Ch. 7 - Notes Pt. 1 Flashcards
Provides information to those presented in the financial statements
Notes
Integral part of a complete set of financial statements
Notes
Complete structure of Notes:
- General information
- Statement of compliance with PFRSs
- Summary of significant accounting policies
- Breakdown of line items
- Other disclosures required by PFRSs
- Other disclosure not required by PFRSs but management deems relevant
Specific principles, rules & practices applied by an entity in preparing & presenting financial statements
Accounting policies
Hierarchy to be followed by management:
Shall:
1. Requirements in other PFRSs dealing with similar transactions
2. Conceptual Framework
May:
1. Pronouncements issued by other standard-setting bodies
2. Other accounting literature
PAS 8 permits change in accounting policy only if:
Change is:
1. required by PFRSs
2. results in reliable and more relevant information
Usually results from a change in a measurement basis
Change in accounting policy
Change in accounting policies are accounted for using the following order of priority:
- Transitional provision, if any
- Retrospective application, in the absence of transitional provision
- Prospective application, if retrospective application is impracticable
Specifically deals with that accounting policy
Transitional provision
Adjusting the opening balance of each affected component of equity
Retrospective application
Means cannot be done after making every reasonable effort to do so
Impracticable
If the other standard-setting body amends the adopted pronouncement and entity decides to adopt the amended version
Voluntary change in accounting policy
Voluntary change in accounting policy is accounted for by
Retrospective application
Change that results in financial statements that are those of a different reporting entity
Change in reporting entity
Change in reporting entity is limited mainly to:
- presenting combined financial statements in place of financial statements of individual entities
- changing specific subsidiaries that make up the group of entities
- changing the entities included in combined financial statements
Change in reporting entity is accounted for by
Retrospective application
PAS 8 mentions only 2 accounting changes:
- Change in accounting policy
- Change in accounting estimate
Many items in the financial statements cannot be measured with precision but only through
estimation
Essential part of financial reporting and does not undermine reliability of information
Estimates
Following requires estimation (5)
- NRVs
- Depreciation
- Bad debts
- FV of assets & liabilities
- Provisions
Adjustment for the carrying amount of asset/liability or amount of the periodic consumption that results from assessment of present status and expected future benefits
Change in accounting estimate
Results from changes on how expected inflows/outflows of economic benefits are realized from assets or incurred on liabilities
Change in accounting estimate
If change is difficult to distinguish between those two, change is treated as:
Change in accounting estimate
Change in accounting estimate is accounted for by
Prospective application
Recognizing the effects of the change in profit or loss
Prospective application
Misapplication of accounting policies, mathematical mistakes, or misinterpretations of facts, and fraud
Errors
Cause the financial statements to be misstated
Material errors
Fraud
Intentional errors
Errors can be:
- Error of commission
- Error of omission
Doing something wrong
Error of commission
Not doing something that should have been done
Error of omission
2 types of errors according to period of occurrence:
- Current period errors
- Prior period errors
Errors in the current period that were discovered during or after the current period but before authorization of FS; SIMPLE CORRECTED BY CORRECTING ENTRIES
Current period errors
Errors in one or more prior periods that were discovered either during or after the current period but before authorization of FS; CORRECTED BY RETROSPECTIVE RESTATEMENT
Prior period errors
Applying new accounting policy as if policy had always been applied
Retrospective application
Correcting a prior period error as if the error had never occurred
Retrospective restatement
Closing entries have not yet been made; NOMINAL ACCOUNTS CAN STILL BE USED IN CORRECTING ENTRIES
‘Books still open’
Closing entries have already been made; ONLY REAL ACCOUNTS ARE USED IN CORRECTING ENTRIES
‘Books closed’
Types of Errors
- Errors in principle
- Clerical and similar errors
Lack of knowledge of accounting standards, misuse of available information, or misinterpretation of accounting standards
Errors in principle
Intentional misstatement of financial statements is called
Fraudulent financial reporting
Include mathematical mistakes, oversights or misinterpretation of facts
Clerical and similar errors
The number of digits is incorrectly increased or decreased
Transplacement error
When digits in an amount are interchanged
Transposition error
Accountant forgot to record a transaction
Error of omission
Accountant recorded a transaction twice
Error of commission
Erroneous credit is compensated by the erroneous debit
Compensating errors
Bug in the computer program
Accounting system error
Errors affecting both SOFP and SCI are either:
a. Counterbalancing errors
b. Non-counterbalancing errors
Errors, if remained uncorrected are automatically corrected in next accounting period
Counterbalancing errors
Errors, if remained uncorrected, are not automatically corrected in next accounting period
Non-counterbalancing errors
Ending inventory : Profit
Direct relationship
Beginning inventory & Purchases : COGS
Direct relationship
Beginning inventory & Purchases : Profit
Inverse relationship
Ending inventory : COGS
Inverse relationship
Asset-related account : Profit
Direct relationship
Asset-related account:
> Error on prepaid asset
Error on accrued income
Liability-related account : Profit
Inverse relationship
Liabilty-related account:
> Error on unearned income
Error on accrued expense
Current assets - Current liabilities
Working Capital
If current assets are understated, working capital is
understated
If current liabilities are understated, working capital is
overstated
Events, favorable and unfavorable, that occur between the end of reporting period and date when financial statements are authorize for issue
Events after the Reporting Period
Date when management authorizes financial statements for issue regardless of whether it is final or subject to further approval
Date of authorization of the financial statements
2 Types of Events after the Reporting Period
- Adjusting events after the reporting period
- Non-adjusting events after the reporting period
Events that provide evidence of conditions that existed at the end of the reporting period
Adjusting events after the reporting period
Events that are indicative of conditions that arose after the reporting period; disclosed if they are material
Non-adjusting events after the reporting period
Disclosure in the notes:
a. Date of authorization for issue
b. Update on the disclosures that includes effects of adjusting events
c. Non-adjusting events that are material
i. nature of event
ii. estimate of its financial effect, or a statement that such an estimated cannot be made
