CH 24

Chapter 24-1
CHAPTER
24
FULL DISCLOSURE IN FINANCIAL REPORTING
Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield

Chapter 24-2
Learning Objectives
Chapter 24-3
Full Disclosure in Financial Reporting
Full Disclosure Principle

Increase in reporting requirements Differential disclosure
Notes to Financial Statements

Accounting policies Common notes
Disclosure Issues
Special transactions or events Post-balancesheet events Diversified companies
Auditors and Managements Report
Current Reporting Issues

Reporting on forecasts and projections Internet financial reporting Fraudulent financial reporting Criteria for accounting and reporting choices
Auditors report
Managements reports
Interim reports
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 AIG highlight the difficulty of implementing the full disclosure principle.
Chapter 24-5
LO 1 Review the full disclosure principle and describe implementation problems.

The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?
a.
b.
All information related to an entity's business and operating

objectives is required to be disclosed in the financial statements. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.
c.
Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make
a profitable decision.
d.
Chapter 24-6
Disclosure of any financial facts significant enough to influence the judgment of an informed reader.

All Information Useful for Investment, Credit, and Similar Decisions Financial Reporting Affected by Existing FASB Standards
Illustration 24-1
Basic Financial Statements

Financial Statements Balance sheet Statement of Income Statement of Cash Flows Statement of Changes in Stockholders Equity
Chapter 24-7
Notes to Financial Statements Examples Accounting Policies Contingencies Inventory Methods Shares Outstanding Alternative Measures
Supplementary Information
Other Means of Financial Reporting Examples: Management Discussion and Analysis
Other Information Examples: Competition and Order Backlog in SEC Forms
Examples: Changing Prices Disclosures Oil and Gas Reserves Information
Letters to Stockholders
Analysts' reports Economic Statistics

Articles

Increase in Reporting Requirements
Reasons:
Complexity of Business Environment. Necessity for Timely Information. Accounting as a Control and Monitoring Device.
Chapter 24-8

Differential Disclosure
Big GAAP versus Little GAAP. FASB takes the position that there should be one set of GAAP.
Chapter 24-9
Notes to the Financial Statements

Notes are the means of amplifying or explaining the items presented in the main body of the statements.
Accounting Policies
Companies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies).
Chapter 24-10
LO 2 Explain the use of notes in financial statement preparation.

Which of the following should be disclosed in a Summary of Significant Accounting Policies? a. Types of executory contracts b. Amount for cumulative effect of change in accounting principle c. Claims of equity holders d. Depreciation method followed
Chapter 24-11

Common Notes
Inventory
Property, Plant, and Equipment Creditor Claims
Equity Holders Claims

Contingencies and Commitments Fair Values Deferred Taxes, Pensions, and Leases Changes in Accounting Principles
Chapter 24-12
Disclosure Issues
Disclosure of Special Transactions or Events
Related-party transactions
Nature of relationship Description of the transaction
Dollar amounts
Amounts due from or to related parties
Illegal acts
Chapter 24-13
Disclosure Issues
If a business entity entered into certain related party transactions, it would be required to disclose all of the following information
except the
a. nature of the relationship between the parties to the transactions.
b. nature of any future transactions planned between the parties

and the terms involved. c. dollar amount of the transactions for each of the periods for which an income statement is presented. d. amounts due from or to related parties as of the date of each balance sheet presented.
Chapter 24-14
Disclosure Issues
Post-Balance-Sheet Events (Subsequent Events)
Illustration 24-4
1 - Events that provide additional evidence about conditions that existed at the balance sheet date.
Chapter 24-15
2 - Events that provide evidence about conditions that did not exist at the balance sheet date.
Disclosure Issues
E24-2 (Post-Balance-Sheet Events): For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
a ______ 1. Settlement of federal tax case at a cost considerably in c ______ 2. Introduction of a new product line. b ______ 3. Loss of assembly plant due to fire.
excess of the amount expected at year-end.
b ______ 4. Sale of a significant portion of the companys assets.

c ______ 5. Retirement of the company president.
stock.
Chapter 24-16
b ______ 6. Issuance of a significant number of shares of common

Disclosure Issues
E24-2 (Post-Balance-Sheet Events): For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
c ______ 7. Loss of a significant customer. c ______ 8. Prolonged employee strike.

customers bankruptcy.
a ______ 9. Material loss on a year-end receivable because of a
c ______ 10. Hiring of a new president.
a ______ 11. Settlement of prior years litigation.
b ______ 12. Merger with another company of comparable size.

