2. FULL DISCLOSURE IN FINANCIAL REPORTING
C H A P T E R 24
FULL DISCLOSURE IN FINANCIAL REPORTING
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield

3. Learning Objectives

4. Full Disclosure in Financial Reporting
Full Disclosure Principle
Notes to Financial Statements
Disclosure Issues
Auditor’s and Management’s Report
Current Reporting Issues
Increase in reporting requirements
Differential disclosure
Accounting policies
Common notes
Special transactions or events
Post-balance-sheet events
Diversified companies
Interim reports
Auditor’s report
Management’s reports
Reporting on forecasts and projections
Internet financial reporting
Fraudulent financial reporting
Criteria for accounting and reporting choices

5. Full Disclosure Principle
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 AIG highlight the difficulty of implementing the full disclosure principle.
LO 1 Review the full disclosure principle and describe implementation problems.

6. Full Disclosure Principle
The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?
All information related to an entity's business and operating objectives is required to be disclosed in the financial statements.
Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.
Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision.
Disclosure of any financial facts significant enough to influence the judgment of an informed reader.
LO 1 Review the full disclosure principle and describe implementation problems.

7. Full Disclosure Principle
All Information Useful for Investment, Credit, and Similar Decisions
Financial Reporting
Affected by Existing FASB Standards
Illustration 24-1
Basic Financial Statements
Financial Statements
Notes to Financial Statements
Supplementary Information
Other Means of Financial Reporting
Other Information
Balance sheet
Statement of Income
Statement of Cash Flows
Statement of Changes in Stockholders’ Equity
Examples
Accounting Policies
Contingencies
Inventory Methods
Shares Outstanding
Alternative Measures
Examples:
Changing Prices Disclosures
Oil and Gas Reserves Information
Examples:
Management Discussion and Analysis
Letters to Stockholders
Examples:
Competition and Order Backlog in SEC Forms
Analysts' reports
Economic Statistics
Articles
LO 1 Review the full disclosure principle and describe implementation problems.

8. Full Disclosure Principle
Increase in Reporting Requirements
Reasons:
Complexity of Business Environment.
Necessity for Timely Information.
Accounting as a Control and Monitoring Device.
LO 1 Review the full disclosure principle and describe implementation problems.

9. Full Disclosure Principle
Differential Disclosure
“Big GAAP versus Little GAAP”.
FASB takes the position that there should be one set of GAAP.
LO 1 Review the full disclosure principle and describe implementation problems.

10. Notes to the Financial Statements
Notes are the means of amplifying or explaining the items presented in the main body of the statements.
Accounting Policies
Companies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies).
LO 2 Explain the use of notes in financial statement preparation.

11. Notes to the Financial Statements
Which of the following should be disclosed in a Summary of Significant Accounting Policies?
Types of executory contracts
Amount for cumulative effect of change in accounting principle
Claims of equity holders
Depreciation method followed
LO 2 Explain the use of notes in financial statement preparation.

12. Notes to the Financial Statements
Common Notes
Inventory
Property, Plant, and Equipment
Creditor Claims
Equity Holders’ Claims
Contingencies and Commitments
Fair Values
Deferred Taxes, Pensions, and Leases
Changes in Accounting Principles
LO 2 Explain the use of notes in financial statement preparation.

13. Disclosure Issues Disclosure of Special Transactions or Events
Related-party transactions
Nature of relationship
Description of the transaction
Dollar amounts
Amounts due from or to related parties
Illegal acts
LO 2 Explain the use of notes in financial statement preparation.

14. Disclosure Issues
If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the
nature of the relationship between the parties to the transactions.
nature of any future transactions planned between the parties and the terms involved.
dollar amount of the transactions for each of the periods for which an income statement is presented.
amounts due from or to related parties as of the date of each balance sheet presented.
LO 2 Explain the use of notes in financial statement preparation.

