a2 Sea Chapter 7 Notes - Part 1 rant unl Og Our discussion on ag chapters: into the = 7 b-topics Chapter Ti ‘Sub-to cee Notes Part | Accounting ~ Tee fron and Evens after the Reporting Pog 5 Notes-Pot2 Related Party Disclosures and Ong Segoe iy Related standards (Notes Par 1: PAS 1 Presentation of Financial Statements Past Acrounting Pts, changes Estimates and Errors Reporting Period PAS 10 Events after Me ‘Learning Objectives 1. Sate the relationship ofthe notes with the other compres ‘of a complete set of financial statements 2. Define the following and give examples: (1) Change in | accounting policy, (2) Change in accounting estimate ani) Error. 3. Differentiate between the following: change in accounting policy, ‘estimate, and correction of prior period error. 4, Define events after the reporting period. 5, Slate the accounting requirements for ever reporting period accounting treatments of && ‘change in account ts after Notes 7 The tes (or nls to te fnancial statements) proves ‘in addition to those presented in the other financial stateme ivan integral pat of a complete set of financial state voter financial statements ae intended to be zea #2008 ote Part 325 “gn bers aon tate ee am nah TAS 1 rogues eee thet — pat oN Pt in 2 General information on the report! 88 Follows: ’ This includes the domeen ee lomicile and ie its country of incomporation and he gaat Ofte enti # adress of its registered office (or principal place of busine i aie ifferent from the registered office) and a descr Pton ofthe operations and its principal ain MME Fhe entity's 1. Statement of compliance with preparation of financial satemens TESS A Bans of 4, Summary of material account ) ing policy inform. Ths incudes nate dep the other financial statements, their recat itn measurement bases, den reieal ee cognition, tra nd other relevantinormaton tons Poisons 4. Disoggregation (breakdowns) of the line item financial slatementsand other sipping ination 5, Other disclosures requited by the RSs, such as not exhaustive): Saas a. Contingent liabilities and unre Contingent ognized contractual b. Non-financial disclosures, eg, the enity’s financial risk ‘management objectives and police. Events after the reporting dt if mate ‘Changes in accounting polices and accounting estimates __ 2d corrections of prior period eros © Related party disclosure Judgments and estimations & Capital management Divi Dividends declared afer the reporting period but oe the financial statements were authorz osu, nthe loted amount per share.326 Se, ‘The amount of any cumulative preference divig, recognized. 6, Other disclosures not required by the PrRs, management deems relevant to the understanding § h financial statements. [Notes are prepared in a necessarily detailed manny, often than not, they are voluminous and occupy a bulk My. the financial statements. For that reason (and to save trge ot only excerpts of notes to the financial statements are Pr! below, sufficient to give you an idea on how the ga. discussed above are presented in the notes. sn Mustrtion 1: General information, Basis of preparation Statement of compliance Entity A Notes December 31, 202 1. General information Entity A (the ‘Company’) is a stock corporation incorporate ai domiciled in the Philippines. The Company is engaged inf ‘manufacture and sale of security devices, fire prevention, and ofr electronic equipment. The Company's registered office is loatit 123 Kalsada St, Dalan City, Philippines. ‘The financial statements of the Company for the yesr ei! December 31, 20:2 were authorized for issue in accordance wit resolution of the board of directors on March 1, 20x3. 2.1 Basis of preparation ‘The financial statements have been prepared on a historic | except for inventories which are measured at the lower of 8 | net realizable value, investments in equity secures wh” measured at fair value with changes in fai values recogni" part ys! ) income, and Hands and tuildiny, snensive " V7 Finacial oP genous The Comp st es hn Com ny fonctinnal yement of compliance satel statements of the Company have t ace with Philippine Financ! Repriny ch a adopted bY the Fnac ant Siete | PRS fe Council (FSRSC) from the prnoue PERS) inability Reporting 1 Accounting Standards Board 14s)” pera postation 2 Summary of mater accounting poy infrmaon “jiestes | nventries are stated at the lower of cost and net ealzable value Coot comprises direct materials, direct labor costs and factory | Grerheads that have been incured in bringing the inventories to thet want location and condition. Cosi calculated using the weighted Jerage method. Net realizable value represents the estimated sling Jess all estimated costs to complete and cst sl Ilustration 3: Significant judgments, estimates and assumptions 5, Significant accounting judgments, estimates and assumptions The key assumptions concerning the future and other key sources of tstimation uncertainty at the reporting date that have a signicant tsk of causing a material adjustment to the carrying amounts of | assets and liabilities within the next financial year are disused below. Revaluation of property, plant and equiprient he Company measures lark! and buildings at walued amounts other comprehensive With changes in fair value being recognized it income. The Companiy engaged independent valuation 3 scember 31,20 et femine fair value as atPERE EEE EEEEEECE cumulative Preference divigg, ‘The amount of aY recognized 4g other disclosures not required BY Ihe PERS. yg Ouetgement deems relevant f0 THE Understanding © financial statements 8 Notes ae prepared in a necessarily’ detailed mann, ‘voluminous and Occupy a bulk ston than not, they are voluminous a ayoncerts of notes to the Financial tates are Pon oo cont 10 give you an idea on How the ved above are presented in the notes. astation 1: General information, Basis of Preparing Statement of compliance See Entity A Fl Notes December 31,202 4. General information tear tne ‘Company’ isa stock corporation corps eosin the Pippines. The Company #8 engaae & sorrcure and sale of security devices ire prevention ant atwonie equipment The Company's registered office i sls [SB Kalat ss Daan, Philippines. the youre the Company for ee wit |The financial statements of xd for issue in accordance December 31, 20x2 were authorizes resolution ofthe board of directors on March 1, 20%. 