FAR SEC 3 Flashcards
What is the Securities and Exchange Commission (SEC)?
The Securities and Exchange Commission (SEC) was created by the Securities Exchange Act of 1934 to regulate the trading of securities and otherwise to enforce securities legislation.
What is the Securities Exchange Act of 1934?
The Securities and Exchange Commission (SEC) was created by the Securities Exchange Act of 1934 to regulate the trading of securities and otherwise to enforce securities legislation.
What are the two basic purposes of the securities laws?
1) to prevent fraud and misrepresentation.
2) to require full and fair disclosure so investors can evaluate investments.
What are the two main requirements of the Securities Exchange Act of 1934?
1) PUBLIC COMPANIES REGISTER WITH SEC. Under the Securities Exchange Act of 1934, all regulated, publicly held companies must register with the SEC. Registration is required of all securities listed on a national exchange.
2) SEC FILERS FILE PERIODIC REPORTS TO SEC. Under the 1934 act, disclosures about subsequent trading of securities are made by filing periodic reports using the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system that are available to the public for review.
What is Regulation S-X?
Regulation S-X describes the form and content of, and requirements for, financial statements filed with the SEC. It applies to the reporting of interim and annual financial statements, including notes and schedules.
Which 4 items are included in Management’s Discussion and Analysis (MD&A)?
This information includes the entity’s outlook and significant effects of known trends, events, and uncertainties. It addresses such matters as (1) liquidity, (2) capital resources, (3) results of operations, and (4) the effect of changing prices.
What is MD&A?
Management’s discussion and analysis (MD&A) of financial condition and results of operations includes the entity’s outlook and significant effects of known trends, events, and uncertainties.
What are the main examples of items other than the complete set of financial statements that must be submitted to the SEC as per Regulation S-X? (6 elements)
1) Management’s discussion and analysis (MD&A) of financial condition and results of operations
2) Management and general data for each director and officer
3) Compensation of the five highest-paid directors and officers
4) Security holdings of directors, officers, and those owning 5% or more of the security
5) Matters submitted to shareholders for approval
6) Pending litigation, e.g., principal parties, allegations, and relief sought
What is the Securities Act of 1933?
-The Securities Act of 1933 was created and passed into law to protect investors after the stock market crash of 1929.
-The Securities Act of 1933 was designed to create transparency in the financial statements of corporations.
-The Securities Act also established laws against misrepresentation and fraudulent activities in the securities markets.
-The Securities Act is enforced by the Securities and Exchange Commission, created by the Exchange Act of 1934.
What is the difference between the Securities Act of 1933 and the Securities Exchange Act of 1934?
The Securities Act of 1933 created the foundational laws regulating the issuance of securities on exchanges, whereas the Securities Exchange Act of 1934 mainly served to create the SEC for the purpose of enforcing the Securities Act of 1933.
What is the form 10-k?
Form 10-K is the annual report to the SEC. It must be audited by an independent public accountant.
What are the annual financial statements included in the form 10-k? (2 elements)
1) Balance sheets for the 2 most recent fiscal year ends
2) Statements of income, cash flows, and changes in equity for the 3 most recent fiscal years
What is the 10-k filing deadline for large accelerated filers?
60 days of the last day of the fiscal year by large accelerated filers [companies with a public float (the market value of shares held by the public) of $700 million or more]
What is the 10-k filing deadline for accelerated filers?
75 days by accelerated filers (public float of $75 million to $700 million and annual revenues of $100 million or more)
What is the 10-K filing deadline for nonaccelerated filers?
90 days by nonaccelerated filers [(1) public float of less than $75 million or (2) public float of $75 million to $700 million and annual revenues of less than $100 million]
What are large accelerated filers?
Companies with a public float (the market value of shares held by the public) of $700 million or more.
What are nonaccelerated filers?
Nonaccelerated filers have either: (1) public float of less than $75 million or (2) public float of $75 million to $700 million and annual revenues of less than $100 million
What are accelerated filers?
Accelerated filers have a public float of $75 million to $700 million and annual revenues of $100 million or more.
What is the form 10-Q?
Form 10-Q is the quarterly report of operations and financial condition filed with the SEC. It must be reviewed by an independent public accountant. A review offers a lower level of assurance than an audit regarding financial condition and the results of operations.