15. Disclosure Issues 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.
LO 2 Explain the use of notes in financial statement preparation.

16. Disclosure Issues a c b b c b
E24-2 (Post-Balance-Sheet Events): For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
______ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.
______ 2. Introduction of a new product line.
______ 3. Loss of assembly plant due to fire.
______ 4. Sale of a significant portion of the company’s assets.
______ 5. Retirement of the company president.
______ 6. Issuance of a significant number of shares of common stock. a c b b c b
LO 2 Explain the use of notes in financial statement preparation.

17. Disclosure Issues c c a c a b
E24-2 (Post-Balance-Sheet Events): For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
______ 7. Loss of a significant customer.
______ 8. Prolonged employee strike.
______ 9. Material loss on a year-end receivable because of a customer’s bankruptcy.
______ 10. Hiring of a new president.
______ 11. Settlement of prior year’s litigation.
______ 12. Merger with another company of comparable size. c c a c a b
LO 2 Explain the use of notes in financial statement preparation.

18. Disclosure Issues Reporting for Diversified Companies
Investors and investment analysts income statement, balance sheet, and cash flow information on the individual segments that compose the total income figure.
LO 3 Discuss the disclosure requirements for major business segments.

19. Disclosure Issues 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).
LO 3 Discuss the disclosure requirements for major business segments.

20. Disclosure Issues Basic Principles
GAAP requires that general-purpose financial statements include selected information on a single basis of segmentation.
A company can meet the segmented reporting objective by providing financial statements segmented based on how the company’s operations are managed (management approach).
LO 3 Discuss the disclosure requirements for major business segments.

21. Disclosure Issues Identifying Operating Segments
An operating segment is a component of an enterprise:
That engages in business activities from which it earns revenues and incurs expenses.
Whose operating results are regularly reviewed by the company’s chief operating decision maker.
For which discrete financial information is available.
LO 3 Discuss the disclosure requirements for major business segments.

22. Disclosure Issues Identifying Operating Segments
Quantitative Materiality Test: Must satisfy one to determines whether the segment is significant enough to warrant actual disclosure.
Its revenue is 10 percent or more of the combined revenue of all the company’s operating segments.
The absolute amount of its profit or loss is 10 percent or more of the greater, in absolute amount, of (a) the combined operating profit of all operating segments that did not incur a loss, or (b) the combined loss of all operating segments that did report a loss.
Its identifiable assets are 10 percent or more of the combined assets of all operating segments.
LO 3

23. Disclosure Issues Identifying Operating Segments
Quantitative Materiality Test:
In applying these tests, the company must consider two additional factors.
Segment data must explain a significant portion of the company’s business. Specifically, the segmented results must equal or exceed 75 percent of the combined sales to unaffiliated customers for the entire company.
The FASB decided that 10 is a reasonable upper limit for the number of segments that a company must disclose.
LO 3 Discuss the disclosure requirements for major business segments.
LO 3

24. Disclosure Issues Materiality Test Illustration
Reporting segments are therefore A, C, D, and E, assuming that these four segments have enough sales to meet the 75 percent of combined sales test.
Solution on note page
LO 3

25. Disclosure Issues Materiality Test Illustration
LO 3 Discuss the disclosure requirements for major business segments.
LO 3

26. Disclosure Issues Segmented Information Reported
General information about operating segments.
Segment profit and loss and related information.
Segment assets.
Reconciliations.
Information about products and services and geographic areas.
Major customers.
LO 3 Discuss the disclosure requirements for major business segments.

27. Disclosure Issues Revenue of a segment includes
only sales to unaffiliated customers.
sales to unaffiliated customers and intersegment sales.
sales to unaffiliated customers and interest revenue.
sales to unaffiliated customers and other revenue and gains.
LO 3 Discuss the disclosure requirements for major business segments.

28. Disclosure Issues
The profession requires disaggregated information in the following ways:
products or services.
geographic areas.
major customers.
all of these.
LO 3 Discuss the disclosure requirements for major business segments.

