Chapter 6

NOTES TO FINACIAL STATEMENTS

QUESTION 6-1

What are the “notes to financial statement”?

ANSWER 6-1

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.

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.

In other words , notes to financial statements are used to report information that does not fit into the
body of the statements in order to enhance the understandability of the statements.

They provide additional information and help clarify the items presented in the financial statements.
Notes to financial statements are component of the financial statements and therefore shall be prepared
carefully and presented in a systematic manner.

Each itemon the face of the statement of financial position, income statement, statement of
comprehensive income, statement of changes in equity and statement of cash flows shall be cross-
referenced to any related information in the notes.

QUESTION 6-2

What is the purpose of the notes to financial statements?

ANSWER 6-2

The purpose of the notes to financial statements is to “to provide the necessary disclosure required by the
Philippine Financial Reporting Standards.”

Specifically, the notes to financial statements of an entity shall:

a. Present information about the basis of presentation of the financial statements and the specific
accounting policies used.
b. Disclose the information required by Philippine Financial Reporting Standards that is not
presented elsewhere in the financial statements.
c. Provide additional information that is not presented on the face of the financial statements but
that is necessary for a fair presentation.

QUESTION 6-3

What is the order of presenting the notes?

ANSWER 6-3

Notes are normally presented in the following order:

 a. Statement of compliance with PFRS
b. Summary of significant accounting policies used
c. Supporting information or computation for line items presented in the financial statements
d. Other disclosures, such as contingent liabilities, unrecognized contractual commitments and
nonfinancial disclosures.

QUESTION 6-4

Explain the note to financial compliance with PFRS.

ANSWER 6-4

An entity whose financial statements comply with Philippine Financial Reporting Standards shall
make an explicit and unreserved statement of such compliance in the notes.

An entity shall not describe financial statements are complying with PFRS unless they comply with
all the requirements of Philippine Financial Reporting Standards.

QUESTION 6-5

What are “accounting policies”?

ANSWER 6-5

Accounting policies are defined as “the specific principles, base, conventions, requirements and
practices used by an entity in preparing and presenting financial statements.”

Accounting standards set out the required recognition and measurement principles that an entity shall
follow in preparing its financial statements, and shall often prescribe the accounting policy to be
adopted.

QUESTION 6-6

What are included in the summary of significant accounting policies?

ANSWER 6-6

The summary of significant accounting policies shall disclose the following:

a. The measurement basis used in preparing the financial statements.

It is important for an entity to inform users of the measurement basis used in the financial
statements because the basis on which the entity prepares the financial statements significantly
affects the users’ analysis.
The measurement base include historical cost, current cost, realizable value and present value.
The most common measurement basis is historical cost.

QUESTION 6-7

What are the “other disclosures” which an entity is required to make?

ANSWER 6-7

An entity shall disclose the following:

a. The domicile and legal form of the entity, its country of incorporation and the address of the
registered office or principal place of the business.
b. A description of the nature of the entity’s operations and its principal activities.
c. The name of the parent entity and the ultimate parent of the group.

An entity shall also disclose in the notes:

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,

QUESTION 6-8

Define the following in accordance withPAS24 on related party disclosures:

1. Related party
2. Related party transaction
3. Control
4. Significant influence
5. Joint control

ANSWER6-8

1. RELATED PARTY – Parties considered to be relate 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 another party.
2. Related party transaction is a transfer of resources or obligations between related parties,
regardless of whether a price is charged.
3. Control is 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 statute or
agreement, the financial and operating policies of the management of the entity.
Simply, stated, control is the power to govern the financial and operating policies of an entity so
as to obtain benefits from its activities
4. Significant influence is participation in the financial and operating policy decision of an entity,
but not control of those policies.
Significant influence may be exercised by representation in the board of directors, participation in
policy making process, material intercompany transactions, interchange of managerial personnel
or dependence on technical information.
Significant influence may be gained by share ownership of 20% or more.
5. Joint control is the contractually agreed sharing of control over an economic activity.

QUESTION 6-9

Give examples of related parties.