What is the difference in rigor between the form 10-K and the form 10-Q?
The form 10-K requires a complete audit by an independent CPA, whereas the form 10-Q requires a review by an independent CPA. A review offers a lower level of assurance than an audit regarding financial condition and the results of operations.
Is form 10-Q required for the fourth quarter of the year?
No filing for the fourth quarter is required; Form 10-K is filed instead.
Do entities filing the form 10-K also have to file the form 10-Q?
Yes. An entity required to file Form 10-K also must file Form 10-Q for each of the first three quarters.
What is the 10-Q filing deadline for both large accelerated filers and accelerated filers?
It must be filed within 40 days of the last day of the fiscal quarter by large accelerated filers and accelerated filers.
What is the 10-Q filing deadline for nonaccelerated filers?
It must be filed within 45 days of the last day of the fiscal quarter by nonaccelerated filers.
What is the form 8-K?
Form 8-K is a current report to disclose material events. It must be filed within 4 business days after the material event occurs.
What are the main examples of material events that would warrant the filing of a form 8-K? (5 examples)
1) A change in control of the registrant
2) Acquisition or disposition of a significant amount of assets not in the ordinary course of business
3) Bankruptcy or receivership
4) Resignation of a director
5) A change in the registrant’s certifying accountant
What is the deadline for filing the form 8-K?
It must be filed within 4 business days after the material event occurs.
What is form 20-F?
Form 20-F is the annual report to the SEC filed by foreign private issuers. It is similar to Form 10-K. The financial statements in Form 20-F may be prepared in accordance with U.S. GAAP or IFRS (International Financial Reporting Standards).
Who certifies the forms 10-K and 10-Q?
They are certified by the CEO and CFO, and the certifiers bear responsibility for any false reporting.
Doe GAAP require reporting of interim financial information?
No. GAAP do not require reporting of interim financial information.
Must GAAP be applied if entities report interim financial information?
Yes. GAAP must be applied when entities report such information, including when publicly traded companies issue summarized interim information.
What is interim financial information?
Interim financial information is information reported midway through an annual reporting period, e.g., the quarterly 10-Q reports.
What is an issuer?
-An issuer is a legal entity that develops, registers and sells securities to finance its operations.
-Issuers may be corporations, investment trusts, or domestic or foreign governments.
-Issuers make available securities such as equity shares, bonds, and warrants.
What is the best qualitative characteristic of interim financial information?
For many reasons, the usefulness of interim financial information is limited. Thus, its best qualitative characteristic is timeliness.
What accounting principles should be used to prepare interim financial statements?
Each interim period is treated primarily as an integral part of an annual period. Ordinarily, the results for an interim period should be based on the same accounting principles the entity uses in preparing annual statements, but certain principles may require modification at interim dates.
How is revenue recognized for interim financial reporting?
Revenue should be recognized as earned during an interim period on the same basis as followed for the full year.
Can interim period revenue be recognized under different rules than those that apply for end of period financial reporting?
No. Revenue should be recognized as earned during an interim period on the same basis as followed for the full year.
What are the three differences in interim financial reporting of inventory as compared to normal reporting of inventory?
1) VALUE INVENTORY WITH GROSS PROFIT METHOD. The gross profit method may be used for estimating cost of goods sold and inventory because a physical count at the interim date may not be feasible (described in Study Unit 6, Subunit 7).
2) TEMPORARY INVENTORY LOSS WRITE-DOWNS ARE DEFERRABLE AT THE INTERIM STATEMENT. An inventory loss from a write-down below cost may be deferred if no loss is reasonably anticipated for the year.
3) NON-TEMPORARY INVENTORY LOSS WRITE-DOWN’S AREN’T DEFERRABLE. But inventory losses from nontemporary declines below cost must be recognized at the interim date. If the loss is recovered during the year (in another quarter), it is treated as a change in estimate. The amount recovered is limited to the losses previously recognized. (Study Unit 6, Subunit 6, contains the relevant outlines.)
Can inventory be reported differently for interim financial reporting as compared to end of period financial reporting?
Yes. Costs associated with revenue are treated similarly for annual and interim reporting. However, some exceptions are appropriate for inventory accounting at interim dates.