2:1 Basis of preparation The financial statements have been prepared on 2 is | except for inventories which are measured at the lower het ealizable value, investments in equity secuiies NT treasured at fair value with changes in fair valves re" torical ft Patt omprcheraive Income, and lands an eget 4 buldings mean a Pron 's functional currency. ‘ any’s financial stat 1 philippine peso (P), whichis the Company's uncnnoea 3 statement of compliance Fhe financial statements of the Com dance with Philippine Financat Repoing snare Reporting Standards (PFRSs) tional Accounting Standards Boerd istration 2: Summary of material a ian lu ny of material accounting policy information (3 Summary of material accounting policy information co soa atners meats er Premge method. Net realizable value represents the etimaiad crn _ prise es al estimated costs to complete and costs to ell. sani Iustration 3: Significant judgments estimates and assumptions 3 Significant accounting judgments, estimates and assumptions The key assumptions concerning the future and other key sources of ‘timation uncertainty at the reporting date that have a significant [ik of causing a material adhsiment tothe carping amon’ of Fossets and liabilities within the next financial yes = financial year are discussed Realation of property, plant and equipment we, Company measures land and buildings a revalued amounts a changes i fair value boing rcogrized in ober comprehensive a The Company engaged independent valuation specialists to te fair value as at December 31, 0x1Cosh on hand Cash inbanks Cash equivalents __— Total cask and cosh euivalents Accounting policies iAccuning paces ae “the specific principles, Bases, conn, rules and pracices applied by an entity in preparing presenting financial statements.” (°AS85) When selecting and applying accounting policy, entity shall refer tothe hierarchy guidance summarized belay ¥ Hierarchy of reporting standards 1. PERSs 2 Judgment ‘When making the judgment > management shall consider the following: a Requirements in other PFRSs dealing wih smiz transactions b. Conceptual Framework > management may consider the following ‘8 Pronouncements issued by other standard.seting bodes . Other accounting iterature and industry practices The foregoing means that, to account for a transact entity refers to the PFRSs first (which consist of the PFRSS F4* and Interpretations); in the absence of a PERS that spect! deals with that transaction, management uses its judg!" developing and applying an accounting policy that 5!" information that i relevant and reliable. In making the = management considers the applicbity of the reer" is port pFRSs are nan By guidance to assist entities in ying, their requirement Suidance states whether it is an Pet ofthe PFRSS.A guidane there ne Te ee ee ome tis an integral part of i ismandaton in Accounting Policies onanges . yas 8 requires ve Stent selection and application of ousting polices PAS 8 permits 2 change in acuning policy may ifthe change: , Ys equiced by a PERS; or results in reliable and more relevant information ‘A change in accounting policy usually results from a cjange in measurement basis. Eamples of changes in accountng policies ‘Change from FIFO to the Weighted Average cost formula for inventories. >. Change from the cost model to the fair value model of ‘meastiring investment propery. Change from the cost model to the revaluation model of measuring property, plant, and equipment and intangible assets 4. Change in business model for lasing inna ast Change in the method of recognizing revenue from longterm construction contracts. {Change to a new policy resulting from the requirement of 2 new PERS, & Change in financial reporting framework, such as from PERS: for SMEs to full PFRSS anges in acco poli: ae olicy for transactions, other in substance from those The following are nat @ the application of an accounting P* events. or conditions that ifr Previously occuring the application of 2 other events or conditions that di immaterial, eas) ‘new accounting policy for transactions id not occur previously oF were%, ‘Accounting Policies in Changes i" following | ork sears Hany orexampl fan entity changes an accountng pj nity ret ist to any speci transitional provision oy ing poli i a eeficaly deals wit that accounting policy. If they Soph a ane retrospective application. I, however, retrospective applic impracticable, the entity is allowed to account for the dy using prospective application. Retrospective Application Retrospective application means adjusting the opening balan cach affected component of equity (eg, retained earings fr earliest prior period presented and the other compan “amouints disclosed for each prior period presented as ifthe ns accounting policy had always been applied.” (Pas822) For example if an entity changes its accountng a from the Average to the FIFO cost formula, all previous fra statements presented in comparative with the cure financial statements are restated to apply FIFO. It is asf FO always been applie. If retrospective application is impracticable for all presented, the entity applies the new accounting, policy 2" beginning of the earliest period for which retro application is practicable, which may be the current pe | retrospective application js sil impracticable as atthe 8" of the current period, the entity is allowed to apply accounting policy prospectively from the earliest date prt" 1 et . acticable means it cannot be done af inprable efor t do so ter making every 7 pasonable B A