29. Disclosure Issues Interim Reports Cover periods of less than one year.
Two viewpoints exist:
The discrete approach
The integral approach
Companies should use the same accounting principles for interim reports that they use for annual reports.
LO 4 Describe the accounting problems associated with interim reporting.

30. Disclosure Issues Unique Problems of Interim Reporting
Advertising and similar costs
Expenses subject to year-end adjustment
Income taxes
Extraordinary items
Earnings per share
Seasonality
LO 4 Describe the accounting problems associated with interim reporting.

31. Disclosure Issues
In considering interim financial reporting, how does the profession conclude that such reporting should be viewed?
As a "special" type of reporting that need not follow generally accepted accounting principles.
As useful only if activity is evenly spread throughout the year so that estimates are unnecessary.
As reporting for a basic accounting period.
As reporting for an integral part of an annual period.
LO 4 Describe the accounting problems associated with interim reporting.

32. Auditor’s and Management’s 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
Disclaim
Illustration 24-14
LO 5 Identify the major disclosures in the auditor’s report.

33. Auditor’s and Management’s Reports
Auditor’s Report
Certain circumstances, although they do not affect the auditor’s unqualified opinion, may require the auditor to add an explanatory paragraph to the audit report.
Going Concert
Lack of Consistency
Emphasis of a Matter
Illustration 24-14
LO 5 Identify the major disclosures in the auditor’s report.

34. Auditor’s and Management’s Reports
Auditor’s Report
A qualified opinion contains an exception to the standard opinion. Usual circumstances may include:
Scope limitation.
Statements do not fairly present financial position or results of operations because of:
Lack of conformity with GAAP.
Inadequate disclosure.
LO 5 Identify the major disclosures in the auditor’s report.

35. Auditor’s and Management’s Reports
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.
LO 5 Identify the major disclosures in the auditor’s report.

36. Auditor’s and Management’s Reports
The MD&A section of a company's annual report is to cover the following three items:
income statement, balance sheet, and statement of owners' equity.
income statement, balance sheet, and statement of cash flows.
liquidity, capital resources, and results of operations.
changes in the stock price, mergers, and acquisitions.
LO 5 Identify the major disclosures in the auditor’s report.

37. Auditor’s and Management’s Reports
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.
LO 6 Understand management’s responsibilities for financials.

38. Current 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
LO 7 Identify issues related to financial forecasts and projections.

39. Current Reporting Issues
Which of the following best characterizes the difference between a financial forecast and a financial projection?
Forecasts include a complete set of financial statements, while projections include only summary financial data.
A forecast is normally for a full year or more and a projection presents data for less than a year.
A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen.
A forecast includes data which can be verified about future expectations, while the data in a projection is not susceptible to verification.
LO 7 Identify issues related to financial forecasts and projections.

40. Current Reporting Issues
Internet Financial Reporting
All large companies have Internet sites, and a large proportion of companies’ websites contain links to their financial statements and other disclosures.
LO 7 Identify issues related to financial forecasts and projections.

41. Current 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.
LO 8 Describe the profession’s response to fraudulent financial reporting.

42. Current Reporting Issues
Fraudulent Financial Reporting
Causes of Fraudulent Financial Reporting
Common causes are the desire
to obtain a higher stock price,
to avoid default on a loan covenant, or
to make a personal gain of some type (additional compensation, promotion).
LO 8 Describe the profession’s response to fraudulent financial reporting.

43. Current Reporting Issues
Fraudulent Financial Reporting
Causes of Fraudulent Financial Reporting
Common opportunities for fraudulent financial reporting
Absence of a board of directors or audit committee
Weak or nonexistent internal accounting controls.
Unusual or complex transactions
Accounting estimates requiring significant judgment
Ineffective internal audit staffs resulting
LO 8 Describe the profession’s response to fraudulent financial reporting.

