F2 - M1 - Notes to Financial Statements Flashcards
What is the Summary of Significant Accounting Policies?
A US GAAP and IFRS requirement to present a description of all significant accounting policies (disclosures) in the financial statements.
This should include policies ONLY; no detailed amounts or computations
Where is the Summary of Significant Accounting Policies presented?
Either the first or second note to the financial statements. Some companies include Nature of Operations as the first note.
What is the additional IFRS requirement regarding notes to the financial statements?
IFRS requires an explicit and unreserved statement of compliance with IFRS. US GAAP does not have a similar requirement.
IFRS requires disclosure of judgments and estimates made by management in the process of applying accounting policies. US GAAP only requires disclosure of significant estimates. (Example: whether an asset is categorized as “held to maturity” or “available for sale”)
List examples of disclosures that would be included in the Statement of Significant Accounting Policies.
- Measurement Basis
- Basis of Consolidation
- Depreciation Methods
- Amortization of Intangibles
- Inventory Pricing
- Use of Estimates
- Fiscal Year Definition
- Special Revenue Recognition Issues (i.e., long term construction contracts, franchising, leasing, etc.)
- Criteria for which investments are cash equivalents
List examples of disclosures that would NOT be included in the Statement of Significant Accounting Policies.
- Composition and detailed amounts of accounts
- Details relating to changes in accounting principles
- Dates of maturity and amounts of long-term debt
- Yearly computation of depreciation, depletion, and amortization
What other types of notes should be included?
Any and all information relevant to decision makers.
Examples:
- Material info regarding inventory, PP&E, etc.
- Change in Stockholders Equity
- Marketable Securities (CV, Gross Unrealized G/L)
- Fair Value Estimates
- Contingency Losses
- Contractual Obligations (i.e., Bonds or Notes Payable)
- Pension Plan Description
- Segment Reporting (Including Discontinued Segment)
- Subsequent Events (Outside Ordinary Business)
- Change in Accounting Principle or implementation of new accounting standards update
- Related Party Disclosures
- Risk and Uncertainties
Areas of disclosure regarding risks and uncertainties
- Nature of Operations
- Use of Estimates
- Certain Significant Estimates
- Current Vulnerability due to certain concentrations
Nature of Operations Disclosure
Description of the entity’s major products or services and its principal markets, including the location of those markets.
If the entity operates multiple businesses, the disclosure should describe the relative importance of each business.
50% of companies now have this as the first footnote
Use of Estimates in Preparation of the Financial Statements
Footnotes should include a statement that says US GAAP allows management to make estimates and assumptions relating to transactions in the financial statements and that actual results could be different from those estimates.
What happens when there are estimates that are probable to have a material change in the near future?
An estimate of the effect of the change should be disclosed. (MD&A - Management Discussion and Analysis). Immaterial items are not disclosed.
Examples:
- Technological Obsolescence (Outdated Technology)
- Deferred Tax Asset Valuation Allowances (NOL Carry)
- Capitalized computer software costs
- Loan valuation allowances
- Litigation-related obligations
- Amounts reported for long-term obligations (pensions)
- Amounts reported in long-term contracts
When does vulnerability due to concentrations arise?
When an entity is exposed to risk of loss that could be mitigated through diversification
Examples:
- Volume of business transacted with a particular customer, supplier, lender, grantor, etc.
- Revenue from particular products, services, or events
- Available supply of resources
- Market or geographic area
What is the purpose of information presented in notes to the financial statements?
To provide disclosures required by GAAP