What special method can be used to estimate COGS and Inventory at interim dates? Why is this reasonable?
The gross profit method may be used for estimating cost of goods sold and inventory for interim reporting. This is reasonable because a physical count at the interim date may not be feasible (described in Study Unit 6, Subunit 7).
For interim financial reporting, how are inventory losses treated? (2 elements)
1) An inventory loss from a write-down below cost may be deferred if no loss is reasonably anticipated for the year.
2) But inventory losses from nontemporary declines below cost must be recognized at the interim date. If the loss is recovered during the year (in another quarter), it is treated as a change in estimate. The amount recovered is limited to the losses previously recognized. (Study Unit 6, Subunit 6, contains the relevant outlines.)
For interim financial reporting, how are costs and expenses treated?
Costs and expenses other than product costs are either charged to income in interim periods as incurred or allocated among interim periods.
For interim financial reporting of costs and expenses other than product costs, what is the basis for the allocation among interim periods? (3 elements)
The allocation is based on the (1) benefits received, (2) estimates of time expired, or (3) activities associated with the period. If an item expensed for annual reporting benefits more than one interim period, it should be allocated.
Under what circumstances would gains or losses pertaining to costs and expenses other than product costs definitely not be deferred for interim financial reporting?
Gains and losses that are similar to gains and losses that would not be deferred at year end are not deferred to later interim periods. For example, an unusual or infrequently occurring item and a gain or loss on the disposal of an asset are recognized in full in the quarter in which they occur. They must not be prorated over the fiscal year.
What are the two major categories of costs and expenses addressed by interim financial reporting?
1) Product costs (costs associated with revenues).
2) All costs and expenses other than product costs.
For interim financial reporting of costs and expenses other than product costs, how are unusual or infrequently occurring items accounted for?
An unusual or infrequently occurring item and a gain or loss on the disposal of an asset are recognized in full in the quarter in which they occur. They must not be prorated over the fiscal year.
For interim financial reporting of costs and expenses other than product costs, can unusual or infrequently occurring items be prorated over the fiscal year?
No. They must not be prorated over the fiscal year. They are recognized in full in the quarter in which they occur.
Is it possible that some items expensed in annual statements should be allocated to interim periods? If so, how is this done?
Some items expensed in annual statements should be allocated to the interim periods that are clearly benefited.
For interim financial reporting of costs and expenses other than product costs, what is the basis for charging quantity discounts to interim periods?
Quantity discounts based on annual sales volume should be charged to interim periods based on periodic sales.
For interim financial reporting of costs and expenses other than product costs, how are interest, rent, and property taxes treated?
Interest, rent, and property taxes may be accrued or deferred at interim dates to assign an appropriate cost to each period.
For interim financial reporting of costs and expenses other than product costs, how are advertising costs treated?
Advertising costs may be deferred within a fiscal year if the benefits clearly extend beyond the interim period of the expenditure.
In interim financial reporting of costs and expenses other than product costs, what is year-end adjustment?
Certain costs and expenses, such as (1) inventory shrinkage, (2) allowance for credit losses, and (3) discretionary bonuses, are subject to year-end adjustment. To the extent possible, these adjustments should be estimated and assigned to interim periods.
For interim financial reporting of costs and expenses other than product costs, which three items are subject to year-end adjustment?
Certain costs and expenses, such as
(1) inventory shrinkage,
(2) allowance for credit losses, and
(3) discretionary bonuses, are subject to year-end adjustment.
How is seasonality addressed in interim financial reporting?
If interim information is issued, certain disclosures are mandatory for businesses that have material seasonal fluctuations. These fluctuations cannot be smoothed in interim information. Accordingly, reporting entities must disclose the seasonal nature of their activities. They also should consider supplementing interim reports with information for the 12-month period that ended at the interim date for the current and preceding years.
Can the reporting of seasonal fluctuations be smoothed in the interim financial reports?
No. These fluctuations cannot be smoothed in interim information.
When should the entity estimate the annual effective tax rate?
At the end of each interim period, the entity should estimate the annual effective tax rate.
What is the equation for calculating the interim period tax expense (benefit)?
