1. Volume 2

2. PRESENTATION AND DISCLOSURE IN FINANCIAL REPORTING
C H A P T E R 24
PRESENTATION AND DISCLOSURE IN FINANCIAL REPORTING
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

3. Learning Objectives
Review the full disclosure principle and describe implementation problems.
Explain the use of notes in financial statement preparation.
Discuss the disclosure requirements for major business segments.
Describe the accounting problems associated with interim reporting.
Identify the major disclosures in the auditor’s report.
Understand management’s responsibilities for financials.
Identify issues related to financial forecasts and projections.
Describe the profession’s response to fraudulent financial reporting.

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
Events after the reporting period
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 Parmalat (ITA), Mahindra Satyam (IND), Société Générale (FRA), and AIG (USA) highlight the difficulty of implementing the full disclosure principle.
LO 1 Review the full disclosure principle and describe implementation problems.

6. Full Disclosure Principle
Illustration 24-1
Types of Financial
Information
LO 1 Review the full disclosure principle and describe implementation problems.

7. 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.

8. Full Disclosure Principle
Differential Disclosure
IASB has developed IFRS for small- and medium-sized entities (SMEs). SMEs are entities that
Publish general purpose financial statements for external users.
Do not issue shares or other securities in a public market.
Single standard of fewer than 230 pages.
Designed to meet the needs and capabilities of SMEs, which are estimated to account for over 95 percent of all companies around the world.
LO 1 Review the full disclosure principle and describe implementation problems.

9. 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).
In addition, companies must:
Identify judgments made in the process of applying the accounting policies.
Disclose information about assumptions made.
LO 2 Explain the use of notes in financial statement preparation.

10. 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.

11. 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.

12. Disclosure Issues Disclosure of Special Transactions or Events
Related-party transactions
Nature of relationship.
Amount of transaction and outstanding balances.
Provision for doubtful debts.
Expense recognized during the period in respect of bad or doubtful debts due from related parties.
Errors and fraud.
LO 2 Explain the use of notes in financial statement preparation.

13. Disclosure Issues
If a business entity entered into certain related party transactions, it would be required to disclose all 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 statement of financial position presented.
LO 2 Explain the use of notes in financial statement preparation.

14. Disclosure Issues
Events after the Reporting Period (Subsequent Events)
Illustration 24-5
Time Periods for
Subsequent Events
1 - Events that provide additional evidence about conditions that existed at the statement of financial position date.
2 - Events that provide evidence about conditions that did not exist at the statement of financial position date.
LO 2 Explain the use of notes in financial statement preparation.

15. Disclosure Issues a c b b c b
E24-2 (Post-Balance-Sheet Events): For each of the following subsequent 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 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 ordinary shares. a c b b c b
LO 2 Explain the use of notes in financial statement preparation.

16. Disclosure Issues c c a c a b
E24-2 (Post-Balance-Sheet Events): For each of the following subsequent 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.

17. Disclosure Issues Reporting for Diversified Companies
Investors and investment analysts income statement, statement of financial position, and cash flow information on the individual segments that compose the total income figure.
Illustration 24-7
Segmented Income
Statement
LO 3

18. 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.
Meeting this objective will help users:
Better understand the enterprise’s performance.
Better assess its prospects for future net cash flows.
Make more informed judgments about the enterprise as a whole.
LO 3 Discuss the disclosure requirements for major business segments.

19. Disclosure Issues Basic Principles
IFRS 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.

20. 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.

21. Disclosure Issues Identifying Operating Segments
Quantitative Materiality Test: Must satisfy one to determine 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

22. 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 IASB 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

23. Disclosure Issues Materiality Test Illustration
Data for Different Possible
Reporting Segments
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.
LO 3

24. Disclosure Issues Materiality Test Illustration
Data for Different Possible
Reporting Segments
LO 3 Discuss the disclosure requirements for major business segments.
LO 3

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

26. 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.

27. 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.

28. Disclosure Issues Interim Reports Cover periods of less than one year.
Two viewpoints exist:
Discrete approach
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.

29. Disclosure Issues Unique Problems of Interim Reporting Income taxes
Seasonality
Continuing controversy - debate on the independent auditor’s involvement in interim reports.
LO 4 Describe the accounting problems associated with interim reporting.

30. 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.

31. Auditor’s and Management’s Reports
Auditor’s Report
Illustration 24-14
Auditor’s Report
Unmodified Opinion – auditor expresses the opinion that the financial statements are presented fairly in accordance with IFRS. Other opinions:
Qualified
Adverse
Disclaim
LO 5 Identify the major disclosures in the auditor’s report.

32. 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
LO 5 Identify the major disclosures in the auditor’s report.

33. Auditor’s and Management’s Reports
Auditor’s Report
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 accepted standards.
Inadequate disclosure.
LO 5 Identify the major disclosures in the auditor’s report.

34. Auditor’s and Management’s Reports
Management commentary helps in the interpretation of the financial position, financial performance, and cash flows of a company. Such a report may include a review of the:
Main factors and influences determining financial performance;
Company’s sources of funding and its targeted ratio of liabilities to equity; and
Company’s resources not recognized in the statement of financial position in accordance with IFRS.
LO 5 Identify the major disclosures in the auditor’s report.