retrospective tteatment is impractiatc the prog effects cannot be determined or fit routes spiny pee jes and assumptions to have been made ws 9m cant ml the prio ei mancal Statements were prepreg. gn pose todetermin inthe caret per - se are i sustation: Change of cost formals Ig 2x1, ABC Co. decided to change he Average ula for inventory valuation to the FIFO com tpventory balances under each method areas follows ula, Average HIE. January 1 11,000,000 7 December 31 2.000000 m0 Income tax ate is 30%. Requirement: What is the net cumulative effect ofthe a change in ABC's opening retained eamings balance? Solution: Average inventory ~ January 1 FIFO inventory ~ January 1 Canalatoe fect ~ ros of tx (nese Multiply by: (100% - Tax rate of 30%) Cian fect — net of ta incre) somone Low m0 Observe that the cumulative fist s computed on the beginning balances of inventory awa I Inventory Retained earings Deferred tax hailty OS 140,000 Y 60,000 ‘Md ntopnch noerage in accounting policy Voluntary change in arcersrouncement Of HN standon, + eee the FASB) inthe aby say applies toa transaction. Mater on ef? Pr et gb amends the adopted PYONOUNCEe, ‘Scotsman mc ag poliey i= accounted for By retrospective api,” oan Pa tg tt ay ee ‘accounting policy ‘PERS that specif eo aman paring ya FASO nes dy, Fao ee ee eet raring a ne a le mr ay et ete ee rr Aes the ing ty ao creda crt Snel ere nee te ee ieee tee ee ee es een eae See ee ee eee entity. Bore - PAS & mentions only two accounting changes — (1) chine | accounting policy and (2) change in accounting estimate. Chre® reporting entity is not specifically mentioned in the PFRSS. Accordingly, a business combination (PERS 3. fst” Combinations) or an event resulting to loss of control by apart subsidiary (PERS 10 Consolidated Financial Statements) is not a du" reporting entity. anges in Accounting Estimate cnamiring estimates fe “monetary amounts in financial Acnints that are Subject fo measurement uncertainty stemevjany items in the fin inty Pas35) Many financial statements cannot be ssured with precision but only through estimation because of amertainties inherent in business activites. The use of reasonable saform™ations " 8 do not undermirie the reliability of financial reports, Fee Sample, the following necessarily requires estimation: eetepreciation bad debts §, fet realizable value of inventories Gir value of financial asets or financial iabiltes Estimates involve judgments tased on latest avaiable information. Consequently, estimates need to be revised when there is a change in circumstances sch that new infonration eve developments or more experince is oblained. A change in accounting estimate does not relate to prior periods and therefore isnot a correction of eror Changes in accounting estimate normally result tom anges on how the expected inflows oF outflows of exonamic tenets are realized from asses or incurred on lables. Change in Accounting Polley vs. Changs in Accounting Estimate thege mccaemet ast ung nh ne np ‘tage Cot farsa ome” brit e * tenant tings Between he 9 he change is treated as. change in an accounting estimate,oO, "es «in accounting estimates: esof change Examples ot ar amortization method ange in depreciation © 7 Cones naePrimated useful We OF TeNdual yl, w depreciate 6 ance of allowance f Frage in the required Balance OF TOWNES FOr une «Changs ent Hosses Mey accounts or impair Grange in estimated warranty obligations. ang, he provisions in Accounting Estimates ing for Changes banana mates are accounted f0r by pros Changes in accounting est , spotaaton. Prospective application MEBRSTecgrizing the.” tthe change in profit or Toss, either in: a. the period of change; oF the pero of change and future periods, ifboth areata, Under prospective application, the beginning talaney retained earnings and the previous financial statements a9 restated [We wil fallow the fllowing accounting procedures when acu) for changes in scounting estimates: | Step Determine the carrying amount of the asset as af being of the period of change. 2 Ifthe entity presents only annual financial sates and the change occurs during the year, the amis amount is computed as at the beginning of he =n period (eg, January 1, if the eitity uses a ale = period) 3. Ifthe entity presents interim financial states change oceurs during a particular interim po carrying amount is computed as atthe begin Interim period (eg, Apri 1, ifthe entity wes 23 year period, prepares quarter interim rept ‘change occurs in the 2! querer ents 86 we in Sey Step 2: io, ws Depreciate the computed carrying amount into account any changes in depreciation mel or residual value pur! pw ro ation 1: Change in depreciation nd residual value ‘method, estimated useful muary 1 20x1, ABC Co, acquired 1,000. The equipment has an estimated use, pdupment for oul aie of PII ABCC ay sl of deprecation Ine ABC one ae pod 0 the sumottheyear digs SYD). Als the eopmren edo havea remain il gee ean asia gaqitements Compute for the depreition expense in 2s solution: Sip I Cartying amount a atthe begining of 20s {P_ (1M ~ 100,000) x 15/20 + 100,000 = 775.000 sie Apply the changes) $*75¢D denominator: (Life +1) +2] xLie=f(¢+1)- © (775000 = 50,000 revised residual value) x #1 depreciation for20x6 410 21.000 The entry to record the effect ofthe chan in estimates a flows 3:31] Depreciation expense 250000 Accumulated depresiation 009 lustration 2: Change in provision Jn 20x1, a lawsuit was filed ageinst ABC Co. for patent initingement. ABC Co. estimated a probable loss of P8000) In th2, due to recent developments on the case, ABC Co. change! as settled ‘sestimate of the probable los to PIOQ.ON. The ase i820 for #90,000 Requirement: Prova te journal ene Suton= oo £80,000 | “oniontrgeng vst | ows ok =) 20,000) "ie Provision for pendin penaing lawsuit Op, ng law 100,009 | 2a stations above that the effects of the in both it c rsa engine i profi oF 8 te peng a change wel ie resid ale oF depreicg, ees