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Chapter 7 Notes Part 1

The document is lecture notes from an Intermediate Accounting 3 class. It discusses several key topics: 1. The relationship between notes to the financial statements and other components. The notes provide supporting information and disclosures. 2. The definitions and accounting treatments for changes in accounting policies, estimates, and prior period errors. A change in estimate is treated differently than a change in policy or correction of an error. 3. Events after the reporting period, which are divided into adjusting events that provide evidence of prior conditions, and non-adjusting events that arise after the period. Certain disclosures are required.

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288 views

Chapter 7 Notes Part 1

The document is lecture notes from an Intermediate Accounting 3 class. It discusses several key topics: 1. The relationship between notes to the financial statements and other components. The notes provide supporting information and disclosures. 2. The definitions and accounting treatments for changes in accounting policies, estimates, and prior period errors. A change in estimate is treated differently than a change in policy or correction of an error. 3. Events after the reporting period, which are divided into adjusting events that provide evidence of prior conditions, and non-adjusting events that arise after the period. Certain disclosures are required.

Uploaded by

AndreaaAAaa Tagle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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(Intermediate Accounting 3)

LECTURE AID

2019

ZEUS VERNON B. MILLAN


Chapter 7 Notes – Part 1
Related standards:
PAS 1 Presentation of Financial Statements
PAS 8 Accounting Policies, Changes in Estimates and Errors
PAS 10 Events after the Reporting Period

Learning Objectives
• State the relationship of the notes with the other
components of a complete set of financial statements.
• Define the following and give examples: (1) Change in
accounting policy, (2) Change in accounting estimate,
and (3) Error.
• Differentiate between the accounting treatments of the
following: change in accounting policy, change in
accounting estimate, and correction of prior period
error.
• Define events after the reporting period.
• State the accounting requirements for events after the
reporting period.
INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)
Order of presentation of disclosures in the Notes

1. Statement of compliance with PFRSs;


2. Summary of significant accounting policies applied;
3. Supporting information for items presented in the other
financial statements; and
4. Other disclosures.

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Objective and Scope of PAS 8

• PAS 8 prescribes the criteria for selecting,


applying, and changing accounting policies and
the accounting and disclosure of changes in
accounting policies, changes in accounting
estimates and correction of prior period errors.

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Accounting policies

• Accounting policies are the specific


principles, bases, conventions, rules and
practices applied by an entity in preparing
and presenting financial statements. These
are the relevant PFRSs adopted by an
entity in preparing and presenting its
financial statements
INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)
PFRSs

• Philippine Financial Reporting Standards


(PFRSs) are Standards and Interpretations
adopted by the Financial Reporting Standards
Council (FRSC). They comprise the following:
1. Philippine Financial Reporting Standards
(PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
INTERMEDIATE ACCTG 3 (By:
Zeus Vernon B. Millan)
INTERMEDIATE ACCTG 3 (By:
Zeus Vernon B. Millan)
• When it is difficult to distinguish a change in
accounting policy from a change in accounting
estimate, the change is treated as a change in
an accounting estimate.

• An entity shall change an accounting policy only


if the change:
1. is required by a PFRS; or
2. results to a more relevant and reliable
information about an entity’s financial
position, performance, and cash flows.

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Examples of changes in accounting policy
1. Change from FIFO cost formula for inventories to the
Average cost formula.
2. Change in method of recognizing revenue from long-
term construction contracts.
3. Change to a new policy resulting from the requirement
of a new PFRS.
4. Change of financial reporting framework such as from
PFRS for SMEs to compliance with full PFRSs.
5. Initial adoption of the revaluation model for property,
plant, and equipment and intangible assets.
6. Change from the cost model to the fair value model of
measuring investment property.
7. Change in business model for classifying financial
assets resulting to reclassification between financial
asset categories.

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Examples of changes in accounting
estimate
1. Change in depreciation or amortization methods
2. Change in estimated useful lives of depreciable assets
3. Change in estimated residual values of depreciable assets
4. Change in required allowances for impairment losses and
uncollectible accounts
5. Changes in fair values less cost to sell on non-current
assets held for sale and biological assets
6. Changes in currency exchange rates for foreign currency
denominated cash and receivables

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Errors

• Errors include the effects of:


1. Mathematical mistakes
2. Mistakes in applying accounting policies
3. Oversights or misinterpretations of facts; and
4. Fraud

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Counterbalancing vs. Non-counterbalancing errors

1. Counterbalancing errors are errors which, if remained


uncorrected, are automatically corrected or offset in the
next accounting period. Their effect on the financial
statements automatically reverses (counterbalance) in the
next accounting period.
2. Non-counterbalancing errors are errors which, if
remained uncorrected, are not automatically corrected or
offset in the next accounting period.

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Relationships between accounts

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM


DISCUSSION

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)


Events after the Reporting Period

• Events after the reporting period are “those events,


favorable or unfavorable, that occur between the end
of the reporting period and the date that the financial
statements are authorized for issue.” (PAS 10)

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Two types of events after the reporting period

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 – those
that are indicative of conditions that arose after the
reporting period

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Date of authorization of the financial statements

• This date is the date when management authorizes the


financial statements for issue regardless of whether such
authorization for issue is for further approval or for final
issuance to users.

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Examples of adjusting events:

1. The settlement after the reporting period of a court case


that confirms that the entity has a present obligation at
the end of reporting period.
2. The receipt of information after the reporting period
indicating that an asset was impaired at the end of
reporting period. For example:
i. The bankruptcy of a customer that occurs after the
reporting period may indicate that the carrying
amount of a trade receivable at the end of reporting
period is impaired.
ii. The sale of inventories after the reporting period may
give evidence to their net realizable value at the end
of reporting period

3. The determination after the reporting period of the cost of


asset purchased, or the proceeds from asset sold, before
the end of reporting period.
INTERMEDIATE ACCTG 3 (By:

4. Zeus Vernon B. Millan)


The discovery of fraud or errors that indicate that the
Examples of non-adjusting events normally requiring
disclosures:

1. Changes in fair values, foreign exchange rates, interest


rates or market prices after the reporting period.
2. Casualty losses (e.g., fire, storm, or earthquake) occurring
after the reporting period but before the financial
statements were authorized for issue.
3. Litigation arising solely from events occurring after the
reporting period.
4. Major ordinary share transactions and potential ordinary
share transactions after the reporting period.
5. Major business combination after the reporting period.
6. Announcing a plan to discontinue an operation after the
reporting period.
7. Declaration of dividends after the reporting period

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
Disclosures

• Date of authorization for issue


• Adjusting events
• Material Non-adjusting events

INTERMEDIATE ACCTG 3 (By:


Zeus Vernon B. Millan)
APPLICATION OF CONCEPTS
 

PROBLEM 7: FOR CLASSROOM


DISCUSSION

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)


OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)


END

INTERMEDIATE ACCTG 3 (By: Zeus Vernon B. Millan)

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