Chapter 24: Full Disclosure in Financial Reporting Flashcards
To report financial facts significant enough to influence the judgment of an informed reader (cost-benefit principle)
full disclosure principle
To report financial facts significant enough to influence the judgment of an informed reader (cost-benefit principle)
full disclosure principle
- summary of significant accounting policies
- inventory
- property, plant, and equipment
- creditor claims
- equity holders’ claims
- contingencies and commitments
- fair values
- items requiring extensive disclosure
- accounting changes
- subsequent events
- related party transactions
- errors and illegal acts
notes to the financial statements (integral part of F/S)
- disclose methods to prepare financial statements
- should be the first note
summary of significant account policies
- basis of valuation (LCM)
- cost flow assumption (FIFO, LIFO, WT’D AVE)
inventory
- basis of valuation (historical cost)
- pledges, liens, or other commitments related to these assets
- balances of major classes of depreciable assets
- current period depreciation expense
property, plant, and equipment
- methods of financing
- timing of future cash outflows
creditor claims
- number of shares authorized and issued; par value
- equity instruments (stock options; convertible securities)
- restrictions on the earnings available for dividends
equity holders’ claims
litigation, purchase commitments, sale of receivables with recourse
contingencies and commitments
- cost and faif value for tose financial instruments; methods used to determine fair value
fair values
deferred taxes, pensions, and leases
items requiring extensife disclosure
change in principle and change in estimate, if material
accounting changes
- financial statement date through report issue date
- Type 1: affects condition existing at balance sheet date; requires adjustment to financial statements
- Type 2: does not affect condition existing at balance sheet date; disclosure only
subsequent events
- transactions not at arms length
- GAAP requires disclosure of the nature of the relationship, a description of the transaction, and the dollar amounts invovled
related party transactions
What are the segment information categories?
- identifying operating segments - a component
- tests for significance
- required disclosures for reportable segments
- a component that earns revenues and incurs expenses
- a component whose operating results are regularly reviewed by the chief operating decision maker to assess performance
- a component that has discrete financial information availabe from the internal financial reporting system
identifying operating segments - A component
A segment is classified as reportable if one or more of the following thresholds are met:
- segment revenue >= 10% of combined segment revenue
- segment’s absolute profit/loss >= 10% of larger of: (a) combined operating profit of all segments that did not incur a loss, (b) combined loss of all segments that did incur a loss
- segment assets >= 10% of combined segment assets
- general information
- reconciliations of the operating segment’s revenues, profits, and assets to company totals
- product information
- major customers
required disclosures for reportable segments
- sales, provision for taxes, and net income
- basic and diluted EPS
- seasonal revenue, cost, or expenses
- significant changes in estimate
- segment disposals
- contingent items
- change in accounting principle
- significant changes in financial positon
required disclosures in interim (temporary) reports
- expenses subject to year-end adjustment
- income taxes
- extraordinary items
items to cosider in interim reports
Should be extimated and allocated to interim periods (i.e. bad debt)
expenses subject to year-end adjustment
use the estimated annual effective tax rate
income taxes
recorded in the quarter it occurs
extraordinary items
- provides an independent opinion on financial statements
auditor’s report
- state whether financial statements are in accordance with GAAP
- state those circumstances where consistency does not exist
- disclosures are to be regarded as reasonably adequate, unless otherwise stated in the report
- must contain an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed
reporting standards (GAAS)
- unqualified opinion: financial statements presented fairly
- qualified opinion: except for
- adverse opinion: financial statements are NOT presented fairly
- disclaimer opinion: unable to express opinion
types of audit opinions
- scope of examination is limited
- lack of conformity with GAAP and/or inadequate disclosure
reasons for departure from unqualified opinion
- scope of examination is limited
- lack of conformity with GAAP and/or inadequate disclosure
reasons for departure from unqualified opinion
Provides a biased but informed perspective of:
- liquidity
- capital resources
- results of operations
management’s discussion and analysis (MD&A)
- asserts the responsibility of a managment for the information contained in the annual reports as well as an assessment of the company’s internal control systems
- section 302 of Sarbanes-Oxley “Corporate Responsibilites for Financial Reports” states that “The CEO and CFO of each issuer shall prepare a statment to accompany the audit report ot certify the appropriateness of the financial statements and disclosures contained in the report adn that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issure.”
management’s responsibilites
Current reporting issues that are reported on financial forecasts and projections
- financial forecast
- financial projection
- controversy about whether these should be required
prospective financial statements that present expected financial positions, results of operations and cash flows.
financial forecast
prospective financial statements that present expected financial position, results of operations and cash flows given one or more hypothetical assumptions
financial projection
- improves the usefulness of financial reports
- disadvantage: reliability of information
internet financial reporting
- communicates with more users
- use internet tools to access information for analysis
- increase relevance by reporting more timely data
improves the usefulness of financial reports
intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements
fraudulent financial reporting
- situational pressures
- opportunities
fraudulent financial reporting
- sudden decreases in revenue/market share
- unrealistic budget pressure
- compensation tied to company performmance
situational pressures
- no board of directors/audit committee
- lack of or weak internal control
- unusual or complex transactions
- significant accounting estimates
- lack of or ineffective internal audit function
opportunities of fraudulent financial reporting