35. Auditor’s and Management’s Reports
Management’s Responsibilities for Financial Statements
Management is responsible for preparing the financial statements and establishing and maintaining an effective system of internal controls.
The auditor provides an independent assessment of whether the financial statements are prepared in accordance with IFRS, and for public companies, whether the internal controls are effective
LO 6 Understand management’s responsibilities for financials.

36. 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. Regulators have established a Safe Harbor Rule.
LO 7 Identify issues related to financial forecasts and projections.

37. Current Reporting Issues
Internet Financial Reporting
A large proportion of companies’ websites contain links to their financial statements and other disclosures.
Allows firms to communicate more easily and quickly with users.
Allow users to take advantage of tools such as search engines.
Can help make financial reports more relevant by allowing companies to report expanded disaggregated data.
LO 7 Identify issues related to financial forecasts and projections.

38. Current Reporting Issues
Fraudulent Financial Reporting
Intentional or reckless conduct, whether through act or omission, that results in materially misleading financial statements.
Frauds involving such well-known companies as Parmalat (ITA), Mahindra Satyam (IND), and Société Générale (FRA) indicate that more must be done to address this issue.
LO 8 Describe the profession’s response to fraudulent financial reporting.

39. 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.

40. 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.
LO 8 Describe the profession’s response to fraudulent financial reporting.

41. Due to the broader range of judgments allowed in more principle-based IFRS, note disclosures generally are more expansive under IFRS compared to U.S. GAAP.
U.S. GAAP and IFRS have similar standards on post-statement of financial position (subsequent) events.
Subsequent events under IFRS are evaluated through the date that financial instruments are “authorized for issue.” U.S. GAAP uses the date when financial statements are “issued.” Also, for share dividends and splits in the subsequent period, IFRS does not adjust but U.S. GAAP does..

42. Like IFRS, U.S. GAAP requires that for transactions with related parties, companies disclose the amounts involved in a transaction, the amount, terms and nature of the outstanding balances, and any doubtful amounts related to those outstanding balances for each major category of related parties. There is no specific requirement to disclose the name of the related party.
Following the recent issuance of IFRS 8, “Operating Segments,” the requirements under IFRS and U.S. GAAP are very similar. That is, both standards use the management approach to identify reportable segments, and similar segment disclosures are required.

43. 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.

44. 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.

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

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

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

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

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

50. 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.

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

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

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

54. IFRS 1 requires that information in a company’s first IFRS statements
be transparent,
provide a suitable starting point, and
Have a cost that does not exceed the benefits.
Overriding principle in converting from national GAAP to IFRS (the conversion process) is full retrospective application of all IFRS.
LO 14 Describe the guidelines for first-time adoption of IFRS.

55. General Guidelines
Objective is to present financial statements as if company always reported on IFRS. To achieve this objective, a company must:
Identify the timing for its first IFRS statements.
Prepare an opening statement of financial position at the date of transition to IFRS.
Select accounting policies that comply with IFRS, and apply these policies retrospectively.
Consider whether to apply any optional exemptions and apply mandatory exceptions.
Make extensive disclosure to explain the transition to IFRS.
LO 14

56. Relevant Dates
Once a company decides to convert to IFRS, it must decide on the following dates—transition date and reporting date.
Illustration 24B-1
First-Time Adoption
Timeline
LO 14

57. Implementation Steps Opening IFRS Statement of Financial Position
Process involves the following steps:
Include all assets and liabilities that IFRS requires.
Exclude any assets and liabilities that IFRS does not permit.
Classify all assets, liabilities, and equity in accordance with IFRS.
Measure all assets and liabilities according to IFRS.
LO 15 Describe the implementation steps for preparing the opening IFRS statement of financial position.

58. Exemptions from Retrospective Treatment
The Board identified three areas in which companies are prohibited from retrospective application in first-time adoption of IFRS:
Estimates.
Hedge accounting.
Non-controlling interests.
LO 16 Describe the exemptions to retrospective application in first-time adoption of IFRS.

59. Exemptions from Retrospective Treatment
Illustration 24B-3
Elective Exemption from
Retrospective Treatment
LO 16 Describe the exemptions to retrospective application in first-time adoption of IFRS.

60. Presentation and Disclosure
An entity’s first IFRS financial statements shall include:
three statements of financial position,
two statements of comprehensive income,
two separate income statements (if presented),
two statements of cash flows, and
two statements of changes in equity and related notes, including comparative information.
LO 17 Describe the presentation and disclosure requirements for first-time adoption of IFRS.

61. Presentation and Disclosure
A company’s first IFRS financial statements shall include reconciliations of:
Its equity reported in accordance with previous GAAP to its equity in accordance with IFRS at the transition date.
Its total comprehensive income in accordance with IFRS to total comprehensive income in accordance with previous GAAP for the same period.
LO 17 Describe the presentation and disclosure requirements for first-time adoption of IFRS.

62. Copyright
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