of change and in fture periods, No adjusts ae ms the pio engiznd expenses oF the being balance og earnings Errors | Enos indude misapplication of accounting peg, mathematical mistakes, oversights or misinterpretations of, and fraud. “Financial statements do not comply with PFRSs ify contain either material errors or immaterial err mt intentionally to achieve a particular presentation of ane financit postion, financial performance or cash flows” ste ‘Matera errors are those that cause the financial sae tobe misstated, Jntentimal errors are fraud. Inthe case ofa oes not matter whether the error is material or imme Fraudulent financial reporting does not comply withthe PS: Errors can be errors of commission or errors of is# ‘An error of commission is doing something wrong, while"! ‘of omission is not doing something that should have been Errors can also be current period errors ot priori Current period errors are errors in the current period tM" discovered before the current period financial stot™ issued. These are corrected simply by correcting et" period errors are errors in prior periods that have sal discovered. when the prior period financial statem= ns royce retlenet means Penang the COMPBrtVE amounts for presented in which the ero ocure be the prior periods) ifthe error occurred before the earle, or pero restating the opening balances of ase ane Penni Tonthe earliest prior period present anti ad ety ss) [Retmspetive pplintion [Re F applying a new accounting > core ways been applied. moe ed never occurred, Just like retrospective application, retrospective restatement is made as far back as pracicible. If it is inpracticable to determine the cumulative efecto prior penod ceror at the beginning of the current period, the enty is allowed to correct the error prospectively from the earliest date practicable. Ilystration 1: Current pesiod eror On January 10, 20x2, before ABC Co.'s December 31, 21 financial statements are authorized for issue, it was discovered that an advertisement expense of 40,000 was not acd Requirement; Prepare the correcting entries assuming (2 the books ate sill open an (b) the books ae alex closed. Ignore income loves, Satin Books are stiller $000 Reine Rivets ‘destin expen Aavertisiny payahnena cota ence they ae 7 Strout of averting FES sil be the cozect emu the income statement throug! — Sh, that closing entries HAVE NOt yet bag, Frail be used in correcting em minal ec ‘ m acon one at sing ees Bae ROMY by Books closet Mal accounts camot Be wel anymore, 8 consequently, 10 “ sewed correcting cme: ooks stl ope” accounting systems prohibit the direct cong acceake are already closed. This iy risk of unauthorized chan ‘a ich minimizes the 1°50 ‘when the books are already gg (Of course, even Yes, fos be presented in the income semen of 400000, The adjustments made des yn the worksheet. » hin Continuation: If income tax isnot ignored, the enties woul yy follows: (income tax rate of 30% is assumed) ~ Books ae ale cad ~ (Books are still open “Ruveiking expense 400000 | Retained eamings anon ‘Advertsing payoble 400000 | Income tax payable 200m)» ‘Advertsing payable ¢ "Income tox payable 120,000 a0 7%) 20000 nk 1305)-12100 |__Income tax expense _ 120,000 | "WORN PA NN Ilustration 2: Prior period error While finalizing its 20x2 current-year financial statement, AKC Co. discovered that the depreciation expense in 20:0 ws ‘overstated by P400,000, Rejuirement: Whats the correcting entry? (Ignore income ax} Answer: L ‘ue Accumulated deprecation Retained earnings (Jan.1, 0x1) call 0 Prior period errors are corrected by adjusting, the beginning bi" retained earnings forthe earliest period presented. ie Moreover, the prior year's financial statements presented 28 c0" to the current year’s Financial statements are restated to corre asifit has never occurred. rors I the income statement only, or both Staer "Ors that affect the income statement only ( part 1 -P a» fos of errors in be broadly classified into y farors i principle ~ these arise from i accounting standards oF procadyr information, OF misinterpretaon of acne tnether intentional or unintentnat nat. andar, of financial statements is called “p, he following nowledge of of available Intentional misstatement raudulent financial reporting.” Clerical and similar errors — these mistakes, oversights or misinterpreai a, Transplacement ero Include mathematical ins of facts, Examples: ransp Y ~ committed when the number of digits in an amount is incorrectly increased or decreas eg a PI, 000 amount is recorded a5 P100or Pia ooo b, Transposition error i commited when digits are interchanged, eg, a P15652 15,625 or P15,268. Errors of omission for example, the accountant forgot to record a transaction, 4._Errors of commission ~forexaraple the accountan recorded a transaction twice or partially Compensating errors ~ for example, 2 P50 overstatement i the sales account is compensated by 2 500 overstatement in utilities expense account - the erroneous crit is compensated by the erroneous debit. This eror will ot be revealed by the trial balance. f. Accounting system err ~ for example, there isa “bug’ i the computer program. inan amount amount is recorded as & Counterbatancing and Now errors (see discussion below). Errors may affect the statement of financial position only Errors that affect the ferrors in real accounts) and "ment of financial position only ( son talnouieal Scouts) are corrected through reclassification entries from the tong account to the appropriate account, For example, anes hop, ati incorrectly recorded 2 travel ey retising expense and crediting » 1g exe! 1 ha advertising expense #! senprected by debiting 24 — Errors the ad he income statement fl a Sntebalancing 70, 2. Nemeounterbslancing errs tafe bot she statement of financial pong, Counterbalancing errors i Coumttrmaneing errors are errors that automatically re, {Gounterbalance or self-correct) i the next accounting period For