NOTES (Part 1)

CONCEPT:

Notes contain information in addition to that presented in the statement of financial position, income
statement, statement of comprehensive income, statement of changes in equity and statement of cash
flows.

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.

*As we all know, there are several information that is required by a user of a financial statements in order
for them to be aided in making relevant decisions.

There are items which are not reported in other components of financial statements, quantitatively or
qualitatively. All of this information which are not disclosed in the face of the financial statements from
the items like statement of financial position, income statement, statement of comprehensive income,
statement of changes in equity and statement of cash flows will be reported to notes to financial
statements.

Notes provide additional information and help clarify the items presented in the financial statements. PAS
1, paragraph 113, provide that an entity shall, as far as practicable, present notes in a systematic manner.

Each item on the face of the statement of financial position, income statement, statement of
comprehensive income, statement of changes in equity and statement of cash flows shall be cross-
referenced to any related information in the notes.

The notes to 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.

PURPOSE OF NOTES TO FINANCIAL STATEMENTS

*Generally, the objective of financial statement is to report other items which are material to the users of
the financial statements in order for them to generate more relevant decision based from the financial
statements.

The purpose of notes to financial statements is "to provide the necessary disclosures required by
Philippine Financial Reporting Standards." (PFRS)

Specifically, PAS 1, paragraph 112, provides that the notes to financial statements shall:

a. Present information about the basis of preparation of the financial statements and the specific
accounting policies used.
*It is in the notes to financial statements, wherein the accountant will disclose on what are the standards
which are used for the preparation of the financial statements. Obviously in the Philippines, the
preparation of the financial statements should be in accordance with PFRS.

The notes should explicitly disclose what are the standards or specifically accounting policies used
specific accounting policies that is used in preparation of the financial statements.

b. Disclose the information required by Philippine Financial Reporting Standards that is not presented in
the financial statements.

*As mentioned, notes to financial statements will be disclosing to the users

all those relevant information which are not presented in other components of your financial statements,
may it be quantitative or qualitative information.

c. Provide additional information which is not presented in the financial statements but is relevant to an
understanding of the financial statements.

ORDER OF PRESENTING THE NOTES.

There is a chronological arrangement of the disclosures to be presented into

your notes to financial statement.

PAS 1, paragraph 114, 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;

There are four general components that is to be reported into your notes to financial statements and they
are reported into this chronological order:

a. the statement of compliance with the PFRS

b. summary of significant accounting policies that is used in the preparation of your financial statements

c. supporting information or computation for line items presented in the financial statements

Example.
In your statement of financial position, we report items per line item so that means, we report different
accounts in a lump basis. (e.g., cash and cash equivalents) So in that line item alone, there are other
accounts that is included in that one-line item.

*In this supporting information or computation for line items, 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 notes to financial statements.

Example.
Your cash and cash equivalents include an aggregate amount of P1M 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
P1M is coming from or what is the details of that P1M. In the notes to financial statement, we will report
for example: cash in bank 500 000, petty cash fund 200 000, revolving fund for 300 000, that makes it a
million.

In that sense, the users of the financial statement will now have more information on detailed data as to
what is presented in your statement of financial position and other components of your financial
statements.

d. other disclosures such as contingent liabilities and recognized contractual commitments and non-
financial disclosures.

TAKE NOTE. These four should be chronologically arranged in order.

In some circumstances, 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.

*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. But it is suggested
since the standard has explicitly stated the order of the contents of your notes to financial statements then
therefore might as well follow the order in the preparation of our notes to financial statements.

*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.

ORDER OF PRESENTING THE NOTES

*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 statements is really the
explicit statement that the entity has followed the PFRS in preparing its financial statements.

a. Compliance with PFRS

PAS 1, 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.

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.

Meaning, compliance with PFRS is compliance with every standard provided by this framework.
The first item that will be disclosed freely into your notes of financial statement is the statement of
compliance with PFRS.

b. Accounting Policies

There are several accounting policies that is used in the preparation of your financial statements.

Accounting policies - these are the specific principles, methods, practices rules, bases and conventions
adopted by the entity in preparing and presenting financial statements.

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 policy to be adopted.

Example. (Significant Accounting Policy used are the measurement basis):

Whether the entity used historical cost, current cost or whatever measurement basis that is used in
preparation of your financial statement, e.g., accounting for the inventories; whether the entity has used
weighted average method, first in first out or last in first out, that will be properly disclosed in under
accounting policies.

The summary of significant accounting policies shall disclose the ff:

a. The measurement basis used in preparing the financial statements.
b. The accounting policies used that are relevant to an understanding of the financial statements.

Disclosure of Measurement Basis.

+ 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

+ The measurement bases include historical cost, current cost, realizable value or present value. The most
common measurement basis is historical cost.