Chapter 24-17
Disclosure Issues
Reporting for Diversified Companies
Investors and investment analysts income statement, balance sheet, and cash flow information on the individual segments that compose the total income figure.
Chapter 24-18
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Objective of Reporting Segmented Information
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 companys operations are managed (Operating Segment).
Chapter 24-19
Disclosure Issues
Basic Principles
GAAP requires that general-purpose financial statements include selected information on a single basis of segmentation. A company can meet the segmented reporting objective by providing financial statements segmented based on how the companys operations are managed (management approach).
Chapter 24-20
Disclosure Issues
Identifying Operating Segments
An operating segment is a component of an enterprise: a. That engages in business activities from which it earns revenues and incurs expenses. b. Whose operating results are regularly reviewed by the companys chief operating decision maker. c. For which discrete financial information is available.
Chapter 24-21
Disclosure Issues
Quantitative Materiality Test: Must satisfy one to determines whether the segment is significant enough to warrant actual disclosure.
1. Its revenue is 10 percent or more of the combined revenue of all the companys operating segments.
2.
The absolute amount of its profit or loss is 10 percent or more of

the greater, in absolute amount, of (a) the combined operating profit of all operating segments that did not incur a loss, or (b) the combined loss of all operating segments that did report a loss.
3.
Chapter 24-22
Its identifiable assets are 10 percent or more of the combined assets of all operating segments.
LO 3
Disclosure Issues
Quantitative Materiality Test: In applying these tests, the company must consider two additional factors. 1. Segment data must explain a significant portion of the companys business. Specifically, the segmented results must equal or exceed 75 percent of the combined sales to unaffiliated customers for the entire company. 2. The FASB decided that 10 is a reasonable upper limit for
the number of segments that a company must disclose.

Chapter 24-23
LO 3 Discuss the disclosure requirements for major business segments. LO 3
Disclosure Issues
Materiality Test Illustration
Illustration 24-7
Chapter 24-24
Solution on note page
Reporting segments are therefore A, C, D, and E, assuming that these four segments have enough sales to meet the 75 percent of combined sales test.
LO 3
Disclosure Issues
Materiality Test Illustration
Illustration 24-7
Chapter 24-25
LO 3 Discuss the disclosure requirements for major business segments. LO 3
Disclosure Issues
Segmented Information Reported
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 24-26
Disclosure Issues
Revenue of a segment includes
a. only sales to unaffiliated customers.

b. sales to unaffiliated customers and intersegment sales.
c. sales to unaffiliated customers and interest

revenue. d. sales to unaffiliated customers and other revenue and gains.
Chapter 24-27
Disclosure Issues
The profession requires disaggregated information
in the following ways:

a. products or services. b. geographic areas. c. major customers. d. all of these.
Chapter 24-28
Disclosure Issues
Interim Reports
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 24-29
LO 4 Describe the accounting problems associated with interim reporting.
Disclosure Issues
Unique Problems of Interim Reporting
(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 24-30
Disclosure Issues
In considering interim financial reporting, how does the profession conclude that such reporting should be viewed? a. As a "special" type of reporting that need not follow generally accepted accounting principles. b. As useful only if activity is evenly spread throughout the year so that estimates are unnecessary. c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.
Chapter 24-31
Auditors and Managements Reports

Auditors Report
Standard Unqualified Opinion auditor expresses the opinion that the financial statements are presented fairly, in all material respects, in conformity with GAAP.
Other opinions: Qualified
Adverse
Disclaim
Illustration 24-14 Chapter 24-32
LO 5 Identify the major disclosures in the auditors report.

Auditors Report
Certain circumstances, although they do not affect
the auditors unqualified opinion, may require the auditor to add an explanatory paragraph to the audit
report.
Going Concert Lack of Consistency Emphasis of a Matter
Illustration 24-14 Chapter 24-33

Auditors Report
A qualified opinion contains an exception to the standard opinion. Usual circumstances may include:
1. Scope limitation.
2. Statements do not fairly present financial position or results of operations because of: a. Lack of conformity with GAAP. b. Inadequate disclosure.
Chapter 24-34

Managements Report
The SEC mandates inclusion of managements discussion and analysis (MD&A).
Management highlights favorable or unfavorable trends related to liquidity, capital resources, and results of operations.
Chapter 24-35

The MD&A section of a company's annual report is to cover
the following three items:

a. income statement, balance sheet, and statement of owners' equity.
b. income statement, balance sheet, and statement of

cash flows. c. liquidity, capital resources, and results of operations.
d. changes in the stock price, mergers, and acquisitions.
Chapter 24-36

Managements Responsibilities for Financial Statements
The Sarbanes-Oxley Act requires the SEC to develop guidelines for all publicly traded companies to report on managements responsibilities for, and assessment of, the internal control system.
Chapter 24-37
LO 6 Understand managements responsibilities for financials.

