Chapter 24-1 Accounting Accounting policies policies Common Common notes notes Full Full Disclosure Disclosure Principle Principle Notes to Notes to Financial Financial Statements Statements Disclosure Disclosure Issues Issues Auditor’s Auditor’s and and Management’s Management’s Report Report Current Current Reporting Reporting Issues Issues Increase Increase in in reporting reporting requiremen requiremen ts ts Differenti Differenti al al disclosure disclosure Special Special transactio transactio ns or ns or events events Post- Post- balance- balance- sheet sheet events events Diversifie Diversifie d d companies companies Interim Interim reports reports Auditor’s Auditor’s report report Management’ Management’ s reports s reports Reporting on Reporting on forecasts forecasts and and projections projections Internet Internet financial financial reporting reporting Fraudulent Fraudulent financial financial reporting reporting Criteria for Criteria for accounting accounting and and reporting reporting choices choices Ch24: Full Disclosure in Financial Reporting Ch24: Full Disclosure in Financial Reporting
Financial Accounting and Accounting StandardsCurrent Reporting
Issues
Internet financial reporting
Fraudulent financial reporting
Criteria for accounting and reporting choices
Ch24: Full Disclosure in Financial Reporting
Service Cost - Actuaries compute service cost as the present value
of the new benefits earned by employees during the year. Future
salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just
as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from
interest, dividends, and realized and unrealized changes in the
fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of
providing retroactive benefits is allocated to pension expense in
the future, specifically to the remaining service-years of the
affected employees.
Gain or Loss - Volatility in pension expense can be caused by
sudden and large changes in the market value of plan assets and by
changes in the projected benefit obligation. Two items comprise the
gain or loss:
difference between the actual return and the expected return on
plan assets and,
amortization of the unrecognized net gain or loss from previous
periods
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Full disclosure principle :
Report any financial facts significant enough to influence the
judgment of an informed reader.
Implementation issues :
2. Increase in reporting requirements by SEC, FASB
3. Differential disclosure: “Big GAAP vs. Small GAAP”
Full Disclosure Principle
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Notes: the means of full disclosure and providing qualitative and
supplementary data
Notes to the Financial Statements
Accounting Policies
Companies should present a statement identifying the accounting
policies adopted (Summary of Significant Accounting
Policies).
Common Notes
Equity Holders’ Claims; Contingencies and Commitments;
Deferred Taxes, Pensions, and Leases
Changes in Accounting Principles
Related-party transactions
(2) Disclosure requirements :SFAS 57
Nature of relationship
Description of transaction
Disclosure Issues
1 - Events that provide additional evidence about conditions that
existed at the balance sheet date (Recognized subsequent event)
=> adjustments to F/S
2 - Events that provide evidence about conditions that did not
exist at the balance sheet date (Non-recognized subsequent event)
=> note disclosure, if necessary
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Investors and investment analysts want financial statement
information on the individual segments of the company.
Pros and cons: Aggregated information vs. Disaggregated
information.
How to disaggregate?: Based on how the company’s operations are
managed (Operating Segment).
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Disclosure Issues
1. A segment is reportable if it meets any one of:
Revenue test: if its total revenue is 10% or more of the company’s
total revenue.
Profit (loss) test: if its profit (loss) is greater than 10% of
total profit (loss) for all segments that reported profit
(loss).
Asset test: if its assets are 10% or more of all operating
segments.
2. Limit of 10 segments and the sales of all the segments must be
at least 75% of the company’s total sales.
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Interim Reports
Disclosure Issues
2.Two viewpoints exist:
(1) The discrete approach
(2) The integral approach
3. Companies should use the same accounting principles for interim
reports that they use for annual reports.
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Disclosure Issues
Income taxes
Extraordinary items