ANSWER 6-9

1. Entities that directly or indirectly through one or more intermediaries, control or are controlled by
or under common control with the reporting entity.
Such entities pertain squarely to affiliates, meaning the parent, the subsidiary and fellow
subsidiaries.
2. Associates – These are the entities for which the investments are accounted for by the equity
method. If the investment in ordinary shares is 20% to 50%, the entity method is used in
accounting for the investment. As clarified, an associate includes the subsidiaries of the
associate.
3. Ventures in a joint venture. A joint venture includes the subsidiaries of the joint venture.
4. Key management personnel are 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.
5. Close family members of an individual are those family members who may be expected to
influence by that individual in their dealings with the entity. They include:
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse.
6. Individuals owning directly or indirectly an interest in the voting power of the reporting entity
that gives them significant influence over the entity, end close family members of such
individuals.
7. Postemployment benefit plans for the benefit of employees of an entity, or of any entity that is a
related party to that entity.

QUESTION 6-10

Give examples of transactions between related parties.

ANSWER 6-10

Examples of related parties transactions that require disclosure by the reporting entity include:

1. Purchase and sale of goods

2. Purchase and sale of property and other asset
3. Rendering or receiving services
4. Leases
5. Transfer of research and development
6. License agreement
7. Finance agreements, including loans and equity contributions in cash or on any kind
8. Guarantee and collateral
9. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party.

QUESTION 6-11

What are the necessary disclosure with respect to related party transactions?

ANSWER 6-11

PAS 24 require disclosure of related party relationship where control exists irrespective whether
there have been transactions between the related parties.

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.

As a minimum, the disclosures shall include:

a. The amount of the transaction.

b. The amount of the 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 expenses recognized during the period in respect of doubtful accounts due from related
parties.

QUESTION 6-12

Explain the disclosure of key management personnel compensation.

ANSWER 6-12

An entity is required to disclose key management personnel 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
e. Share based payment transactions, for example, share options

QUESTION 6-13

Give examples of unrelated parties.

ANSWER 6-13

In the context of PAS 24, unrelated parties include the following:

1. Two entities simply because they have a director or key management personnel in common.
2. 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.
3. A single customer, supplier, franchisor or general agent whom an entity transacts a significantly
volume of business merely by virtue of the resulting economic dependence.
4. Two ventures simply because they share joint control over a joint venture.

QUESTION 6-14

Explain the situations where disclosure of related party transaction is not required.

ANSWER 6-14

PAS 24, paragraph 3, requires disclosure of related party transactions and outstanding balances in the
separate financial statements of a parent, venturer or investor.

PAS 24, paragraph 4, further provides that intragroup related party transactions and outstanding
balances are eliminated in the preparation of consolidated financial statements of the group.

QUESTION 6-15

Explain the disclosure requirements for transactions with “government-related entities”.

ANSWER 6-15
 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 amendment version of PAS 24, a reporting entity is exempted from providing the normal
disclosures for 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 extent is required to be disclosed.

QUESTION 6-16

Briefly explain the methods of pricing transaction between related parties.

ANSWER 6-16

1. Uncontrolled price method – This 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 – This method is often used where goods are transferred between related
parties before a sale to an independent party is made.

The 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 – This 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 credit on a debt.

QUESTION 6-17

What are the “events after the reporting period”?

ANSWER 6-17

“Events after the reporting period” are those events both favorable and unfavorable that occur
between the end of the reporting period and the date when the financial statements are authorized for
issue.

These are also known as subsequent events. Such events require adjustments or disclosure.

There are two types of events after the reporting period, namely:

1. Adjusting events after reporting period are those that provide evidence of conditions that exist at
the end of the reporting period.
2. Nonadjusting events after reporting period are those that are indicative of conditions that arise
after the end of the reporting period.
 QUESTION 6-18

Give examples of adjusting events after the reporting period which require the entity to adjust its
financial statement are:

1. Resolution after the reporting period of a court case because it confirms that the entity already
had a present obligation.
2. Bankruptcy of a customer which occurs after the reporting period.
3. Sale of investors after the reporting period may give evidence about the net realizable value at
reporting date.
4. The determination after the reporting period of the cost of assets purchased or the proceeds from
assets sold before the reporting date.
5. The determination after the reporting period of the profit sharing or bonus payment if the entity
has the present obligation at the reporting date to make such payment.
6. The discovery of fraud or errors that show the financial statements were incorrect.

Examples of nonadjusting events after the reporting period which require disclosure include:

1. Business combination after the reporting period.

2. Plan to discontinue an operation
3. Major purchase and disposal of asset or expropriation of major asset by government.
4. Destruction of a major production plant by a fire after the reporting period.
5. Major ordinary share transactions and potential ordinary share transactions after reporting period.
6. Abnormally large changes after the reporting period in asset prices or foreign exchange rates.
7. Entering into significant commitments or contingent liabilities, for example, by issuing
guarantees.
8. Commencing major litigation arising solely from events that occurred after the reporting period.