Interim Period Tax Expense (Benefit) = [Estimated Annual Effective Tax Rate]*[Year-to-date Ordinary Income (Loss) Before Income Taxes] – Interim Tax Expense (Benefit) Recognized in Previous Interim Periods
For interim financial reporting, are unusual and infrequently occurring events or results of discontinued operations included in the “ordinary” year-to-date income (loss) used to calculate the interim period tax expense (benefit)?
No, they are not. “Ordinary” in this context means excluding unusual or infrequently occurring items and results of discontinued operations.
How is the estimated annual effective tax rate determined? (3 elements)
1) The estimated annual effective tax rate is based on the statutory rate adjusted for the current year’s expected conditions. These include (1) anticipated tax credits, (2) foreign tax rates, (3) capital gains rates, and (4) other tax planning alternatives.
2) The rate also includes the effect of any expected valuation allowance at year end for deferred tax assets related to deductible temporary differences and carryforwards arising during the year.
3) The rate is determined without regard to (1) significant unusual or infrequently occurring items to be reported separately or (2) items reported net of tax effect. However, such items are recognized in the interim period when they occur. The method of intraperiod tax allocation described in Study Unit 9, Subunit 5, is used.
In determining the estimated annual effective tax rate, which two items are excluded from the rate estimate?
The rate is determined without regard to (1) significant unusual or infrequently occurring items to be reported separately or (2) items reported net of tax effect. However, such items are recognized in the interim period when they occur.
When is a tax benefit recognized for interim periods?
A tax benefit is recognized for a loss early in the year if the benefits are expected to be realized during the year or recognizable as a deferred tax asset at year end.
What is a valuation allowance?
A valuation allowance is a reserve that is used to offset the amount of a deferred tax asset. The amount of the allowance is based on that portion of the tax asset for which it is more likely than not that a tax benefit will not be realized by the reporting entity.
When is a valuation allowance recognized?
A valuation allowance must be recognized if it is more likely than not that a deferred tax asset will not be fully realized. Accordingly, the tax benefit of an ordinary loss early in the year is not recognized to the extent that this criterion is met. However, no income tax expense is recognized for subsequent ordinary income until the earlier unrecognized tax benefit is used.
How do the principles for tax benefits in interim reporting, including the rules for valuation allowances, relate to determining the estimated tax benefit of an ordinary loss for the fiscal year?
The foregoing principles are applied in determining the estimated tax benefit of an ordinary loss for the fiscal year used to calculate (1) the annual effective tax rate and (2) the year-to-date tax benefit of a loss.
When is a change in accounting principle retrospectively applied?
In interim as well as annual periods, a change in accounting principle is retrospectively applied unless it is impracticable to determine the cumulative or period-specific effects of the change.
Under what circumstance would a change in accounting principle not be retrospectively applied?
It would not be retrospectively applied if it is impracticable to determine the cumulative or period-specific effects of the change in principle.
How is the cumulative effect of a change in accounting principle on prior periods reported in the interim financial reports?
The cumulative effect of the change on periods prior to those presented is reflected in the carrying amounts of assets, liabilities, and retained earnings at the beginning of the first period presented. All periods presented must be adjusted for period-specific effects.
For interim financial reporting, how is a change in accounting estimate accounted for?
A change in an accounting estimate, including a change in the estimated effective annual tax rate, is accounted for prospectively in the interim period in which the change is made and in future periods. Prior-period information is not retrospectively adjusted.
What rules apply for prior interim period adjustments to litigation, income taxes (except for the effects of retroactive tax legislation), or renegotiation proceedings? (2 elements)
1) All or part of the adjustment or settlement must relate specifically to a prior interim period of the current year. Moreover, its effect must be material, and the amount must have become reasonably estimable only in the current interim period.
2) If an item of profit or loss occurs in other than the first interim period and meets the criteria for an adjustment, the portion of the item allocable to the current interim period is included in net income for that period.
i) The financial statements for the prior interim periods are restated to include their allocable portions of the adjustment.
ii) The portion of the adjustment directly related to prior fiscal years is included in net income of the first interim period of the current fiscal year.
What is the valid justification for an entity to voluntarily change their accounting principles?
If financial information is to be comparable and consistent, entities must not make voluntary changes in accounting principles unless they can be justified as preferable.
What is shown on the Impracticability Exceptions flow chart?
