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BLUE NOTES
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42 S
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 PAS 1, paragraph 7, states that notes to financial statements provide narrative description or disaggregation of
items presented in the financial statements and information about items that do not qualify for recognition.

 Each item on the face of the financial statements shall be cross-referenced to any related information in the notes.
Thus, notes to financial statements shall be highly detailed, precise, complete and easily understood by a reader
who has a reasonable understanding of business affairs and is willing to study the financial statements.
 Its purpose is to provide the necessary disclosures required by Philippine Financial Reporting Standards.

 PAS 1, paragraph 112, states that the notes to financial statements shall:
a. Present information about the basis of preparation of the financial statements and the specific accounting
policies used.
b. Disclose the information required by Philippine Financial Reporting Standards that is not presented in the
financial statements.
c. Provide additional information which is not presented in the financial statements but is relevant to an
understanding of the financial statements.

 Order of presenting the notes:

1. Statement of compliance with PFRS
- PAS 1, paragraph 16, provides that an entity whose financial statements comply with Philippine Financial
Reporting Standards shall make an explicit and unreserved statement of such compliance in the notes.
2. Summary of significant accounting policies used
- Accounting policies are the specific principles, methods, practices, rules, bases and conventions adopted
by an entity in preparing and presenting financial statements.
- It must disclose the following:
a. The measurement basis used in preparing the financial statements. The measurement bases include
historical cost, current cost, realizable value, and present value. The most common measurement basis is
historical cost.
b. The accounting policies used that are relevant to an understanding of the financial statements.
c. 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 financial statement such as determining the following:
i. Whether financial assets are to be measured at fair value or amortized cost.
ii. Whether substantially all significant risks and rewards of ownership of the leased asset are
transferred to the lessee.
iii. Whether in substance particular sales of goods are product financing arrangement and therefore
do not give rise to revenue.
3. Supporting information or computation for line items presented in the financial statements
4. Other disclosures, such contingent liabilities, unrecognized contractual commitments and nonfinancial
disclosures

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- PAS 1, paragraph 138, provides that an entity shall disclose the following:
a. The domicile and legal form of the entity, its country of incorporation and address of registered office or
principal place of business.
b. A description of the nature of the entity’s operations and its principal activities.
c. The name of the parent and ultimate parent of the group.
- Paragraph 137 also provides that an entity shall disclose the following:
a. 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.
b. The amount of any cumulative preference dividends not recognized.

Related Party Disclosures and Disclosures of related party transactions

Definition of terms:
1. 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.
- The following are examples of related parties:
a. Entities that directly or indirectly through one or more intermediaries, control or are
controlled by or under common control with the reporting entity. This pertains to affiliates,
meaning the parent, the subsidiary and fellow subsidiaries.
b. Associates – entities for which the investments are accounted for by the equity method. It
includes the subsidiary or subsidiaries of the associate.
c. Venturer – in a joint venture. A joint venture includes the subsidiaries of the joint venture.
d. Key management personnel – those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly, including any
executive director or nonexecutive director.
e. Close family members of an individual – those family members who may be expected to
influence or be influenced by that individual in their dealings with the entity. It include:
i. The individual’s spouse and children
ii. Children of the individual’s spouse
iii. Dependents of the individual or the individual’s spouse.
f. Individuals – owning directly or indirectly an interest in the voting power of the reporting
entity that gives them significant influence over the entity, and close family members of such
individuals.
g. Postemployment benefit plans for the benefit of employees of an entity, or of any enity that is
related party to that entity.
2. Related party transaction – is a transfer of resources or obligations between related parties, regardless of
whether a price is charged.
- The following are examples of related party transactions:
a. Purchase and sale of goods
b. Purchase and sale of property and other asset
c. Rendering or receiving services
d. Leases
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e. Transfer of research and development

f. License agreement
g. Finance arrangements, including loans and equity contributions in cash or in kind
h. Guarantee and collateral
i. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party.
3. Control – ownership, directly or indirectly through subsidiaries of more than half of the voting power of an
entity, or a substantial interest in voting power and the power to direct, by statue or agreement, the financial
and operating policies of the management of the entity.
4. Significant influence – the power to participate in the financial and operating policy decision of an entity, but
not control of those policies.
5. Joint control – the contractually agreed sharing of control over an economic activity.
6. Unrelated parties – it include the following:
a. Two entities simply because they have a director or key management personnel in common.
b. Providers of finance, trade unions, public utilities and government agencies in the course of their normal
dealings with an entity by virtue only of those dealings.
c. A single customer, supplier, franchisor or general agent with whom an entity transacts a significant volume
of business merely by virtue of the resulting economic dependence.
d. Two venturers simply because they share joint control over a joint venture.
Related Party Disclosures
 PAS 24, paragraph 12, requires disclosures of related party relationships where control exists irrespective of
whether there have been transactions between the related parties. An entity shall also disclose the name of the
entity’s parent and if different, the ultimate controlling party. If neither the entity’s parent nor the ultimate
controlling party produces financial statements available for public use, the name of the next most senior parent
that does so shall also be disclosed.
Disclosures of related party transactions
 PAS 24, paragraph 17, provides that if there have been transactions between related parties, an entity shall
disclose the nature of the related party relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the potential effect of the relationship on the financial
statements.
 It shall include:
a. The amount of the transaction.
b. The amount of outstanding balances, their terms and conditions, whether secured or unsecured, and nature of
consideration to be provided in settlement.
c. Provision for doubtful accounts related to the outstanding balances.
d. The expense recognized during the period in respect of doubtful accounts due from related parties.
Key management personnel compensation
 PAS 24, paragraph 16, states that an entity shall disclose key management personnel compensation in total and for
each of the following categories:
a. Short-term employee benefits
b. Postemployment benefits, for example, retirement pensions
c. Other long-term benefits
d. Termination benefits

