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.