Reporting on Financial Forecasts and Projections
Financial forecast is a set of prospective financial statements that present, a companys expected financial position, results of operations, and cash flows.
Financial projections are prospective financial statements that present, given one or more hypothetical assumptions, an entitys expected financial position, results of operations, and cash flows. SEC Safe Harbor Rule
Chapter 24-38
LO 7 Identify issues related to financial forecasts and projections.

Which of the following best characterizes the difference between a financial forecast and a financial projection?
a.
Forecasts include a complete set of financial statements, while

projections include only summary financial data.
b. A forecast is normally for a full year or more and a projection presents data for less than a year. c. A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen.
d. A forecast includes data which can be verified about future

expectations, while the data in a projection is not susceptible to verification.
Chapter 24-39

Internet Financial Reporting
All large companies have Internet sites, and a large proportion of companies websites contain links to their financial statements and other disclosures.
Chapter 24-40

Fraudulent Financial Reporting
Intentional 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 24-41
LO 8 Describe the professions response to fraudulent financial reporting.

Causes of Fraudulent Financial Reporting
Common causes are the desire
to obtain a higher stock price, to avoid default on a loan covenant, or to make a personal gain of some type (additional compensation, promotion).
Chapter 24-42

Causes of Fraudulent Financial Reporting
Common opportunities for fraudulent financial reporting
Absence of a board of directors or audit committee Weak or nonexistent internal accounting controls. Unusual or complex transactions Accounting estimates requiring significant judgment Ineffective internal audit staffs resulting
Chapter 24-43
Due to the broader range of judgments allowed in more principlebased iGAAP, note disclosures generally are more expansive under iGAAP compared to U.S. GAAP. Like U.S. GAAP, iGAAP requires similar disclosure for transactions with related parties. iGAAP and U.S. GAAP have similar standards on post-balance-sheet events. That is, under both sets of GAAP, events that occurred after the balance sheet date that provide additional evidence of conditions that existed at the balance sheet date are recognized in the financial statements.
Chapter 24-44
Following the recent issuance of IFRS 8, Operating =Segments, the requirements under iGAAP and U.S. GAAP are very similar. That is, both GAAPs use the management approach to identify reportable segments, and similar segment disclosures are required.
Neither U.S. GAAP nor iGAAP requires interim reports. Rather the SEC and stock exchanges outside the U.S. establish the rules. In the U.S., interim reports generally are provided on a quarterly basis; outside the U.S., 6-month interim reports are common.
Chapter 24-45
Perspective on Financial Statement Analysis

A logical approach to financial statement analysis is necessary,
consisting of the following steps.

1. Know the questions for which you want to find answers. are able to help answer. 3. Match 1 and 2 above. By such a matching, the statement analysis will have a logical direction and purpose.
2. Know the questions that particular ratios and comparisons
Chapter 24-46
LO 9 Understand the approach to financial statement analysis.
Perspective on Financial Statement Analysis

Analysis includes an understanding that
1. Financial statements report on the past. 2. Single ratio by itself is not likely to be very useful. 3. Awareness of the limitations of accounting numbers used in an analysis.
Chapter 24-47
LO 9 Understand the approach to financial statement analysis.
Ratio Analysis
Analysis includes an understanding that
1. Financial statements report on the past. 2. Single ratio by itself is not likely to be very useful. 3. Awareness of the limitations of accounting numbers used in an analysis.
Chapter 24-48
LO 10 Identify major analytic ratios and describe their calculation.
Ratio Analysis
Chapter 24-49
Ratio Analysis
Illustration 24A-1
Chapter 24-50
Ratio Analysis
Illustration 24A-1
Chapter 24-51
Ratio Analysis
Illustration 24A-1
Chapter 24-52
Ratio Analysis
Illustration 24A-1
Chapter 24-53
Limitations of Ratio Analysis

Based on historical cost. Use of estimates. Achieving comparability among firms in a given industry.
Substantial amount of important information is not

included in a companys financial statements.
Chapter 24-54
LO 11 Explain the limitations of ratio analysis.
Comparative Analysis
Illustration 24A-2
Chapter 24-55
LO 12 Describe techniques of comparative analysis.
Percentage (Common Size) Analysis