evample, ita counterbalancing error causes prof Year 1 to be overstated, the profit in Year 2 will be understate thecrror is not corrected. Profit in Year 3 is unaffected because, teor has already counterbalanced in Year 2. The statement y financial position in Year 1 is erroneous but the statement financial position in Year 2 and succeeding periods are unaffecte, Effet of counterbalancing ‘error on yearend Profit or loss Statement of financial Examples of counterbalancing errors include es relating to: inventories, purchases, sales, preps ‘unearned income, accrued income and accrued expenses. Non-counterbalancing errors ‘Non-counterbalancing errors are errors that do not self-corret inte next accounting period. Examples include: misstatemett # depreciation and erroneous capitalization or non-capitalizai® costs. i For example, the overstatement of depreciation in Yer does not self-correct in Year 2. Thus, the depreciation in YO") may be unaffected. However, the accumulated depret Years 1 and 2 will be overstated unless the error is corte’ saap-couniebalaiing emer on fect of 7 aft oF 1s eeement of financial position polationships between accounts Fr periodic inventory system, the following rl Wsounts can provide guidance in determin srunterbalancig EFTOPS On profit or loss, lationship between ing, the effects of Ending inventory = Pot Diet eaimaip The above sans ining ives pr seals understated det raony Msate 28 rom the reaiontip there wean ae dene faowing 7 Nteging enon orPurdus: Pot - iene mtoip 7 Bmling inventory: Cott gst ne aes > Beginning inventory or Purchases : Cost of goods so - Direct relationship 17 Beginning inventory is opposite of nding imei. This be at betwen ening Henry rts st ie any ee Ineetory nd profit ese, vere witosip sccounts are ‘opposites Gf bearing wens verte). © Cost of goods sold, as an expense, opps pst Thos ahem between ening fer ad pt se wlatop ec octal of god le ‘i Soe only new Wo remember one etntip When sig PBEM we ‘imply derive the ther rations ‘The relationships above ame applicable only under the Periodic inventory system because, wndes this system, cost of Boods Sold isa residual amout ater deducting ending inventory through physical count) fom the total goods Sallable for sate. The abovementioned elaonships are not epplicable under te perpetual nvenry este Because, under this system, cost of goods sold is determined independently from etermined ‘he physical count of ending inveatoryaise be derived 16 prepyyy, sam aie of income and eXPenses, fy etatombips sna nae oa fe ous ee nahap with pri is det tne Teset_ anal its relationship wth st sor accrued income related ac interest receivabl igventoot ening ciated accounts (eg sity fo bit oe inst, Oppel mse) the realionship with re income 25s inverse, For eXample, profit is also wndersta the prepayment ee iene’ (enc in mae A a tecraes be tearing See terete mrarance expense. If expense is overstated, png overt expense overed vet ae band, Acer slr (tg a anderstated, because expenses veracee, tlustration 1: Counterbalancing & Non-counterbalancing emmy, ge ee — 20x1 5 i 4,000,000 2, Profit au Retained earnings. end. 2,200,000 4am “The following errors were discovered in 20%2: 4a). Ending inventory in 20x] was overstated by P50,000. b) Accrued salaries payable in 20x1 were understated by Pili ©) Repairs and maintenance expenses in 20x1 amounting 1P100,000 were erroneously capitalized as cost of equips and depreciated over 4 years. > Correct profits: 20x __ ‘Unadjusted profits 1,000,000 (@) Overstatement of ending inventory (60,000) (©) Understatement of acruc salaries (40,000) (1) Expense erroneously capitalized (100,000) (2) Overstatement in depreciation _ 25,000 Net correction a Correct profits 835,000 0 Unadjusted retained earings infect of 77075 00 Profil’ This sowie wm oat ierstatement in 20:2, Iso, sometimes accounting problem ct effect of e708 On retained earings, ‘Malng the te corectns to pratt mt pe The ne effect ofthe errorson maine! 2x (165,00) = 165,000) 20x2: (165,00) + 115,000 = 000 5 Weean use the above to comput ore ore > Correct retained earnings: ‘Tnadjusted retained earning Net effect of errors on retained eon Correct retained earnings 2035.00 4158000 We can reconcile the computed amounts a follows 2m {@) Overstatement of ending inventor (by Understatement of accrue! slaries ret won (ct)Expeneeeronsousl co (2 Oreaniemer is dere itera ‘ Lomeet retained earnings 035.000 4.150.000. ntecbalancing errors have avy se-correce: Ta iy ba ect on the enaing tained €3P8 et conretionoO cates als0 rete the Aeterming. Series 3 Egg capital Working opal ge Te te er aorking capital: 5 een eros PI jing inventory (50,000) ed salaries (40,000) ngcapital (90,000) asses and liabilities afect working apy» ion of equipment costs simply ignorey — ‘Severed wane Beet poor Scrotecase the eror has already counterbalanced, re > Comectng entries: ‘Books in 20:2 are already daz [a Overstatement of invinin, No entry, Error has countess: “Die (D)Understatement of ce site No entry. Eror has countetains: (Eroneous cpitalizatoe ‘Accum, depreciation 500) Retained earnings Equipment fn Equipment Depreciation expense 25,000 a 100,000 Ifthe books are still open, the net correction to retained eariss to the net correction to retained earnings in the previous ye 165.000 in 20x1 or 50,000 debit + 40,000 debit + 75,000 deb) ‘counts are used in the corrections, - If the books are already closed, the net correction to tea ‘equal tothe net correction to retained earnings in the cue" ‘ins 50000 in 20:2) Only real accounts are used. sion 2: Comprehensive 0 reported the following befor ne sik fen nece 20 23 Correct profits: “Hadise profits al) Understatement of ending invent 82) Overstatement of ending invent ®/Overstatement of prepaid insurance 6) Overstatement of depreciadon «) Understatement of alvances om cs «1 Equipment cost charged expose £2) Depreciation not rsogrit Gainer sale not ol Loreoe a7 