Chapter 3

 Notes to financial statements provide a narrative description or

disaggregation of items presented in the financial statements
and information about items that do not qualify for recognition
 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.
 PAS 1, par. 113 provides that an entity shall as far as practicable,
present notes in a systematic manner.
 The notes to financial statements shall be highly detailed,
precise, complete and easily understood by a reader who ahs a
reasonable understanding of business affairs .
PAS 1 par 112 provides that the notes to financial statements shall:
1. Present information about the basis of preparation of the financial
statements and the specific accounting policies used.
2. Disclose the information required by PFRS that is not presented in
the F/S
3. Provide additional information which is not presented in the F/S
but is relevant to an understanding of the F/S

Order of presenting Notes

a. Statement of compliance with PFRS
b. Summary of significant accounting policies used
c. Supporting information or computation for line items presented in
the F/S
d. Other disclosures such as contingent liabilities, unrecognized
contractual commitments and nonfinancial disclosures.
 PAS 1, par 16 provides that an entity whose F/S comply with
PFRS shall make an explicit and unreserved statement of
such compliance in the notes.
 Accounting policies are defined as the specific principles,
methods, practices, rules, bases and conventions adopted by
an entity in preparing and presenting F/S
 Significant accounting policies
 The summary of significant accounting policies shall disclose
the following:
a. The measurement basis used in preparing the F/S
b. The accounting policies used that are relevant to an
understanding of the F/S
 Disclosures of judgment
PAS 1, par 122 provides that an entity shall disclose the judgments that
management has made in the process of applying accounting policies and that
have a significant effect on the amounts recognized in the F/S
Disclosures of estimation uncertainty
PAS 1, par 125 an entity shall disclose information about the assumptions it makes
about the future and other major sources of uncertainty at the end of the
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.
Other disclosures
PAS 1 par 138, provides that an entity shall disclose the following:
a. Domicile and legal form of the entity, its country of incorporation and the
address of the business
b. Nature of the entity’s operations and its principal activities
c. The name of the parent and the ultimate parent of the group.
Par 137 provides that an entity shall disclose the following
1. The amount of dividends proposed or declared before the financial statements
were authorized for issue but not recognized as distribution during the period
and the related amount per share.
2. The amount of any cumulative preference dividends not recognized.

RELATED PARTIES

In accordance with PAS 24, par.9 the following terms are defined:

Related Party – parties are considered to be related if one party has

a. The ability to control the other party
b. The ability to exercise significant influence over the other party
c. Joint control over the entity.
Related party transaction is a transfer of resources or obligations between related
parties, regardless of whether a price is charged.
CONTROL – ownership, directly or Examples of related parties
indirectly through subsidiaries of 1. Entities that directly or indirectly
more than half of the voting power through one or more
of an entity, or a substantial interest intermediaries, control or are
in voting power and the power to controlled by or under common
direct by statute or agreement, the control with the reporting entity.
financial and operating policies of (AFFILIATES parent, the subsidiary
the management of the entity. The and fellow subsidiaries)
power to govern 2. Associates – entities for which the
investments are accounted for by
SIGNIFICANT INFLUENCE is the power the equity method. If the
to participate in the financial and investment in ORDINARY SHARES
operating policy decision of an entity is 20% to 50% the equity method is
but not control of those policies. i.e. used in accounting for the
share ownership of 20% or more. investment.
3. Venturer in a joint venture
JOINT CONTROL – is the contractually 4. Key management personnel
agreed sharing of control over an 5. Close family members of an
economic activity. individual
PAS 24, par 20 provides examples of Transactions with Government –related
related party transactions: entities
1. Purchase and sale of goods
2. Purchase and sale of property and Under the amended version of PAS 24, a
other asset reporting entity is exempted from
3. Rendering or receiving services providing the normal disclosures for
4. Leases transactions with:
5. Transfer of research and 1. A government that has control, joint
development control or significant influence over
6. License agreement the entity
7. Finance arrangements, including 2. Other entities controlled, jointly
loans and equity contributions in controlled or significantly influenced
cash or in kind. by the same government.
8. Guarantee and collateral
9. Settlement of liabilities on behalf
of the entity or by the entity on
behalf of another party
Accounting recognition of a transfer PAS 24 did not provide for the
of resources is normally based on measurement of related
the price agreed upon between
the parties. Between unrelated
party transactions.
parties, the price is an arm’s However, a variety of
length price. Between related methods is used to price
parties, there may be a degree of transactions between
flexibility in the price setting related parties.
process that is not present
between unrelated parties.
1. Uncontrolled price
method
2. Resale price method
3. Cost plus method
4. No price method
PAS 10 par. 3 defines events after the
reporting period as “those Examples of Adjusting Events
events, whether favorable or 1. Settlement after the reporting
unfavorable that occur between the period of a court case because It
end of reporting period and the date confirms that the entity already had
on which the F/S are authorized for a present obligation at the end of
issue reporting period.
2. Bankruptcy of a customer which
Two types of events after the reporting occur after the reporting period
period. 3. Sale of inventories after the
1. Adjusting events – after the reporting reporting period may give evidence
period are those that provide
about the net realizable value at
evidence of conditions that exist at
the end of reporting period. reporting date.
2. Nonadjusting events after reporting 4. The discovery of fraud or errors that
period are those that are indicative of show the F/Ss were incorrect.
conditions that arise after the end of
reporting period
1. Business Combination after the FINANCIAL STATEMENTS
reporting period AUTHORIZED FOR ISSUE
2. Plan to discontinue an operation Financial statements are authorized for
3. Major purchase and disposal of asset issue when the board of directors
or expropriation of major asset by reviews the financial statements and
government authorizes their issue.
4. Destruction of major production
plant by a fire after the reporting The F/S are authorized for issue on the
period date of issue by the board of
5. Announcing or commencing the directors and not on the date when
implementation of a major shareholders approve the financial
restructuring statements.
6. Abnormally large changes after the
reporting period in asset prices or
foreign
7. Change in tax rate enacted or
announced after the end of reporting
period that has a significant effect on
current and deferred tax asset and
liability.
PAS 10, par 17 provides that an entity DEVELOPMENT STAGE ENTITY
shall disclose the date when the F/Ss
are authorized for issue and who Development stage entity is either:
gave the authorization a. An organization that is
devoting substantially all of its
If the entity’s owners or others have the effort to establishing a new
power to amend the F/Ss after business and that has not
issue, the entity shall disclose such begun planned principal
fact. operations.
b. An organization that has begun
It is important for users to know when planned principal operations
the F/Ss are authorized for issue but has not yet generated
because the financial statements do significant revenue from those
not reflect events after this date. operations.
Development stage entity typically is Financial Reporting Requirements
devoting a substantial amount of Development stage entity incur
effort to activities like the following: significant costs but generate little
1. Financial planning or no revenue. Thus, DSEs incur
2. Raising capital operating losses during the
3. Exploring natural resources development stage.
4. Developing natural resources DSEs are required to account and
5. Research and Development report on much the same basis as
6. Establishing sources of supply established operating entities.
7. Acquiring property, plant and Financial reporting by a DSE differs
equipment and other operating from financial reporting for an
assets established operating entity in
8. Recruiting and training personnel regard to footnote sdisclosures
9. Starting up production only.