024- Full Disclosure - Concepts and Practices

Chapter 24-1

Full Disclosure: Concepts and PracticesFull Disclosure: Concepts and PracticesFull Disclosure: Concepts and Practices

Chapter Chapter

2424Intermediate Accounting

12th 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 ObjectivesLearning Objectives

Chapter 24-3

Accounting Accounting policiespolicies

Common Common notesnotes

Full Full Disclosure Disclosure PrinciplePrinciple

Notes to Notes to Financial Financial

StatementsStatements

Disclosure Disclosure IssuesIssues

AuditorAuditor ’’s and s and ManagementManagement ’’s s

ReportReport

Current Current Reporting Reporting

IssuesIssues

Increase in Increase in reporting reporting requirementsrequirements

Differential Differential disclosuredisclosure

Special Special transactions transactions or eventsor events

PostPost--balancebalance--sheet eventssheet events

Diversified Diversified companiescompanies

Interim Interim reportsreports

AuditorAuditor’’s s reportreport

ManagementManagement’’s s reportsreports

Reporting on Reporting on forecasts and forecasts and projectionsprojections

Internet financial Internet financial reportingreporting

Fraudulent Fraudulent financial financial reportingreporting

Criteria for Criteria for accounting and accounting and reporting reporting choiceschoices

Full Disclosure in Financial ReportingFull 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 highlight

the difficulty of implementing the full disclosure

principle.

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

Full Disclosure PrincipleFull 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 Other Means of Financial of Financial ReportingReporting

Other Other InformationInformation

Balance sheetBalance sheet

Statement of Statement of IncomeIncome

Statement of Statement of Cash FlowsCash Flows

Statement of Statement of Changes in Changes in StockholdersStockholders’’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



Basic Financial StatementsBasic Financial Statements

Affected by Existing FASB StandardsAffected by Existing FASB Standards

Financial ReportingFinancial Reporting

All Information Useful for Investment, Credit, and Similar DecisAll Information Useful for Investment, Credit, and Similar Decisionsions

Illustration 24-1

Chapter 24-6

Increase in Reporting Requirements

Reasons:

• Complexity of Business Environment.

• Necessity for Timely Information.

• Accounting as a Control and Monitoring Device.



Chapter 24-7

Differential Disclosure

“Big GAAP versus Little GAAP”.

FASB takes the position that there should be

one set of GAAP.



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 StatementsNotes to the Financial Statements

Accounting Policies

Companies should present a statement

identifying the accounting policies adopted

(Summary of Significant Accounting Policies).

Chapter 24-9

Common Notes

Inventory

Property, Plant, and Equipment

Creditor Claims

Equity Holders’ Claims

Contingencies and Commitments

Deferred Taxes, Pensions, and Leases

Changes in Accounting Principles


Notes to the Financial StatementsNotes to the Financial StatementsNotes to the Financial Statements

Chapter 24-10

Disclosure of Special Transactions or Events

Related-party transactions

Illegal acts


Disclosure IssuesDisclosure IssuesDisclosure Issues

Chapter 24-11

Post-Balance-Sheet Events (Subsequent Events)



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.


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



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



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.


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.


(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 ReportsAuditorAuditor’’s and Managements and Management’’s Reportss Reports

Auditor’s 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

DisclaimIllustration 24-14

Chapter 24-18 LO 5 Identify the major disclosures in the auditor’s report.


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.


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 IssuesCurrent Reporting Issues

Reporting on Financial Forecasts and Projections

Financial 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 IssuesCurrent Reporting Issues

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 24-22

Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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024- Full Disclosure - Concepts and Practices