Correct retained caring jgnfssiooment ton tomes wscaded | ~ sie ined ei OF gop > Accum. depos Unadjated tained ch eas Retained eam cn 80) . Neve omer an 1222200 im); ent 7 san se eel ar L z fi Leppert a Saree amie —__1 2B 0 a —— as aos ae ‘2a: 99.200 + (138,000) ~ 8,800) itt Adjustr 2 8 go sen 93200 ss oe stil oper: Adusimens treed earings soem « os; + Htpoe 4000" GRAND were oor on ag 720 - _Netefice om working capital: _ 1p nk already eos: 7200 + 36.000» 000 ony "3 Onde imag or retained earnings in 203, of errors ‘aij Underatement fending inventory” 25,005, 3 ovestetement of ening inventory (40000) ; omamnnt eats gy oo (a) Understatement of advances from cust (60.00 rents after the reporting period are “those events, favorable and () Understatement of ash navorable, that occur Between the end of he wepoaing poveal Netajicton working capital 2000000009 i} Wg the date when the financial statements ae suthorzed tor issue” (PAS 103) > Correcting entries: = a For example, Entity A's reporting. period ends on Tools i203 are stillopen | Hooks in 2033 ae aendydea December 31, 20x1 and its financial sateen are atborzed for aditndestlemestofinventon: | (au Undersitementofinnis, fp igue on March 31, 20%2. Evens after the reporting period ae | Noeniry Noentry those events that occur within January 1, 202 to March 31, 2x2 Gd Overiaienentafineniog: | @2\Overalement tinny Reaned eninge 40.00, Noentry > The date of authorization of the financial statements ste Invent, beg. 40,000 date then managenent authorizes the financial sttemen's tr issue regardless of whether the authorzatin i final or subs (@iWadersatementofprepaidins: |) Understatement ofp Noentry eo to further approval (@.Oveionentindeonaton | Ouesaiomentindepay | [Cae ae coum deprecation 7200 | Accum. depreciation 72 BANC Co. completes the draft ofits December 31 2M! yearend ae eal —— iD rancial statements on January 31, 20%2. On February 5, 202 the ssatementnadvan Tard of directors reviews the financial statements and autores Retained eamings 0,000 Shem for issue. ‘The enfity anaounces it prof and sees! other = 60,000 Sancial information on February 25 202, Ths franc ONT | @Gestofequipmentexpensad: | [remade available to shareholders and others on March 1200 eee eee 2 oar ara one fn sateen ae ten | ‘Accum dep 1000 | Retained eam 2s” | le with a regulatory body on Apa 200 tained earning 2 regulatory bod Retained comings 34000, oo)c - Oy, “semana tones a6 auorind wie? date of urd authorization fOr ue), Ryn, include events occurring from Jann, ay 1 nals February 5 reporting period will toFebriny 5. [case ce tarch 1, 20, the management of ABC Co, autho ines vents for issue to its supervisory board. The su, | fy | aap anley ofnonexecutves and may include ry Fe made up solely of non-exeetives and may ince rep fromployees and other outside interests. The superige tpovoes the finan statements on March 10,202 The eirens ae made avaiable to shareholders and other 14 26a, The sharhoers approve the financial sateneny yt | annual meeting on March 23, 20%2 and the financial sans, then filed with a regulatory body on April 1, 20x2, nal Analyse The financial statements are authorized for issue on 1, 20x2 (date of management authorization for issue to the sapere feurd). Evens after the reporting period will inctude evens cc from January 1, 20x2 to March 1, 20%2. ® ‘Two types of events after the reporting period 1. Adjusting events after the reporting period ~ are eves provide evidence of conditions that existed at the ent ol reporting period. 2. Non-adjusting events after the reporting period are that are indicative of conditions that arose after the r=) period Adjusting events after the reporting period Adjusting events, as the name suggests, require adjust amounts in the financial statements, Examples of adjusting a. The settlement after the reporting period of a cou Confirms that the entity has a present obligation a!“ reporting period. ne pth re Feceipt of nfrmation afer the Frcating that AP aSSet Was mpeg jod. For example: ‘The bankruptcy of a castomer "eporting period at the end of reporting ‘The sale of inventories after the evidence to their net realizable period. the determination after the reporting period o asset purchased, oF the proceeds from mst, end of reporting period, ‘The determination after the repotng perio of the aman of profit-sharing or bonus payments if th entity hada pret gal or constructive obligation at the end of porting pene omake such payments The discovery of fraud or ears that indicate hat the franca siatements are incorrect Teportng period may give lua at the end of reporting the cost of before the asia) Non-adjusting events after the reporting period Non-adjusting events do not require adjustments of amounts ir the financial statements, However, they are disclosed if they are saterial. Examples of non adjusting vents: Changes in fair values foreign exchange rates, interest ates ot market prices after the reporting peviod Casualty losses (eg, ire, storm o earthquake) ocuring afer the reporting period Litigation arising solely from events occuring alt porting period. Significant commitments oF contingent lilies ert the reporting period, eg, sigifantgarates Mor ey, share tants and etal ay Share transactions after the reporting peed Major business combination afte the report" wr the red after period.Gy , commencing the implementation 5 oe jing period. ter the report Jan 10 discontinue aM Operatign ay restructuring fh. Announcing & PP 2 period. einen a te eng pg Change in 8 wwidends after the reporting pey 4, Declaration of divi nds § period (rasi0z) Dividends Dividends declared after the reporting period are not x pty at the end of reporting peridd because ny 5 Shlgation exists atthe end of reporting period. “a Going Concern pas 10 prohibits the preparation of financial statemen going concem basis if management determines after the ry perio’ that i ether intends to liquidate the entity oy