5. Public Company Reporting Topics & EPS Flashcards
What are SEC’s 5 divisions?
The division of corporate finance Enforcement Trading and markets Investment management Economic and risk analysis
Which division oversees compliance with the securities act?
Division of corporate finance
Which division oversees secondary market, exchanges, brokers and dealers?
Division of trading and market
What does Regulation S-X regulate?
Format and content of financial stmt disclosures (IS, BS, Change in OE, stmt of CF, foot note/disclosures, qualification of accountants)
What does Regulation S-K regulate?
Form and content of non financial stmt disclosures (the content of 10-K besides financial stmt: description of business, stockholders matters, MD&A, change in the disagreements w accountants, info on directors and managers)
Which form is used for initial registration with SEC?
Form S-1 submit financial info, BS within 90 days of the submission
What’s the part 1 of Form S-1?
Prospectus - supplied to potential purchasers. Description of the issuing company, operations/risks, financial stmts - audited BS (2yrs), 3 yrs of IS, change in OE, stmt of CF.
What does Form 8-K report?
Significant events
What’s the filing deadlines for 10K for Large accelerated filer (>700mil), accelerated filer (>75>700), and nonaccelerated filer (<75)?
For 10Q?
60days, 75days, 90days
40days, 40days, 45days
In form 10K, how many parts are there?
4
Form 10-K, what’s included in part 1?
Description of business, risk, unresolved staff comments, legal, submission of matters to a vote of stockholders
Form 10-K, what’s included in part 2?
Market price of com. stock, financial data, MD&A, financial stmts, disagreements with accountants
Form 10-K, what’s included in part 3?
Directors/officers, executive compensations, security ownerships, related party, fees
Form 10K, what’s included in part 4?
Exhibits, signatures, certifications
What does MD&A (management discussions and analysis) include?
Financial, trend, events, important acct policies, forward looking perspectives
Is Form 10Q audited?
No, but must be reviewed by an auditor
What did the Sarbarnes-Oxiley Act of 2002 change?
Requirement of annual audits by registered auditing firm
The auditing firm can’t provide non audit service
Audit committee requirement
Management must report on internal controls: existence and effectiveness
Increased penalties
Reporting of EPS required for who?
Public entities
EPS reported only on which types of stock?
Common
For simple capital structure (only com. stock or com. stock and non convertible pref. stock. No PCS potential com. stock), which EPS must be reported?
BEPS
For complex capital structure, which EPS must be reported?
BEPS and DEPS
EPS reported on which segments of IS?
Income from continuing operations
Discontinued operations
NI
Where on the IS EPS can be reported?
On the face of foot note
Is EPS after tax amount?
Yes
What’s the formula to compute BEPS?
NI - pref. stock dividends / weighted average com. shares outstanding
To compute EPS, subtraction of pref. stock dividend depends on cumulative or not and current yr dividend declared or not. Summarize
If cumulative and current yr divi declared: 1 full yr dividend
Not declared: 1 full yr dividend
If non cumulative and current yr did declared: Amount declared
Not declared: none
To compute WA (weighted average), if stock dividend and split occur between BS date and issuance date, how are they treated?
Must be incorporated
To compute EPS, which segment you don’t subtract pref. stock divi pd?
Discontinued operation
Contingent shares - included in WA?
Yes
GAAP: DEPS, dilution portion of ordinary shares determined cumulatively yr to date. IFRS?
Independently of each other
GAAP: BEPS/DEPS not allowed for alternative earnings measures. IFRS?
Allowed
Which characteristics segment reporting represent?
Predictive value and confirmatory value
Segment reporting: which approach?
Management approach
3 characteristics of segment reporting
Involved in revenue producing and expense incurring activities.
The operating results reviewed by chief operating decision maker on a regular basis
Discreet financial info available
How is a reportable segment identified?
- The segment’s revenue from all internal/external sources is 10% or more of the combined revenues of all of the company’s reported operating segments.
- The segment’s operating profit (pre tax) or loss is 10% or more of the greater of the following:
Combined operating profit of all operating segments that did not report operating loss or combined operating loss - The segment’s identifiable assets are 10% or more of the combined asset of all operating segments
- Segment revenue at least 75% of the total external revenue
When can segments be aggregated?
When it meets 10% criteria and similar in nature
When a major customer must be disclosed under segment reporting?
If the revenue from the customer is 10% or more of the total revenue
IFRS: when the disclosure of total liabilities required under segment reporting?
When the info is provided to chief operating decision maker
Interim reporting: when decline in inventory value must be reported?
When it’s other than temporary
Interim reporting: audited?
No, but for SEC registrants reviewed
Interim: EPS reported on which view?
Discreet view: reflect only for the period
Interim: expenses- which view?
Discreet view (if cost not related to other periods, recognize in the period)
Interim: expense - when should it be reported under integral view?