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e. Share based payment transactions, for example, share options

Related party disclosure not required
Intragroup related party transactions and outstanding balances are eliminated in the preparation of consolidated
financial statements of the group.
Transactions with the government-related entities
 Under the old version of PAS 24, state-controlled entities that transact with other state-controlled entities are
required to disclose the same level of information as for other related party transactions.
 Under the amended version, a reporting entity is exempted from providing the normal disclosures for the
transactions with:
a. A government that has control, joint control or significant influence over the entity.
b. Other entities controlled, jointly controlled or significantly influenced by the same government.
 In applying the exemption, the reporting entity is required to disclose only the following:
a. The name of the government and the nature of its relationship with the reporting entity.
b. The information on the nature and amount of each individually significant transaction with the government.
For other transactions that are collectively but not individually significant, a qualitative or quantitative
indication of their extent is required to be disclosed.
Pricing policies
The following are methods used to price related party transactions.
1. Uncontrolled price method – sets the price by reference to comparable goods sold in an economically
comparable market to a buyer unrelated to the seller.
2. Resale price method – reduces the resale price by a margin. Representing an amount from which the reseller
would seek to recover costs and make an appropriate profit.
3. Cost plus method – seeks to add an appropriate markup to the supplier’s cost.
4. No price method – literally, no price is charged, as in the case of free provision of management services and
the extension of free credit on a debt.
Events after reporting period
 According to PAS 10, paragraph 3, events after reporting period are those events, whether favorable or
unfavorable, that occurs between the end of reporting period and the date on which the financial statements
are authorized for issue.
 Also known as subsequent events.

Types of subsequent
Adjusting events Nonadjusting events
events
Definition Events that provide evidence of conditions Events that are indicative of conditions
that exist at the end of reporting period. that arise after the end of reporting period.

Requires adjustment of the financial Requires disclosures only

statements

Examples 1. Settlement after the reporting period 1. Business combination after the
of a court case because it confirms that reporting period.
the entity already had a present 2. Plan to discontinue an operation.
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obligation at the end of reporting 3. Major purchase and disposal of asset

period. or expropriation of major asset by
2. Bankruptcy of a customer which occurs government.
after the reporting period. 4. Destruction of a major production
3. Sale of inventories after the reporting plant by a fire after the reporting
period may give evidence about the period.
net realizable value at reporting date. 5. Major ordinary share transactions
4. The determination after the reporting and potential ordinary share
period of the cost of assets purchased transaction after the reporting
or the proceeds from asset sold before period.
the end of reporting period. 6. Announcing or commencing the
5. The determination after the reporting implementation of a major
period of the profit sharing or bonus restructuring.
payment if the entity has the present 7. Abnormally large changes after the
obligation at the end of reporting reporting period in asset prices or
period to make such payment. foreign exchange rates.
6. The discovery of fraud or errors that 8. Entering into significant
show the financial statements were commitments or contingent liabilities,
incorrect. for example, by issuing guarantees.
9. Commencing major litigation arising
solely from events that occurred after
the reporting period.
10. 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.
Financial statements authorized for issue
 Financial statements are authorized for issue when the board of directors reviews the financial statements and
authorizes them to issue.
 In some cases, an entity is required to submit its financial statements to the shareholders for approval after the
financial statements have been issued. In such cases, the financial statements are authorized for issue on the date
of issue by the board of directors and not on the date when shareholders approve the financial statements.

Disclosures of date of authorization for issue

 PAS 10, paragraph 17, states that an entity shall disclose the date when the financial statements are authorized for
issue and who gave the authorization.

Development stage entity

 A development stage entity is either:
a. An organization that is devoting substantially all of its effort to establishing a new business and that has not
begun planned principal operations.

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b. An organization that has begun planned principal operations but has not yet generated significant revenue
from those operations.
 It is devoting its substantial amount of effort to activities like the following:
1. Financial planning
2. Raising capital
3. Exploring natural resources
4. Developing natural resources
5. Research and development
6. Establishing sources of supply
7. Acquiring property, plant, and equipment, and other operating assets
8. Recruiting and training personnel
9. Starting up production
 Development stage entities are required to account and report on much the same basis as established operating
entities. Financial reporting by a development stage entity differs from financial reporting for an established
operating entity in regard to footnote disclosures only.
 The same generally accepted accounting principles that apply to established entities govern the recognition of
revenue and expenses and the capitalization of costs for development stage entities.
 The financial reporting requirements of development stage entities are summarized below:

Financial statements Special disclosures requirements

1. Statement of financial position Cumulative net loss reported with a descriptive title,
such as deficit accumulated during the development
stage in shareholders’ equity
2. Income statement Cumulative amount of revenue and expenses from
the entity’s inception.
3. Statement of cash flows Cumulative amount of cash receipts and cash
disbursements since the entity’s inception.

 The special disclosure requirements are in addition to those normally required by accounting standards.

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