QUESTION 6-19

When are financial statements authorized for issue?

ANSWER 6-19

The financial statements are authorized for issue when the board of directors reviews the financial
statements and authorizes them for issue.

In some cases, an entity is required to submit its financial statements to its 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 on the date of issue by
the board of directors and not the date when shareholders approve the financial statements.

In other cases, the management of an entity is required to issue when the management authorizes them
for issue to the supervisory board.

QUESTION 6-20

What is a development stage is either:

a. An organization that is devoting substantially of its effort to establishing a new business and that
has not begun planned principal operations.
b. An organizational that has begun planned principal operations but has not yet generated
significantly revenue from those operations.
 A development stage entity typically is devoting a substantially 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

QUESTION 6-21

Explain the financial reporting requirements development stage entities.

ANSWER 6-21

Development stage entities incur significant costs but generate little or no revenue.

Thus, development stage entities typically incur operating losses during the development stage.

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 operating 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 disclosure requirements

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

The financial disclosure requirements are in addition to those normally required by PFRS.

QUESTION 6-22 Multiple choice (PAS 1)

1. Which is not a purpose of the notes to financial statements?

 a. To present information about the basis of preparation of the financial statements and the
specific accounting policies used.
b. To disclose the information required by Philippine Financial Reporting Standards that is not
presented elsewhere in the financial statements.
c. To provide additional information which is not presented on the face of the financial
statements but that is necessary for a fair presentation.
d. To provide information about the financial position, financial performance and cash flows of
an entity that is useful to a wide range of users in making economic decisions.

2. Indicate the proper order of presenting the notes to financial statements.

I. Statement of compliance with PFRS.
II. Other disclosures, such contingent liabilities, unrecognized contractual commitments
and nonfinancial disclosures.
III. Supporting information for items presented on the face of the financial statements.
IV. Summary of significantly accounting policies.

a. I,II,III and IV
b. I,IV, III and II
c. I, III, IV and II
d. I, IV II and III

3. The “summary of accounting policies” shall describe

a. Only the measurement basis used in preparing the financial statements
b. Only the accounting policies used by the entity
c. Both the measurement basis and accounting policies used
d. Nature of the entity’s operations and its principal activities

4. An entity is required to disclose certain nonfinancial information. Which is not embraced in this
disclosure?
a. A description of the nature of the entity’s operations and its principal activities
b. The name of the parent entity and the ultimate parent of the group
c. Domicile and legal form of the entity, its country of incorporation and address of the
registered office.
d. Names and address of the corporate directors and officers.

5. An entity shall disclose in the notes

I. The amount of dividends proposed or declared before the financial statements are
authorized for issue but not recognized as distribution during the period and the related
amount per share.
II. The amount of any cumulative preference dividends not recognized.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER 6-22

1. D
2. B
3. C
4. D
 5. C

QUESTION 6-23

1. Parties are considered to be related if one party has (choose the in correct one)
a. The ability to control the other party.
b. The ability to exercise significant influence over the other party.
c. Joint control over an entity.
d. Significant volume of business with the other party

2. A related party transaction is a transfer of resources or obligations

a. Between related parties when a price is charged.

b. Between related parties, regardless of whether a price is charged.

c. Between unrelated parties when a price is charged.

d. Between unrelated parties, regardless whether a price is charged.

3. Control is

I. The power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities.

II. The power to participate in the financial and operating policy decisions of an entity but not
control of those policies.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. Related parties include all of the following, except

a. Affiliates

b. Associates

c. Individuals owning, directly or indirectly, an interest in the voting power of the reporting
entity that gives them significant influence over the entity

d. Two entities that have a common director

5. Unrelated parties include all of the following, except

a. Providers of finance in the course of their normal dealings with an entity by virtue only of
those dealings.
 b. Two venturers simply because they share joint control over a joint venture.

c. Single customer with whom an entity transacts a significant volume of business merely
by virtue of the resulting economic dependence.

d. Key management personnel and close family members of such individuals.