*Whatever measurement basis that is used by the entity whether it's historical, current or realizable value
or even present value should properly be disclosed into your notes to financial statements as well as those
accounting policies.

+ In deciding whether a particular accounting policy should be disclosed management shall consider
whether the disclosure would assist users in understanding how transactions, other events and conditions
are reflected in the financial statements.

+ Disclosures of accounting policies is especially useful to users when those policies are selected from
alternatives allowed in Philippine Financial Reporting Standards.

Example of the accounting policies.

The manner of depreciating your property, plant and equipment and all other
depreciable assets are required to be reported into your financial statements.
Disclosure of Judgments.
PAS 1, 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.

Specifically, management makes judgments in determining the following:

a. whether financial assets are to be measured at fair value or at amortized cost.
b. whether substantially all the significant risk and the rewards of ownership of the leased asset are
transferred to the lessee.
c. whether in substance particular sale of goods are product financing arrangement and therefore do not
give rise to revenue.

*These are considered as disclosure of judgements, which are also this to be disclosed in summary of
significant accounting policies used in an entity.

Disclosure of Estimation Uncertainty.

PAS 1, paragraph 125, provides 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 carrying amount of assets and liabilities within the next
financial year.

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.

Example.
The estimation of your contingent assets and your contingent liabilities.

AGAIN.
There are four general components that is to be reported into your notes to financial statements and they
are reported into this chronological order:

a. the statement of compliance with the PFRS

b. summary of significant accounting policies that is used in the preparation of your financial statements

c. supporting information or computation for line items presented in the financial statements.

d. other disclosures such as contingent liabilities and recognized contractual commitments and non-
financial disclosures.
*These four are really the important items that what includes to be reported into your notes to financial
statements. It is important that we should be aware of what are the items to be reported to the notes to
financial statements.
SAMPLE OF NOTES TO FINANCIAL STATEMENTS.

Note 1 - Compliance with PFRS.

The explicit and unreserved statement of the compliance with PFRS can be worded in this manner.

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

The accounting policies adopted in the preparation of financial statements have been applied on a
consistent basis.

Commonly, it is a uniform statement to all entities no complying with the PFRS in the presentation of
their financial statements.

Note 2 - Significant Accounting Policies

Measurement Basis - the financial statements have been prepared on the basis of historical cost, and
except where stated, do not take into account changing prices and current cost of non-current assets.

Inventories - Inventories are measured at the lower of FIFO cost and net realizable value.

Property plant and equipment - PPE are recorded at cost. The straight-line method is used in recording
depreciation on the basis of estimated useful life of the assets.

Note 3 - Inventories

*So, the third in the order is the supporting information or computation

for line items or let us say, our inventory.

Example.
You are preparing for your financial statements for the year ending December 31, 2019, obviously, there
is only a one-line item presenting for your inventories. So, your line item will only report inventories
totaling 6.2M but this idea or this information might be somehow lacking in the eyes of our users of fs or
readers of fs without the detailed aggregate or details of that 6.2M na aggregate value.

Meaning, it is important for us to report also the components of that 6.2M, and that will also be reported
to notes to financial statements.

This is very important in terms of considering the amount of inventory level that is maintained by the
entity.
Note 4 - Contingent Liability

Obviously, other disclosures include contingent liabilities, unrecognized contractual commitments and
non-financial disclosures.

If there's a contingent liability, you should properly disclose it this way:

Example.
The entity is a defendant in a patent infringement suit-seeking damages of P2M. [so we have a contingent
liability here of P2M] The suit is still pending and the entity's legal counsel firmly believe that the case
will not prosper.

*There is actually an information about that specific contingent liability because take note, there is a
contingent liability to be reported into THE statement of financial position. But as to the probability of
losing that lawsuit or winning that lawsuit will be stated in these notes to financial statements.

Meaning, there is a tendency that in the next accounting period the recorded contingent liability will be
reversed because the case is somehow believed not to prosper or depending on the result of the cases.

Note 5- Long Term Debt

It includes non-financial disclosures and contractual commitments, in this case, it includes the bonds
payable of P5M will mature on December 31 2022, pay an annual interest of 12% on June 30 and
December 31. The bonds require sinking fund deposit of P1M annually starting December 31 of 2019.

*These are the important disclosures that we need to remember and be familiar in preparing for our
financial statements.

AGAIN, WHAT IS THE ORDER OF DISCLOSURE IN THE NOTES TO FINANCIAL

STATEMENTS?

a. the statement of compliance with the PFRS

b. summary of significant accounting policies that is used in the preparation of your financial statements

c. supporting information or computation for line items presented in the financial statements.

d. other disclosures such as contingent liabilities and recognized contractual commitments and non-
financial disclosures.