trading, or that it has no realistic alternative but todo so Iustration 1: Identifying adjusting and non-adjusting eves ‘ABC Co’s current reporting period ends on’ December 312 The following transactions occurred after the end of rot period: a. On January 5,20x2, ABC declared 2,000,000 dividends. b. On January 15, 20%2, ABC issued 1,000 shares with par per share of P100 for P600 per share. On February 1, 20x2, a building with a carrying amoun's! December 31, 20x1 of P500,000 was totally razed by fi 4. On February 2, 20x2, ABC installed an oil rig: C4 legislation requires the oil rig to be uninstalled at thee) useful life and the installation site to be restore: A&” estimates the present value of the decommission" restoration costs at P1,000,000. On February 10, 20%2, ABC received notice of Iii. relation to an accident that happened on Deceit ‘ABC Co. estimates a probable loss of P200, 00: put - don March 20%2, ABC purchased 3 on sine combination acute fpetnod. Goodwill of F250}0I yao Bh acetstin ness combination, 8S recognized on the Subsidiary for P1o,00n,000 bust pe fnandal Statement Were authoring 2 osnmet: Wentity the adusting ro for issue on March 1 solution: - ¢simated liability on pending Iigaton otal adjusting events Ns sting events ae those that provide evidence of conditions hn exited sie end of the reporting period. Now-using cos sm thon mes an pésative of conditions that aroseafterthereporing ers fF o)t0(4) ate ll conditions that arse fer tereprsng edo ae nor-adjusting events. As to (2, the obligation to decommission theo tig and restore the site arises fom instillation ABC Co salt ‘gonly on Feb. 2, 2042 Therefore, ABC Co. has reo i theend of reporting peri. © (The business combination is eter engi mr Sse 9 December 31, 20k1-finandlstatemens combination is not an event ater te reporing per after the financial statements were authorize se 4 Only) isan adjusting eventhecus i provides {a present obligation) that existe he ep happened on December 31, 201. faconditon hustration 2: Accounting for adjusting even's ABC Co’s daft financial statements forthe yearend December M20 ay 12 200,000. The financial statements ported a profit of were athe P 1, 202, The following, RS authorized for issue on March Pasitions occurred after the end of reprengPerad- yy, aox2, a pending WHgation was 4g On Jeary 1 provision of PI20,000 28 rec op 100.000. A Tos ements. 20st financial state oo be aNtmries, costing PLOODOOO and recognized ay oon 000 in the 20x1 financials reatizable value of i oa SEENE Gr scono near 208 The ata eM rere 30.00. cM Rienng 200, a debtor sith a OUtstanding ago Ploniwe tiled for bankruptcy. No allowance was able. It was assessed thatthe receivable ee lg tg . ed ling. 4 fon this receiv be collected. : : dL The fair value of held for trading securities dec Try sca © a ooo cent Be or aetmeal eae Selene eter One Sad ee a Requirement: Compute for the adjusted profit. Provide the jum entries, Solution: Unadjusted profit, December 31, 20x1 () Reduction in proviston (120K 100) (b) Reduction in NRV of inventories [900K - (0 ~20K}] (6) Impairment loss on receivables Adjusted profit, December 31, 20x1 Notes: 9) The actual setlement of a provision after the reporting rer! Provide evidence regarding the amount of probable loss tha have been recognized at the reporting date. b)_ The sale of inventories after the reporting period may povide i regarding the et raizable value atthe reporting date. ©) The bankruptcy ofa customer after the reporting date may iio * receivable at the end of reporting period is impaired In fair values ater the seporin Had on-adjustng rota “event afer the ering pratense g vil statements wees auth at finan ie tr yinsting entries Estimated Habilty on pending niga | Probable loss on itgnion "| Costok soos sold /Impimentions — 1-3 Inventory [get ‘Accounts receivabl “ pisclosure ‘The following are disclosed in the notes ‘a. Date of authorization for issue and who gave he authorvation . Anupdate on the disclosures to include the effect of a ‘events c_ Nonadjusting events that are material, ncliding i. the nature of the event; and ii, an estimate of its financial effect, ora statement that such an estimate cannot be made.cn aeEEEse = amr gral part of the Financial state, is an i 7 ean Mon evant (0 understang provides inform ged in the other financial statemenjs inormation re ey is changed oly when i () ia, + an accounting Pulls in relevant and more st by a PERS; or (b) fe ome Te | information i —aecountng | Begg Seopeof ——esciption “treatment a | Yar Transitional >On gee | provision gy |b Retrospective baloney | application | retin | Je Woe | canaet | impracable| Scot, | Prospective | retospesin | application | “cLchangein > Changsintbe | Prospective Tapa aecounting reaization(or | application | Losofane \| | |) inne esureeof | etodae | cexpectedinfiow | cuenta (orcuttow) of | fare, economic benefits | theca fromases(or | | afestoa labites, | Misapp =) ive | > Ont principles, restatement | begmtig oversightor |b. Eis balnceof nisinterpreation impracticable, | retin offs and | prospective | earings mathematical | application”) acount nists resp + Hending inventory is understated, profit is also understat direct relationship, ; * Adjusting events are those that provide condi jos that a | at the end of reporting period, Non-adjusting events ai o that provide conditions that arose after the end of the rep” _petiod se art . 355 p08 EMS )xoBLEM 1: TRUE OR FALSE as 1 Presentation of Financial Statements [final statements cn be prepa in cca wih prRSs even without the notes, information inthe other financial stemenss ig cross-referenced tothe notes. 