6. Close family members of an individual include all of the following, except

a. The individual’s spouse and children

b. Children of the individual’s spouse

c. Dependents of the individual or individual’s spouse

d. Brothers and sisters of the individual

7. If there have been transactions between related parties, an entity shall disclose

I. Nature of the relationship

II. Information about the transaction and outstanding balances

a. I only
b. II only
c. Both I and II
d. Neither I nor II

8. The elements of related party transactions necessary for an understanding of the financial statements
include all of the following, except

a. The amount of the transactions

b. Amounts of outstanding balances

c. Provision for doubtful accounts related to the outstanding balances

d. Nature of the relationship

9. This is a pricing policy between related parties which sets the price by reference to comparable goods
sold in an economically comparable market to a buyer unrelated to the seller.

a. No price method

b. Cost plus method

c. Resale price method

d. Uncontrolled price method

10. Which statement is incorrect concerning disclosure of related party transactions?

a. Transactions with associates accounted for under the equity method are not eliminated
and therefore require separate disclosure as related party transactions.
 b. Disclosure o transactions between members of a group is unnecessary in consolidated
financial statements because consolidated financial statements present information about
the parent and subsidiaries as a single economic reporting entity.

c. Related party relationship where control exists shall be disclosed even if there are no
related party transactions.

d. A reporting entity is exempted from providing any disclosures for transactions with a
government that has control, joint control or significant influence over the reporting
entity.

ANSWER 6-23

1. d 6. d

2. b 7. c

3. a 8. d

4. d 9. d

5. d 10.d

QUESTION 6-24 Multiple Choice (IFRS)

1. Which of the following is not a related party?

a. A director of an entity

b. The parent of an entity

c. A shareholder of the entity that holds 1% stake in the entity

d. The son of the chief executive officer of the entity

2. PAS 24 requires disclosure of compensation of key management personnel. Which of the following
would not be considered “compensation” for this purpose?

a. Short-term benefits

b. Share-based payments

c. Termination benefits

d. Reimbursements of out-of-pocket expenses

3. To enable financial statement users to form a view about the effects of the related party transactions,
PAS 24 requires certain disclosures to be made. Which of the following is not a mandated disclosure?

a. Relationship between parents and subsidiaries irrespective of whether there have been
transactions between those related parties.

b. Names of all the “associates” that an entity has dealt with during the year.
 c. Name of the entity’s parent and, if different, the ultimate controlling party.

d. If neither the entity’s parent nor its ultimate controlling entity produces financial
statements available for public use, then the name of the next most senior parent that does
so.

4. If there have been related party transactions during the year, an entity is required to make, at a
minimum, certain disclosures. Which of the following is not a required minimum disclosure?

a. The amount of the related party transactions.

b. The amount of the outstanding related party balances and their terms and conditions
along with details of guarantees given and received.

c. The amount of similar transactions with unrelated parties to establish that comparable
related party transactions have been entered into at arm’s length.

d. Provisions for doubtful debts related to the amount of outstanding related party balances
and expense recognized during the year in respect of bad or doubtful debts due from
related parties.

5. The minimum disclosures prescribed under PAS 24 are to be made separately for certain categories of
related parties. Which of the following is not among the list of categories specified under the standard for
purposes of separate disclosure?

a. Entities with joint control or significant influence over the entity

b. The parent of the entity

c. An entity that has a common director with the entity

d. Joint ventures in which the entity is a venture

ANSWER 6-24

1. c. 3. b. 5. c.

2. d. 4. c.

QUESTION 6-25 Multiple Choice (IFRS)

1. According to PAS 24, all of the following fall within the definition of an entity’s related party, except

a. Joint venture in which the entity is a venturer

b. A postemployment benefit plan for the benefit of the employees of the entity’s parent

c. An executive director of the entity

d. The partner of a key manager is a major supplier of the entity

2. Which of the following statements in relation to compensation is true?

I. Compensation includes social security contributions paid by the entity.

 II. Compensation includes postemployment benefits paid on behalf of a parent of the entity in
respect of the entity.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

3. Which of the following statements in relation to related parties is true?

I. A party is related to another entity that it is jointly controlled by.

II. A party is related to another entity that it controls.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

4. An entity has a 70% subsidiary and is a venturer in a joint venture. During the financial year-end, the
entity sold goods to both subsidiary and joint venture. Consolidated financial statements are prepared
combining the financial statements of the entity and the subsidiary.

