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.
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.
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.
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
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
• 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.
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.
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
Errors

• Errors include the effects of:

1. Mathematical mistakes
2. Mistakes in applying accounting policies
3. Oversights or misinterpretations of facts; and
4. Fraud
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.
Relationships between accounts
 APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM DISCUSSION

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)
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
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.
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.

4. The discovery of fraud or errors that indicate that the financial

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
Disclosures

• Date of authorization for issue

• Adjusting events
• Material Non-adjusting events
 APPLICATION OF CONCEPTS
 

PROBLEM 7: FOR CLASSROOM DISCUSSION

END