When they benefit other periods. Ex) depr. property tax exp. rent exp. advertising exp. bad debt exp.
Interim: income tax expense. Which view?
Integral view. Annual rate must be reestimated each quarter. Rate applied through the end of quarter. The income tax reported in previous quarters subtracted.
Interim: gross margin method allowed? (Not allowed for 10K)
Yes to estimate COGS
Interim: principles change. How are they treated?
Same as annual
Is interim reporting required by GAAP?
Yes for SEC registrants
Interim reporting contents?
Sales, revenue, discontinued operation, NI, seasonal reve/exp, change in estimated tax expense, contingencies, FV, EPS, change in accounting policies, significant CF changes
IFRS for interim: mainly which view?
Discreet view
IFRS. Interim: reporting required?
No. Encourages semi annual reporting at a minimum
Private company council: GW: amortize over how long?
10 yrs or less
Private company council: impairment test required?
No. Only when triggering events occur
What are two main pronouncement published by the SEC?
Financial reporting release and staff accounting bulletins
Does common stock dividend have bearing on EPS?
No
What is the formula for diluted EPS?
NI - preferred stock dividends + adjustments to income for assumed conversion of PSC / weighted average of CS outstanding + shares from assumed conversion of PSC
How to calculate preferred stock dividend? ex) 1000 shares of 4%, $100 par nonconvertible cumulative preferred stock.
1000 x 100 x 4% = 4,000
Calculation of BEPS: does preferred stock dividend subtracted from discontinued operation income?
No.
What are three method for DEPS?
If converted method: convertible preferred stock/bonds.
Treasury stock method: stock options/warrants.
The dilution/anti dilution method: more than one PCS.
How is the tax affect involved in “if converted method”?
If bonds are converted to CS, there will be no interest expense. So the interest expense that would have been paid (add the tax pmt: 1 - tax rate to NI) if there were bonds must be added back to NI.
Explain “if converted method”
100, 5%, $1,000 convertible bond. Each bond is convertible into 20 shares of CS. Tax rate 30%. NI: $18,500. WA CS: 5,000. BEPS: $18,500/5,000=$3.70.
What about when it’s issued in the middle of the year, in April?
- Numerator effect: Calculate the after-tax interest expense saved - 100($1000)(5%)(1-0.3)=$3,500.
- Denominator effect: # of CS issued on conversion - 100(20) = 2,000 shares.
- Determine if the convertible bonds are dilutive. $3,500/2,000=1.75. Compare this with BEPS. If BEPS > 1.75, then this is dilutive.
- DEPS=(18,500+3,500)/(5,000+2,000)=$3.14
(9/12)$3,500/(9/12)2,000=1.75 no effect.
Explain “treasury stock method”
5,000 options to purchase $2 par CS for $10: outstanding all year. The average market price of CS: $25.
- 5,000($10)=$50,000 proceeds from exercise. 5,000 increase in CS shares.
- Then, the company will purchase CS as treasury stock using the proceeds so that it can keep the same level of treasury stock. $50,000/$25=2,000 shares purchased for treasury.
- Therefore, the denominator affect is +3,000 shares (5,000-2,000).
No NI affect.
“Treasury method.” What happens when options outstanding only since in April? How do you know when options are dilutive?
Use fraction of the year: 9/12.
Dilutive when option exercise price < average market price of CS.
Explain “the dilution/anti dilution method”
- Compute each PCS impact on numerator and denominator.
- If the result < BEPS, then dilutive. (If result is > BEPS, the anti dilutive and do not use for the following calculation). Use the smallest result to incorporate into BEPS numerator and denominator to compute DEPS. Then, do the same for next smallest.
When is BEPS=DEPS?
When income from continuing operations is negative
When would anti dilutive items be used?
Only for discontinued operation
When stock dividend is issued, what’s the impact on calculating CS outstanding?
Consider it outstanding for the whole year. Don’t use fraction.
Segment reporting: Does the amount of internal and external sales be reported separately?
Yes.
Explain tax affect for interim financial stmt.
1Q: Income before tax: $10,000. Tax expense: $1,500.
2Q: Income before tax: $20,000. An estimate effective tax rate: 25%.
(25%)(10,000+20,000)-1,500=$6,000
Modified cash basis: Explain two key points.
Have some elements of accrual accounting.
Must have substantial support in practice to be acceptable.
EPS: stock splits and dividend to calculate the numerator: do you use weighted?
No, consider them outstanding the whole year.
IFRS: How are cash advances and loans classified for stmt of CF?
Operating. Borrowing = operating under IFRS.
What’s the percentage threshold for the revenue for external customers for reporting segments?
ex: Total reve: 80. Total external reve (included in the total rev): 30.
75%. 30x75%=22.5
When can segments be aggregated?
Either all of aggregation criteria are met or a majority of criteria is met after performing the 10% test
