Full Disclosure in Financial Reporting
22
Chapter 24-1 Full Disclosure in Financial Full Disclosure in Financial Reporting Reporting Chapte Chapte r r 24 24 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara
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Transcript of Full Disclosure in Financial Reporting
Chapter 24-1
Full Disclosure in Full Disclosure in Financial ReportingFinancial Reporting
ChapteChapter r
2424Intermediate Accounting12th Edition
Kieso, Weygandt, and Warfield
Prepared by Coby Harmon, University of California, Santa Barbara
Chapter 24-2
1. Review the full disclosure principle and describe implementation problems.
2. Explain the use of notes in financial statement preparation.
3. Discuss the disclosure requirements for major business segments.
4. Describe the accounting problems associated with interim reporting.
5. Identify the major disclosures in the auditor’s report.6. Understand management’s responsibilities for financials.7. Identify issues related to financial forecasts and
projections.8. Describe the profession’s response to fraudulent financial
reporting.
Learning ObjectivesLearning Objectives
Chapter 24-3
Accounting Accounting policiespoliciesCommon Common notesnotes
Full Full Disclosure Disclosure PrinciplePrinciple
Notes to Notes to Financial Financial
StatementsStatements
Disclosure Disclosure IssuesIssues
Auditor’s and Auditor’s and Management’s Management’s
ReportReport
Current Current Reporting Reporting
IssuesIssues
Increase in Increase in reporting reporting requirementsrequirementsDifferential Differential disclosuredisclosure
Special Special transactions transactions or eventsor eventsPost-balance-Post-balance-sheet eventssheet eventsDiversified Diversified companiescompaniesInterim Interim reportsreports
Auditor’s Auditor’s reportreportManagement’s Management’s reportsreports
Reporting on Reporting on forecasts and forecasts and projectionsprojectionsInternet financial Internet financial reportingreportingFraudulent Fraudulent financial financial reportingreportingCriteria for Criteria for accounting and accounting and reporting reporting choiceschoices
Full Disclosure in Financial ReportingFull Disclosure in Financial Reporting
Chapter 24-4
Full disclosure principle calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader.
Financial disasters at Microstrategy, PharMor, WorldCom, and Global Crossing highlightthe difficulty of implementing the full disclosure principle.
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure PrincipleFull Disclosure Principle
Chapter 24-5
ExamplesExamples Accounting Accounting
PoliciesPolicies ContingenciesContingencies Inventory Inventory
MethodsMethods Shares Shares
OutstandingOutstanding Alternative Alternative
MeasuresMeasures
Financial Financial StatementsStatements
Notes to Notes to Financial Financial
StatementsStatements
Supplementary Supplementary InformationInformation
Other Means of Other Means of Financial Financial ReportingReporting
Other Other InformationInformation
Balance sheetBalance sheetStatement of Statement of IncomeIncomeStatement of Statement of Cash FlowsCash FlowsStatement of Statement of Changes in Changes in Stockholders’ Stockholders’ EquityEquity
Examples:Examples: Changing Changing
Prices Prices DisclosuresDisclosures
Oil and Gas Oil and Gas Reserves Reserves InformationInformation
Examples:Examples: Management Management
Discussion Discussion and Analysisand Analysis
Letters to Letters to StockholdersStockholders
Examples:Examples: Competition Competition
and Order and Order Backlog in SEC Backlog in SEC FormsForms
Analysts' Analysts' reportsreports
Economic Economic StatisticsStatistics
ArticlesArticles
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure PrincipleFull Disclosure Principle
Basic Financial Basic Financial StatementsStatements
Affected by Existing FASB StandardsAffected by Existing FASB StandardsFinancial Financial ReportingReporting
All Information Useful for Investment, Credit, and Similar All Information Useful for Investment, Credit, and Similar DecisionsDecisions
Illustration 24-1
Chapter 24-6
Increase in Reporting RequirementsReasons:• Complexity of Business Environment.• Necessity for Timely Information.• Accounting as a Control and Monitoring
Device.
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure PrincipleFull Disclosure Principle
Chapter 24-7
Differential Disclosure
“Big GAAP versus Little GAAP”.
FASB takes the position that there should be one set of GAAP.