Under PAS 24, in the separate financial statements of the entity for the current year, disclosure is
required for transactions with

a. Neither subsidiary nor joint venture

b. Subsidiary only

c. Joint venture only

d. Both subsidiary and joint venture

5. An entity completed the following transactions in the current year:

I. Sold a car to the uncle of the entity’s finance director.

II. Sold goods to another entity owned by the daughter of the entity’s managing director.

Which transaction would require disclosure in the financial statements of the entity?

a. Neither transaction

b. Transaction I only

c. Transaction II only

d. Both transactions
6. A parent entity has a wholly-owned subsidiary. During the current year, the parent sold goods to the
subsidiary.

The subsidiary paid a part of this debt before the year-end and then encountered financial difficulties.
The subsidiary is not expected to be able to pay the remainder of the balance and therefore it has been
provided as uncollectible. Administration costs are incurred as a result of the parent’s credit controllers
chasing the debt.

Under the minimum disclosure requirements of PAS 24, all of the following are required to be disclosed
in relation to this arrangement, except

a. The administration costs of the credit control department incurred in chasing the debt

b. Details of any guarantees received in relation to the outstanding balance

c. The provision in relation to the debt being uncollectible

d. The amount of the transaction and outstanding balance

7. An entity carried out of the following four transactions during the current year. All of the following are
related party transactions, except

a. Transferred goods from inventory to a shareholder owning 40% of the entity’s ordinary
shares

b. Sold an entity car to the wife of the managing director

c. Sold an asset to an associate

d. Took out at huge bank loan

8. According to PAS 24, which of the following is not a related party of n entity?

a. A shareholder of the entity owning 30% of the ordinary shares

b. An entity providing banking facilities to the entity

c. An associate of the entity

d. Key management personnel of the entity

9. A general principle of disclosure is that material related party transactions shall be disclosed. The
auditor of an entity noted the following transactions entered into by the entity during the past fiscal year:

I. The entity borrowed P1,000,000 from Southwest Bank issuing a noninterest-bearing note.

II. The entity borrowed P2,000,000 from Northwest Bank at a rate significantly above the market
rate prevailing at that time for such a borrowing.

III. The entity borrowed P500,000 from Eastwest Bank with no scheduled terms for how or when
funds will be repaid.

Assuming all of the transactions are material, which transactions most likely would be a related party
transaction requiring disclosure in the entity’s financial statements?
 a. Only I

b. Only III

c. Both I and III

d. Both II and III

10. A director of Maximus Company owns 65% of Aye Company and also a “one-share” director of Bee
Company. The wife of the director is major shareholder in Cee Company. The director’s daughter holds
5% off the ordinary shares of Dee Company. The only involvement she has in Dee Company is to receive
dividends.

Under PAS 34, which entities would be classified as related parties of Maximus Company?

a. Aye, Bee, Cee and Dee

b. Aye, bee and Cee only

c. Aye and Cee only

d. Aye only

ANSWER 6-25

1. d 3. c 5. c 7. d 9. b

2. c 4. d 6. a 8. b 10. c

QUESTION 6-26 Multiple Choice (AICPA)

1. What is the purpose of information presented in notes to the financial statements?

a. To provide disclosures required by generally accepted accounting principles.

b. To correct improper presentation in the financial statements.

c. To provide recognition of amounts not included in the total of the financial statements.

d. To present management’s responses to auditor comments.

2. Which of the following information shall be disclosed in the summary of significant accounting
policies?

a. Refinancing of debt subsequent to the reporting period

b. Guarantees of indebtedness of others

c. Criteria for determining which investments are treated as cash equivalents

d. Adequacy of pension plan assets relative to vested benefits

3. The summary of significant accounting policies shall disclose

a. The composition of property, plant and equipment and the depreciation method used
 b. The composition of property, plant and equipment only

c. The depreciation method used only

d. Neither the composition of property, plant and equipment and the depreciation method
used

4. Financial statements shall include disclosure of material transactions between related parties except

a. Nonmonetary exchange by affiliates

b. Sales of inventory by a subsidiary to its parent

c. Expense allowance for executives which exceed normal business practice

d. An entity’s agreement to act as surety for a loan to its chief executive officer

5. During the current year, an entity engaged in the following transactions:

I. Payment of key management personnel compensation

II. Sales to affiliated entities

Which of the two transactions would be disclosed as related party transaction in the entity’s separate
financial statements for the current year?

a. Neither I nor II

b. I only

c. II only

d. Bothe I and II

ANSWER 6-26

1. a

2. c

3. c

4. b

PAS 24 does not require disclosure of transactions which are eliminated in the preparation of
consolidated financial statements.