Illustration 24A-3
Chapter 24-56
LO 13 Describe techniques of percentage analysis.
Percentage (Common Size) Analysis
Illustration 24A-4
Chapter 24-57
LO 13 Describe techniques of percentage analysis.
The Present Environment

Multinational corporations. Mergers and acquisitions. Information technology. Financial markets.
Chapter 24-58
LO 14 Describe the current international accounting environment.
Reasons to Understand International Standards

Convergence. Investors expectations Competitive factors
Chapter 24-59
The Challenge of International Accounting

High quality standards must
1. Permit few alternative practices. 2. Be clearly stated, to allow for easy interpretation and
consistent application.
3. Be comprehensive, covering the major transactions facing companies, and must provide an effective system for responding to new transactions. 4. Provide transparency of information to make that information relevant for making effective decisions.
Chapter 24-60
Who Are the Key Players

IASB International Accounting Standards Board
develops the standards, which are referred to as International Financial Reporting Standards (IFRS) or
iGAAP.
Other Organizations
National Standard-Setters IOSCO International Organization of Securities Commissions
Chapter 24-61
Who Are the Key Players

Illustration 24B-1
Chapter 24-62
Accounting Standard-Setting and Convergence

The FASB and the IASB are working together toward the goal of a single set of high quality accounting standards that will be used both domestically and
internationally.
Illustration 24B-2
Chapter 24-63
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Chapter 24-64

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Chapter 24-1

FULL DISCLOSURE IN FINANCIAL REPORTING

Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield

Full Disclosure in Financial Reporting

Full Disclosure Principle

Notes to Financial Statements

Auditors and Managements Report

Current Reporting Issues

Full Disclosure Principle

LO 1 Review the full disclosure principle and describe implementation problems.

Full Disclosure Principle

All information related to an entity's business and operating

Full Disclosure Principle

Basic Financial Statements

Other Means of Financial Reporting Examples: Management Discussion and Analysis

Other Information Examples: Competition and Order Backlog in SEC Forms

Examples: Changing Prices Disclosures Oil and Gas Reserves Information

Analysts' reports Economic Statistics

LO 1 Review the full disclosure principle and describe implementation problems.

Full Disclosure Principle

LO 1 Review the full disclosure principle and describe implementation problems.

Full Disclosure Principle

LO 1 Review the full disclosure principle and describe implementation problems.

Notes to the Financial Statements

LO 2 Explain the use of notes in financial statement preparation.

Notes to the Financial Statements

LO 2 Explain the use of notes in financial statement preparation.

Notes to the Financial Statements

Equity Holders Claims

LO 2 Explain the use of notes in financial statement preparation.

LO 2 Explain the use of notes in financial statement preparation.

b. nature of any future transactions planned between the parties

LO 2 Explain the use of notes in financial statement preparation.

LO 2 Explain the use of notes in financial statement preparation.

b ______ 4. Sale of a significant portion of the companys assets.

b ______ 6. Issuance of a significant number of shares of common

c ______ 7. Loss of a significant customer. c ______ 8. Prolonged employee strike.

a ______ 9. Material loss on a year-end receivable because of a

c ______ 10. Hiring of a new president.

a ______ 11. Settlement of prior years litigation.

b ______ 12. Merger with another company of comparable size.

LO 2 Explain the use of notes in financial statement preparation.

LO 3 Discuss the disclosure requirements for major business segments.

LO 3 Discuss the disclosure requirements for major business segments.

LO 3 Discuss the disclosure requirements for major business segments.

LO 3 Discuss the disclosure requirements for major business segments.

The absolute amount of its profit or loss is 10 percent or more of

the number of segments that a company must disclose.

LO 3 Discuss the disclosure requirements for major business segments. LO 3

Solution on note page

LO 3 Discuss the disclosure requirements for major business segments. LO 3

General information about operating segments.

LO 3 Discuss the disclosure requirements for major business segments.

a. only sales to unaffiliated customers.

c. sales to unaffiliated customers and interest

LO 3 Discuss the disclosure requirements for major business segments.

in the following ways:

LO 3 Discuss the disclosure requirements for major business segments.

Two viewpoints exist:

LO 4 Describe the accounting problems associated with interim reporting.

(2) Expenses subject to year-end adjustment

LO 4 Describe the accounting problems associated with interim reporting.

c 7. Loss of a significant customer. c 8. Prolonged employee strike.