Notes to Financial Statements and Interim Reporting PDF

NOTES TO FINANCIAL STATEMENTS AND INTERIM REPORTING Lecture F – PROFESSIONAL ELECTIVES FOR BSMA Notes to Financial Statements Definition: Notes provide detailed information that complements the financial statements, helping users understand the company's financial position and performance better....

NOTES TO FINANCIAL STATEMENTS AND INTERIM REPORTING Lecture F – PROFESSIONAL ELECTIVES FOR BSMA Notes to Financial Statements Definition: Notes provide detailed information that complements the financial statements, helping users understand the company's financial position and performance better. Purpose: Enhance transparency, offer context for line items in the financial statements, and meet regulatory and stakeholder needs for comprehensive disclosure. Importance: They clarify figures presented in the financial statements, supporting informed decision-making by investors, creditors, and other stakeholders. Requirements under PAS 1 PAS 1 Overview: PAS 1, Presentation of Financial Statements, mandates the inclusion of notes as part of complete financial reporting. Key Elements: Accounting Policies: Methodologies and practices used in preparing the financial statements. Assumptions and Judgments: Key estimates, judgments, and assumptions affecting reported amounts. Disclosures: Information on commitments, risks, contingencies, and other relevant financial details. Key Components Summary of Significant Accounting Policies: The basis for preparing financial statements, including methods for revenue recognition, inventory valuation, and depreciation. Detailed Disclosures: Explains financial statement items in depth, covering areas such as: Related Party Transactions, Contingent Liabilities, Segment Reporting. Other Financial Information: Anything necessary for understanding the financial results, including event-driven disclosures. Order of Presentation: 1. Statement of Compliance with PFRS 2. Summary of Significant Accounting Policies used 3. Supporting Information or Computation for line items presented in the financial statements. 4. Other disclosures, such contingent liabilities, unrecognized contractual commitments and non-financial disclosures. Summary of Significant Accounting Policies Purpose of Policy Disclosure: Provides clarity on the basis of measurement and specific accounting practices, ensuring comparability with industry standards. Examples: Revenue recognition methods, inventory costing methods (FIFO, Average), asset valuation techniques, and methods for calculating depreciation. Philippine Specifics: Mention policies relevant to the Philippine Financial Reporting Standards (PFRS). Disclosures Required by PAS and PFRS PAS/PFRS Disclosure Categories: PAS 1 and PFRS set standards for required disclosures to ensure comprehensive and compliant reporting. Key Areas: Property, Plant, and Equipment (PPE): Includes breakdown of asset costs, depreciation, and impairment. Financial Instruments: Fair value, risk assessments, and hedging information. Leases: Information on lease terms, assets, liabilities, and commitments. Income Taxes: Deferred and current tax breakdowns. Employee Benefits: Defined benefit plans, retirement obligations. Contingencies and Commitments Nature of Contingencies: Potential liabilities that depend on uncertain events, like lawsuits or guarantee obligations. Types of Commitments: Long-term contractual obligations, such as purchase agreements, lease commitments, and supply contracts. Impact on Financial Reporting: Explaining these in notes helps users anticipate potential future costs. Interim Reporting Definition and Purpose: Interim reporting provides condensed, timely information on financial performance at intervals shorter than the fiscal year (e.g., quarterly). PAS 34 Requirements: Interim reports must follow recognition and measurement principles consistent with annual reports, though disclosures may be less detailed. Importance: Allows stakeholders to track performance trends and react to short-term changes. Views on Interim Financial Reporting Integral View: each interim period is an integral part of the annual accounting period. Costs incurred which clearly benefit the entire year are allocated to the interim periods benefited. Independent View: each interim period is considered a discrete or separate accounting period with status equal to a fiscal year. Annual operating expenses are recognized in the interim period when incurred, irrespective of the number of interim periods benefited, Components of an Interim Financial Report Condensed statement of financial position Condensed statement of comprehensive income Condensed statement of changes in equity Condensed statement of cash flows Selected explanatory notes Nothing in the standard is intended to prohibit or discourage an entity from publishing a complete set of financial statements rather than condensed financial statements and selected explanatory notes. Recognition and Measurement Principles Consistency with Annual Reporting: Interim figures should use the same accounting principles as year-end reports. Interim Adjustments: Adjustments must reflect unusual events or seasonal fluctuations that could impact earnings. Examples: Seasonal industries, revenue recognition adjustments. Selected Disclosures in Interim Financial Reports Major Disclosure Requirements: Significant Events or Transactions: Major events like acquisitions, restructurings, or legal outcomes. Changes in Estimates or Judgments: Revised assumptions for items like inventory or asset valuation. Business Combinations: Effects of mergers and acquisitions during the interim period. Objective: Provide enough information for a clear understanding of interim results. Adjustments for Interim Financial Reporting Income Tax Estimates: Prorated based on the annual effective tax rate. Depreciation/Amortization: Adjusted to reflect seasonal activity or usage patterns. Inventory Valuation: Seasonal adjustments for inventory levels. Seasonality and Cyclicality of Interim Reporting Seasonal Businesses: Examples include tourism, retail, or agriculture, where earnings fluctuate significantly. Required Disclosures: Seasonal impacts on revenue, expenses, and cash flows must be explained for context.