5. d

PAS 24 specifically requires disclosure of key management personnel compensation and transactions
between affiliates when preparing separate financial statements.

QUESTION 6-27(PAS 10)

1. These are events whether favorable or unfavorable that occur between the end of the reporting period
and the date on which the financial statements are authorized for issue.

a. Events after reporting period

b. Current events

c. Past events

d. Future uncertain events

2. These are the events that provide evidence of conditions that exist at the end of the reporting period.

a. Adjusting events after reporting period

b. Nonadjusting events after reporting period

c. Provisions

d. Contingent liabilities

3. The financial statements are authorized for issue

a. When the board of directors reviews the financial statements and authorizes them for
issue.

b. When the financial statements are made available to shareholders.

c. When the shareholders approve the financial statements at their annual meeting.

d. When the approved financial statements are filed with a regulatory body.

4. Adjusting events after reporting period include all of the following, except

a. The settlement of a court case after the issuance of the financial statements that confirms
that the entity has a present obligation.

b. Bankruptcy of a customer occurring between the end of the reporting period and date of
issuance of financial statements.

c. Determination after reporting period and before the issuance of the statements of the cost
of asset purchased before the end of the reporting period.

d. The discovery of fraud or errors between the end of the reporting period and the date of
issuance of financial statements.

5. Nonadjusting events after reporting period that generally result in disclosure include all of the
following, except

a. A major business combination after reporting period

b. Announcing a plan to discontinue an operation

c. Major purchase of asset or expropriation of major asset after reporting period

d. Destruction of a major production plant by a fire before the end of the reporting period
ANSWER 6-27

1. a 3. a 5. d

2. a 4. A

QUESTION 6-28 Multiple Choice (IFRS)

1. An entity’s financial statements for the year ended April 30,2010 were approved by its finance director
on July 7,2010 and a public announcements of its profit for the year was made July 10,2010.

The board of directors authorized the financial statements for issue on July 15,2010 and the financial
statements were approved by the shareholders on July 20,2010.

Under PAS 10, after what date should consideration no longer be given as to whether the financial
statements on April 30,2010 need to reflect adjusting and nonadjusting events?

a. July 7,2010

b. July 10,2010

c. July 15,2010

d. July 20,2010

2. Which of the following statements is true according to PAS 10?

I. Notes to financial statements shall give details of all material adjusting events included in those
financial statements.

II. Notes to financial statements shall give details of material nonadjusting events which could
influence the economic decisions of users.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

3. Which of the statements about the classification of each of the following events after the end of
reporting period but before the financial statements are authorized for issue is true?

I. A decline in the market value of investments would normally be classified as an adjusting

event.

II. The settlement of a long-running court case would normally be classified as a nonadjusting
event.

a. I only

b. II only

c. Both I and II
 d. Neither I nor II

4. Between the date on which the financial statements for this year were completed and the date on which
they were due to be authorized for issue, a number of events took place. According to PAS 10, all of the
following events would be classified as nonadjusting events requiring disclosue, except?

a. The entity announced the discontinuance of its assembly operation

b. The entity entered into an agreement to purchase the freehold of its currently leased
office building

c. Destruction of a major production plant by fire

d. A mistake was discovered in the calculation of the allowance for uncollectible trade
receivables resulting to understatement of the trade receivables.

5. An entity is preparing its financial statements for the year ended June 30,2010. The board of directors
reviews the final draft financial statements and authorizes them for issue on August 15,2010.

The earnings figure and key data are issued to the public on September 15,2010. The financial
statements are issued to shareholders on October 15,2010 and approved by shareholders on October
31,2010.

The period in respect of which the entity would consider events after the end of reporting period is from
June 30,2010 to

a. August 15,2010

b. September 15,2010

c. October 15,2010

d. October 31,2010

ANSWER 6-28

1. c 3. d 5. a

2. b 4. d

QUESTION 6-29 Multiple Choice (IFRS)

1. An entity decided to build and operate a new amusement park in 2011. The financial year-end is
December 31,2010. The entity has applied for a letter of guarantee for an amount equal to the cost of the
amusements park. The letter of guarantee was issued on March 31,2011.