44. Due to the broader range of judgments allowed in more principle-based iGAAP, note disclosures generally are more expansive under iGAAP compared to U.S. GAAP.
Like U.S. GAAP, iGAAP requires similar disclosure for transactions with related parties.
iGAAP and U.S. GAAP have similar standards on post-balance-sheet events. That is, under both sets of GAAP, events that occurred after the balance sheet date that provide additional evidence of conditions that existed at the balance sheet date are recognized in the financial statements.

45. Following the recent issuance of IFRS 8, “Operating =Segments,” the requirements under iGAAP and U.S. GAAP are very similar. That is, both GAAPs use the management approach to identify reportable segments, and similar segment disclosures are required.
Neither U.S. GAAP nor iGAAP requires interim reports. Rather the SEC and stock exchanges outside the U.S. establish the rules. In the U.S., interim reports generally are provided on a quarterly basis; outside the U.S., 6-month interim reports are common.

46. Perspective on Financial Statement Analysis
A logical approach to financial statement analysis is necessary, consisting of the following steps.
Know the questions for which you want to find answers.
Know the questions that particular ratios and comparisons are able to help answer.
Match 1 and 2 above. By such a matching, the statement analysis will have a logical direction and purpose.
LO 9 Understand the approach to financial statement analysis.

47. Perspective on Financial Statement Analysis
Analysis includes an understanding that
Financial statements report on the past.
Single ratio by itself is not likely to be very useful.
Awareness of the limitations of accounting numbers used in an analysis.
LO 9 Understand the approach to financial statement analysis.

48. Ratio Analysis Analysis includes an understanding that
Financial statements report on the past.
Single ratio by itself is not likely to be very useful.
Awareness of the limitations of accounting numbers used in an analysis.
LO 10 Identify major analytic ratios and describe their calculation.

49. Ratio Analysis
LO 10 Identify major analytic ratios and describe their calculation.

50. Ratio Analysis
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.

51. Ratio Analysis
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.

52. Ratio Analysis
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.

53. Ratio Analysis
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.

54. Limitations of Ratio Analysis
Based on historical cost.
Use of estimates.
Achieving comparability among firms in a given industry.
Substantial amount of important information is not included in a company’s financial statements.
LO 11 Explain the limitations of ratio analysis.

55. Comparative Analysis
Illustration 24A-2
LO 12 Describe techniques of comparative analysis.

56. Percentage (Common Size) Analysis
Illustration 24A-3
LO 13 Describe techniques of percentage analysis.

57. Percentage (Common Size) Analysis
Illustration 24A-4
LO 13 Describe techniques of percentage analysis.

58. The Present Environment
Multinational corporations.
Mergers and acquisitions.
Information technology.
Financial markets.
LO 14 Describe the current international accounting environment.

59. Reasons to Understand International Standards
Convergence.
Investors’ expectations
Competitive factors
LO 14 Describe the current international accounting environment.

60. The Challenge of International Accounting
High quality standards must
Permit few alternative practices.
Be clearly stated, to allow for easy interpretation and consistent application.
Be comprehensive, covering the major transactions facing companies, and must provide an effective system for responding to new transactions.
Provide transparency of information to make that information relevant for making effective decisions.
LO 14 Describe the current international accounting environment.

61. Who Are the Key Players
IASB – International Accounting Standards Board
develops the standards, which are referred to as International Financial Reporting Standards (IFRS) or iGAAP.
Other Organizations
National Standard-Setters
IOSCO – International Organization of Securities Commissions
LO 14 Describe the current international accounting environment.

62. Who Are the Key Players
Illustration 24B-1
LO 14 Describe the current international accounting environment.

63. Accounting Standard-Setting and Convergence
The FASB and the IASB are working together toward the goal of a single set of high quality accounting standards that will be used both domestically and internationally.
Illustration 24B-2
LO 14 Describe the current international accounting environment.

64. Copyright
Copyright © 2010 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.