FAR: Notes to Financial Statements

Summary

In 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

00:00

📚 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.

05:00

🔍 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.

10:01

📝 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.

15:01

📌 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.

20:03

🏢 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.

25:04

📑 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.

Keywords

💡Financial Statements

Financial statements are formal records of a business's financial activities, including the balance sheet, income statement, and cash flow statement. They are essential for assessing a company's financial health. In the video, financial statements are the central theme, with the lecturer focusing on the notes to these statements as a means to enhance their understandability and provide additional information that does not fit in the main body of the statements.

💡Notes to Financial Statements

Notes to financial statements are supplementary information that provides context and clarification for the numbers presented in the main financial statements. They are crucial for a more comprehensive understanding of a company's financial situation. The video lecture discusses the purpose of these notes and how they support the financial statements by explaining items in more detail, such as the basis of preparation and accounting policies.

💡Accounting Policies

Accounting policies refer to the specific principles, methods, practices, rules, bases, and conventions adopted by a company in preparing and presenting its financial statements. In the script, the lecturer emphasizes the importance of disclosing these policies in the notes to ensure transparency and to guide users in understanding the financial statements, such as the measurement basis used for assets and liabilities.

💡Measurement Basis

The measurement basis in financial statements refers to the method used to determine the value of an entity's assets and liabilities. Common bases include historical cost, current cost, realizable value, and present value. The video script mentions that the entity must disclose the measurement basis used, such as historical cost, which is the most common, to help users accurately interpret the financial statements.

💡Disclosure

Disclosure in the context of financial statements involves revealing specific information about a company's financial activities, policies, and estimates that could impact the user's understanding and decision-making. The video highlights several types of disclosures, including compliance with standards, accounting policies, supporting information for line items, and other relevant details like contingent liabilities.

💡Compliance

Compliance in financial reporting means adhering to a set of rules or standards, such as the Philippine Financial Reporting Standards (PFRS) mentioned in the script. The video emphasizes that entities must make an explicit statement of compliance with PFRS in their notes to financial statements, indicating that all requirements of the applicable standards have been met.

💡Line Items

Line items in financial statements represent specific categories of financial data, such as 'cash and cash equivalents' or 'inventory'. The script explains that supporting information or computation for these line items is provided in the notes to give a more detailed breakdown of the amounts reported, which is essential for users to gain a deeper understanding of the financial position.

💡Estimates and Judgments

Estimates and judgments are inherent in the preparation of financial statements, as they involve making assumptions about future events and conditions. The video script points out that entities must disclose information about these assumptions, especially when they have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities.

💡Contingent Liabilities

Contingent liabilities are potential obligations that depend on the outcome of uncertain future events. In the script, the lecturer provides an example of a contingent liability arising from a patent infringement lawsuit, which must be disclosed in the notes to financial statements along with the entity's legal counsel's view on the case, illustrating the importance of transparency regarding potential financial impacts.

💡Non-Financial Disclosures

Non-financial disclosures refer to information that is not directly related to an entity's financial performance but may still be relevant to stakeholders' decisions. The video mentions these as part of the notes to financial statements, including examples such as contractual commitments like bonds payable, their maturity dates, interest rates, and sinking fund requirements.

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