The audited financial statements have been authorized to be issue on April 15,2011. The adjustment
required to be made on December 31,2010 should be

a. Booking a long-term payable for the amount of the guarantee

b. Disclosing as a contingent liability in 2010 financial statement an amount equal to the

guarantee

c. Increasing the contingency reserve by an amount equal to the guarantee

 d. Do nothing

2. A new drug named “EEE” was introduced by an entity in the market on December 1,2010. The entity’s
financial year ends on December 31,2010. It was the only entity that was permitted to manufacture this
patented drug.

The drug is used by patients suffering from an irregular heartbeat. On March 31,2011, after the drug
was introduced, more than 1,000 patients died.

After a series of investigations, authorities discovered that when this drug was simultaneously used with
“BBB”, a drug use to regulate hypertension, the patient’s blood would clot and the patient suffered a
stroke.

A lawsuit for P100,000,000 has been filed against the entity. The financial statements were authorized
for issuance in April 30,2011.

Which of the following options is the appropriate accounting treatment for this event after reporting
period?

a. The entity should provide P100,000,000 because this is an “adjusting event” and the
financial statements were authorized to be issued after the accident.

b. The entity should disclose P100,000,000 as a contingent liability because it is an

“adjusting event”.

c. The entity should disclose P100,000,000 as a “contingent liability” because it is a present

obligation with an improbable outflow.

d. Assuming the probability of the lawsuit being decided against the entity is remote, the
entity should disclose it in the notes, because it is a nonadjusting material event.

3. At the end of the reporting period, December 31,2010, a entity carried a receivable from another entity,
a major customer. The “authorization date” of the financial statements is on February 16,2011. The
customer declared bankruptcy on Valentine’s Day, February 14,2011. The entity should

a. Disclose the fact that the customer has declared bankruptcy in the notes.

b. Make a provision for this post-reporting period events in its financial statements as
opposed to disclosure in notes.

c. Ignore the event and wait for the outcome of the bankruptcy because the event took place
after the year-end.

d. Reverse the sale pertaining to this receivable in the comparative statement for the prior
period and treat this as an “error”.

4. An entity built a new factory building during 2010 at a certain cost. Subsequent to year-end, March
15,2011, the building was destroyed by fire and the claim against the insurance entity proved futile
because the cause of the fire was negligence on the part of the caretaker of the building.

If the date of authorization of the financial statements for the year ended December 31,2010 was March
31,2011, the entity should
 a. Write off the carrying amount of the building to its scrap value because the insurance
claim would not fetch any compensation.

b. Make a provision for one-half of the carrying amount of the building

c. Make a provision for three-fourths of the carrying amount of the building based on
prudence.

d. Disclose this nonadjusting event in the notes.

5. An entity deals extensively with foreign entities, and its financial statements reflects this foreign
currency transactions. Subsequent to the reporting period, and before the “date of authorization” of the
issuance of the financial statements, there were abnormal fluctuations in foreign currency rates. The entity
should

a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse
fluctuations in foreign exchange rate.

b. Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in
foreign exchange rates and not just adverse movements.

c. Disclose the post-reporting period event in the notes as a nonadjusting event.

d. Ignore the post-reporting period event.

ANSWER 6-29

1. d 3. b 5. c

2. c 4. d

QUESTION 6-30 Multiple Choice (AICPA)

1. A development stage entity

a. Issues an income statement that shows only cumulative amounts from the entity’s
inception

b. Issues an income statement that is the same as an established operating entity, but does
not show cumulative amounts from the entity’s inception as additional information

c. Issues an income statement that is the same as an established operating entity, and shows
cumulative amounts from the entity’s inception as additional information

d. Does not issue an income statement

2. Financial reporting by a development stage entity differs from financial reporting for an established
operating entity in regard to note disclosures

a. Only

b. And expense recognition principles only

 c. And revenue recognition principles only

d. And revenue and expense recognition principles

3. Deficits accumulated during the development stage of an entity should be

a. Reported as organization cost

b. Reported as part of shareholders’ equity

c. Capitalized and written off in the first year of principal operations

d. Capitalized and amortized over a five-year period beginning when principal operations
commence

4. A statement of cash flows for a development stage entity

a. Is the same as that of an established operating entity and, in addition, shows cumulative
amounts from the entity’s inception

b. Shows only cumulative amounts from the entity’s inception

c. Is the same as that of an established operating entity, but does not show cumulative
amounts from the entity’s inception

d. Is not presented

ANSWER 6-30

1. c

2. a

3. b

4. a