4, PAS I encourages the disclosure ofan en legal form, its country of incorporation, ig a description ofthe nature ofits operations required to be ity’s domicile and Main address, and AS 8 Accounting Policies, Changes in Estimates and Errors 4, According to PAS 8, the three main categories of acevsning changes are change in estimate, change in policy and correction of prior period errors 5, According to PAS 8, changes in accountng policy always be accounted for retrospectively ‘According to PAS §, changes in accounting es always be accounted for prospectively 7. A change that results from 2 change in measurement basis s usually accounted for asa change in accountng policy A change in the percentage used in determin accounts is a change in accounting policy 9, A change from an unacceptable accounting principle to one that is acceptable is accounted for asa change in acounting policy. 10. The primary distinction between a change in accounting estimate and a correction of error isthe timing of availability and ld uncollectible OF information; a change in estimate is based on new information not previously available HL. The application of a new accounting policy for transactions, other events or conditions that did not occur previously 18 2 chang, ounting policy ‘ge in accounting pSp, om FIFO t0 LIFO inventory COS OW form, Curing policy egg Fatman gy al statement. ‘ Co. is preparing its financial statemenss December 31, 20x1, a new standard hac" th Peake fect on January 1, 20%3; Ee, hoy issued to . aly this standard at an earlier date, If a the new standard in its ee oer none hig would be refersed 0 38a Voluntary arg accounting policy under PASS. iy 14, The efiect of a change from doubledectning bale, straight-line depreciation is properly reported on thei siatement immediately before profit or oss inthe perag change. 15.1 a change in accounting policy is caused by 2 a pronouncement by an authoritative accounting body, 4 cumulative effect must always be reported by retrospexine application. 16, The effect of prior period errors that have not ale “counterbalanced” are adjusted directly to the reins earnings balance. 12, A change fr change i period financ 13, Sunny June year 20x1. AS of PAS 10 Events after the Reporting Period 17. A decline in the fair value of investment in equity secuitiss classified as an adjusting event only if the decline is deel ‘material and permanent. 18. The settlement of a long-running court case after the reporting, Period but before the financial statements are authorize ft issue would normally be classified as a non-adjusting ever 19. Details of material non-adjusting events are required 0 disclosed in the notes, 20. A lawsuit filed against the entity for an accident that oc! after the end of the reporting period is a non-adjusting after the reporting period, tart » (note 2MULTIPLECHOICE toy sentation of Financial 51 Present al Stee ‘which of the following is a cones presented in the notes? 1 Disegresation fn tems General information on the IL eportin i, Shonen! of compan an eee preparation of financial statemons WW, _ Other disclosures Vv, Summary of material accountng cig ect se "uence of information information a. LILV, land IV b. LV,1l, Mand Iv cc ILMLLVandiv 4. ILL, V, land IV 2 Which of the following will mos likly appear on summary of material accounting policy information sec the notes? a. definition of cash equivalent . breakdown of the composition of inventories disclosures not required by the PFRSs but are deemed relevant to the understanding of the financial statements 4. explanation on how the untealized. gains on investment property in the periods presented are calculated PAS 8 Accounting Policies, Changes in Estimates and Erors 3. State the correct order ofthe hierarchy of tnancal reporting standards under PASS 1 PERSs comprising PASS, PFRSs and Interpretations I. Other accounting literature and industry practies NL Requirements. in other PERSS dealing. with simlor transactions Management’ judgment rd esd yee sanda-seting bis tat 8 Standards issued by othe 2 similar conceptual frameworkvi, Conceptual Framework LIVI VI, V ap LV, IV and I Md a. LMLVLV. 1 TIL VEIN, Vang b. LMLVLY, Mand onl ecan accounting poli thee antity changes af aco 1a, is required by a PFRS, vecalt in refable and more relevant information bore Which of the fellowing is accounted for retrospective change in accounting policy? 4. Application of a new accounting policy for ta ‘rovaidnot occ previously “sin Change from FIFO tothe Weighted Average cot omg, for inventories Change in the method of recognizing bad des gg doubtful accounts 4. Change in depreciation method, estimated useful iee residual value of a depreciable asst. Iya Which of the following is accounted for as a changes accounting estimate? 2. Change from the cost model to the fair value mall _measuring investment property. Change to a new policy resulting from the requireme? a new PERS, Change in financial reporting framework, such 3H” PERS for SMEs to full PERSs, Change in the percentage used in calculating a wl” obligation, The effect of a change from one accepted accounting we to another is reflected in the financial statements by the cumulative effect ofthe change in the part 1 income statement forthe curegy 2 come statement for fatuncren opening balance of retained comings ‘e {f. notes only, asa note disclosure are affect tx results from changes in the resization jog © expected inflow (or out) o cry inn uel ot {or liabilities) S iran esse a, Change in accounting policy ban b. Change in accountingestimate gg 4, When an entity changes from the staightine method depreciation to the double-dectinng-slance meth, which of the following should be reported? Cumulative effet ofa retrospective application Yes Yes No No x 10, When it is difficlt to determine whether in accounting policy oF a chang change is treated as a(n) a. change inan accounting stimate change in an accounting ©. error. d. any of these, as a matter of an accounting policy Choice oli. ot recognized in The effect of which ofthe following events profit or lose? 4. Change in the useful ie of amantangible set b Change in depresation metha e the allowance Change in the percentage ust to determine te eee ena in ee