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure PrincipleFull Disclosure Principle
Chapter 24-8
Notes are the means of amplifying or explaining the items presented in the main body of the statements.
LO 2 Explain the use of notes in financial statement preparation.
Notes to the Financial StatementsNotes to the Financial Statements
Accounting PoliciesCompanies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies).
Chapter 24-9
Common NotesInventory Property, Plant, and Equipment Creditor Claims Equity Holders’ Claims Contingencies and Commitments Deferred Taxes, Pensions, and LeasesChanges in Accounting Principles
LO 2 Explain the use of notes in financial statement preparation.
Notes to the Financial StatementsNotes to the Financial Statements
Chapter 24-10
Disclosure of Special Transactions or EventsRelated-party transactions
Illegal acts
LO 2 Explain the use of notes in financial statement preparation.
Disclosure IssuesDisclosure Issues
Chapter 24-11
Post-Balance-Sheet Events (Subsequent Events)
LO 2 Explain the use of notes in financial statement preparation.
Disclosure IssuesDisclosure Issues
Illustration 24-4
1 - Events that provide additional evidence about conditions that existed at the balance sheet date.
2 - Events that provide evidence about conditions that did not exist at the balance sheet date.
Chapter 24-12
Reporting for Diversified Companies
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure IssuesDisclosure Issues
Investors and investment analysts income statement, balance sheet, and cash flow information on the individual segments that compose the total income figure.
Chapter 24-13
Objective of Reporting Segmented Information
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure IssuesDisclosure Issues
To provide information about the different types of business activities in which an enterprise engages and the different economic environments in which it operates.A company can meet objective by providing financial statements segmented based on how the company’s operations are managed (Operating Segment).
Chapter 24-14
Segmented Information Reported
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure IssuesDisclosure Issues
1. General information about operating segments.
2. Segment profit and loss and related information.
3. Segment assets.4. Reconciliations.5. Information about products and services and
geographic areas.6. Major customers.
Chapter 24-15
Interim Reports
LO 4 Describe the accounting problems associated with interim reporting.
Disclosure IssuesDisclosure Issues
Cover periods of less than one year.
Two viewpoints exist:1. The discrete approach 2. The integral approach
Companies should use the same accounting principles for interim reports that they use for annual reports.
Chapter 24-16
Unique Problems of Interim Reporting
LO 4 Describe the accounting problems associated with interim reporting.
Disclosure IssuesDisclosure Issues
(1) Advertising and similar costs(2) Expenses subject to year-end adjustment(3) Income taxes(4) Extraordinary items(5) Earnings per share(6) Seasonality
Chapter 24-17 LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s ReportsAuditor’s and Management’s Reports
Auditor’s ReportStandard unqualified opinion – auditor expresses the opinion that the financial statements are presented fairly, in all material respects, in conformity with GAAP.Other opinions:
QualifiedAdverseDisclaim
Illustration 24-14
Chapter 24-18 LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s ReportsAuditor’s and Management’s Reports
Management’s Report
The SEC mandates inclusion of management’s discussion and analysis (MD&A).
Management highlights favorable or unfavorable trends related to liquidity, capital resources, and results of operations.
Chapter 24-19 LO 6 Understand management’s responsibilities for financials.
Auditor’s and Management’s ReportsAuditor’s and Management’s Reports
Management’s Responsibilities for Financial Statements
The Sarbanes-Oxley Act requires the SEC to develop guidelines for all publicly traded companies to report on management’s responsibilities for, and assessment of, the internal control system.
Chapter 24-20 LO 7 Identify issues related to financial forecasts and projections.
Current Reporting IssuesCurrent Reporting Issues
Reporting on Financial Forecasts and ProjectionsFinancial forecast is a set of prospective
financial statements that present, a company’s expected financial position, results of operations, and cash flows.
Financial projections are prospective financial statements that present, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows. SEC Safe Harbor Rule
Chapter 24-21 LO 8 Describe the profession’s response to fraudulent financial
reporting.
Current Reporting IssuesCurrent Reporting Issues
Fraudulent Financial ReportingIntentional or reckless conduct, whether through act or omission, that results in materially misleading financial statements.
The Sarbanes-Oxley Act has numerous provisions intended to help prevent fraudulent financial reporting.
Chapter 24-22
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