user's
analysis
so the measurement bases include
historical cost current cost
realize realizable value or present
value
but the most common measurement basis
that is used in
preparation of your financial statement
is really on historical cost
so um whatever measurement basis that is
used by the entity whether it's
historical correct or realized
realizable value or even
present value should properly be
disclosed into your
notes to financial statements as well as
as what i have mentioned earlier
those accounting policies so in deciding
whether a particular accounting policy
should be disclosed
management shall consider whether the
disclosure would assess
would assist users
in understanding how transactions other
events and conditions are reflected in
the financial statements
so disclosures of accounting policies
especially useful
to users when those policies are
selected from alternatives
allowed in philippine financial
reporting
standards all right so again um
for example of the accounting policies
are
let's say the manner of depreciating
your inventor depreciating your
property platinum equipment and all
other
um and all other depreciable assets
not are required really to um to be
reported into your
financial statements okay so past one
paragraph
122 provides that 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 been
significant
effect in the amounts recognized in the
financial statements
so specifically management makes
judgments in determining the following
for example
whether financial assets are to be
measured at fair value or
at amortized cost or whether
substantially all the significant risk
and the rewards of
ownership of the leased asset are
transferred to the lessee
or whether in substance particular sale
of goods
or product financing arrangement and
therefore do not give rise to
revenue okay so these are
um considered as disclosure of
judgements which are also this to be
disclosed
some summary of significant accounting
policies used in an npt alright
so another item to be disclosed is the
disclosure of estimation
warranty so pass one paragraph 125
provides guys that
an entity shall disclose information
about the assumptions
it makes about the future and major
sources of uncertainty at the end of
reporting period
that have a significant risk of
resulting in a material adjustment
to the caring amount of assets and
liabilities within the next financial
year so with respect to those assets and
liabilities
the notes shall include the nature and
carrying
amount of the assets and liabilities
at the end of the reporting period
all right so um very good exam example
of this disclosure
um of of this disclosure of estimation
of uncertainty guys
are um of course the estimation of
your contingent assets and your
contingent
liabilities okay
so of course lastly
no the third um
of course in the order we have there the
number one your statement of clients
with pfrs
number two summary of significant
accounting policies
and number three don't forget the
supporting information or computation
for line items presented in the
financial statements
and lastly your other disclosure so
other disclosures
includes your contingent liabilities and
recognized construction commitments and
non-financial
disclosures so
these four are really the important
items that
um what no what includes to be reported
into your notes to
financial statements okay so important
uh we should be aware of what are the
items to be reported
notes to financial statement so we have
here some
notes to financial statement guys so
again
we have the first note no number one
talaga in the order is the compliance
with
pfrs for example the explicit and
unreserved statement
of the compliance with pfrs can be
worded in this manner
like the financial statements have been
prepared in compliance
with the philippine financial reporting
standards and rules and regulations of
the philippine securities and exchange
commissions
all right and the accounting policies
adopted in the preparation of financial
statements
have been applied on a consistent
basis so commonly
it is a uniform statement to all um
entities no complying with the pfrs
in the presentation of their financial
statements
all right so that is note number one
another note guys
note number two is the summary of our
significant accounting policies used
so example of this note are the
measurement basis so the financial
statements have been prepared on the
basis of historical cost
so there is an explicit statement as to
the measurement basis so in this case
for example the fs
was presented or was prepared based on
historical cost
except where stated do not take into
account changing
prices and current cost of non-current
assets also examples
inventory so inventories are measured at
lower of five for cost and net
realizable
value so lc frv and gamet inventory
okay another significant accounting
policy in terms of property plant and
equipment
property plot and equipment are recorded
at cost so that means
ppe and ppa components
are recorded at cost so the straight
line method
is used in recording depreciation on the
basis of
estimated useful life of the assets
so
so another guys is um we have here
for example note 3 so the third in the
order is the supporting information or
computation
for line items or let us say our
inventory
so obviously guys let us say you are
preparing for your financial statements
for the year ending december 31 2019
so obviously there is only a one line
item
presenting for your inventories so your
line item will only report
inventories totaling 6.2 million but
this idea or this information might
be somehow lacking
in the eyes of our you know
users of fs or readers of fs without the
detailed
um aggregate or detailed details
of that 6.2 na aggregate the value so
that means it is important for us to
report also
the components of that six point two as
a geek
and six point two so that will also be
reported some notes to
financial statements all right so for
example your 62 is coming from
finished goods of 3 million goods in
process
of 2 million raw materials of 1.5
manufacturing supplies of 400 and there
is actually an allowance for inventory
write down of
700 000 that makes it 6.2
million take note guys this is very
important
no in terms of you know um
considering um considering
the amount of inventory level that is
maintained by
the mpp okay so that is also important
so that is
the third order in the
notes two financial statements and
lastly guys
your last note is your i know your other
disclosures obviously your other
disclosures
includes contingent liabilities
unrecognized contractual commitments and
non-financial disclosures
for example if there's a contingent
liability you should properly disclose
it this way so let's
example let's have an example the entity
is a defendant in a patent infringement
suit seeking damages
of 2 million so we have a contingent
liability here of two million
so the suit is still pending and the
entities legal counsel
firmly believe that the case will not
prosper all right so there is actually
an information about that specific
contingent liability because take note
there is a condition contingent
liability to be reported into your
statement of financial position
but as to um the the probability of
losing that lawsuit or winning that
lawsuit
will be stated in these notes to
financial statements so in this case for
example
the legal counsel of the entity firmly
believes sorry for the spelling
that the case will not prosper so that
means there is a tendency that
in the next accounting period the
recorded contingent liability will be
reversed because um again
the case is somehow believed not to
prosper
or depending on the result of
the cases all right so
also it includes um
[Music]
non-financial disclosures and
contractual commitments in this case
um it includes the bonds payable of 5
million
will mature on december 31 2022
it pays an annual interest of 12 on june
30 and december 31
and the bonds require sinking fund
deposit of
1 million annually starting december 31
of
2019 all right so these are the
important disclosures guys that we need
to
remember and um be familiar
of course in preparing for our financial
statements all right so again
those are the items necessary
not to remember in preparing for our
financial statements
so again question
what is the order of disclosure in the
notes to financial statements so i have
identified four earlier
so again to make sure that everyone is
going through the lecture please comment
down
in the comment section below the order
of disclosures
to be of course presented into your
notes to financial statements and let us
know
who are again among you guys my students
can go up to this level of our video
lecture so i hope that we have um
considered and
gained knowledge about the preparation
of our notes to financial statements and
the purpose of our
financial statement so if you have more
questions
um clarifications and additional inputs
you may reserve that and present that
during our
virtual class that's it for this lecture
guys thank you very much
and god bless us all
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