Transcript Financial Accounting and Accounting Standards

PREVIEW OF CHAPTER 24
Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
24-1
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-2
Describe the accounting problems
associated with interim reporting.
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, Enron, PharMor, WorldCom, and
AIG highlight the difficulty of implementing the full disclosure
principle.
Warren Buffet: “Financial reporting for Berkshire
Hathaway, and for me personally, is the
beginning of every decision that we make around
here . . . I’m punching out 10-Ks and 10-Qs
every single day . . . “
24-3
LO 1 Review the full disclosure principle and describe implementation problems.
24-4
LO 5
Full Disclosure Principle
I think I’m getting it. Has something to do with financial statement
disclosures, whatever they are.
24-5
Characteristics of Accounting
Economic Entity
Financial Statements
Additional Information
Financial
Information
Balance Sheet
President’s letter
Stmt of Income
and/or OCI
Prospectuses,
Accounting?
Identifies
and
Measures
and
Communicates
Statement of Cash
Flows
News releases
Statement of
Owners’ or
Stockholders’
Equity
Environmental
Reports
Note Disclosures
GAAP
24-6
SEC Reporting
Forecasts
Etc.
Not GAAP
Full Disclosure Principle
Illustration 24-1
Types of Financial
Information
24-7
LO 1
Full Disclosure Principle
Increase in Reporting Requirements
One study has shown over the last 20 years, the
number of pages in the annual report has
increased 83%.
Reasons:
Complexity of Business Environment.
Necessity for Timely Information.
Accounting as a Control and Monitoring Device.
24-8
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure Principle
Differential Disclosure
“Big GAAP versus Little GAAP”.
Historically, the FASB has taken the position
that there should be one set of GAAP.
Currently, efforts are underway to produce to
some sort of Little GAAP for non-public and
small-public companies, both at the FASB and
IASB levels.
24-9
LO 1 Review the full disclosure principle and describe implementation problems.
24-10
LO 1
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-11
Describe the accounting problems
associated with interim reporting.
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 and followed.

Should present the disclosure as
► first note or
► separate Summary of Significant Accounting Policies
section preceding the notes to the financial statements.
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LO 2
Notes to the Financial Statements
Which of the following should be disclosed in a Summary of
Significant Accounting Policies?
a. Types of executory contracts.
b. Amount for cumulative effect of change in accounting
principle.
c. Claims of equity holders.
d. Depreciation method followed.
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LO 2
Notes to the Financial Statements
Common Notes
24-14
MAJOR
DISCLOSURES

Inventory

Property, Plant, and Equipment

Creditor Claims

Equityholders’ Claims

Contingencies and Commitments

Fair Values

Deferred Taxes, Pensions, and Leases

Changes in Accounting Principles
LO 2
24-15
LO 2
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-16
Describe the accounting problems
associated with interim reporting.
Disclosure Issues
Disclosure of Special Transactions or Events


24-17
Related-party transactions
►
Nature of the relationship(s) involved.
►
A description of the transactions for each of the
periods for which income statements are presented.
►
Dollar amounts of transactions for each of the periods
for which income statements are presented.
►
Amounts due from or to related parties.
Errors, fraud, and illegal acts.
LO 3
Disclosure Issues
If a business entity entered into certain related party transactions, it
would be required to disclose all the following information except the
a. nature of the relationship between the parties to the
transactions.
b. nature of any future transactions planned between the parties
and the terms involved.
c.
dollar amount of the transactions for each of the periods for
which an income statement is presented.
d. amounts due from or to related parties as of the date of each
statement of financial position presented.
24-18
LO 3
Disclosure Issues
Post-Balance Sheet-Events
(Subsequent Events)
1 - Events that provide additional
evidence about conditions that
existed at the balance sheet date.
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Illustration 24-3
Time Periods for
Subsequent Events
2 - Events that provide
evidence about conditions that
did not exist at the balance
sheet date.
LO 3
Subsequent Events
Subsequent events that must be disclosed (but not
recognized) are listed in your textbook and include:
1. Significant sales of bonds or stock or assets
2. A business combination (merger, acquisition, etc.)
3. Settlement of significant litigation
4. Major loss from a disaster
5. Loss of receivable due to bankruptcy etc.
6. Making significant commitments or guarantees
Events that don’t have to be disclosed include changes
in legislation, products, mgmt team, strikes,
unionization, marketing agreements, and customers.
24-20
LO 2 Explain the use of notes in financial statement preparation.
Disclosure Issues
Illustration: 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 federal tax case at a cost considerably in
excess of the amount expected at year-end.
24-21
______ 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.
LO 3
Disclosure Issues
Illustration: 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.
24-22
LO 3
Segment Reporting
Reporting for Diversified Companies
Diversified companies, which operate many different
types of businesses, can be very frustrating to
analyze. For example, at one time Sears owned Dean
Witter Investments, Coldwell Banker Real Estate,
Allstate Insurance, and Discover Card. Companies
diversify so that all their eggs aren’t in one basket.
But this also makes it hard to manage so many
different businesses. The trend recently has been
to spin-off or divest different businesses so that
managers can focus on their core competancy.
24-23
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Reporting for Diversified Companies
Investors and investment analysts want income statement,
balance sheet, and cash flow information on the individual
segments that compose the total income figure.
Illustration 24-5
Segmented Income
Statement
24-24
LO 3
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:
a) Better understand the enterprise’s performance.
b) Better assess its prospects for future net cash flows.
c) Make more informed judgments about the enterprise as a
whole.
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LO 3
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).
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LO 3
Disclosure Issues
Identifying Operating Segments
An operating segment is a component of an enterprise:
a. That engages in business activities from which it earns
revenues and incurs expenses.
b. Whose operating results are regularly reviewed by the
company’s chief operating decision-maker.
c. For which discrete financial information is available.
24-27
LO 3
Disclosure Issues
Identifying Operating Segments
Quantitative Materiality Test: Must satisfy one to determine
whether the segment is significant enough to warrant actual disclosure.
1.
Its revenue is 10 percent or more of the combined revenue of all
the company’s operating segments.
2.
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.
3.
Its identifiable assets are 10 percent or more of the combined
assets of all operating segments.
24-28
LO 3
Segment Disclosure
Example
Segment
A
B
C
D
E
TOTAL
Total
Revenue
11
38
8
47
11
115
x 10%
11.5
Operating
Profit (Loss)
1
8
(3)
7
(18)
(5)
Profit
16
Loss
(21)
Total
(5)
21
x 10%
2.1
Which segments must be disclosed?
24-29
Total
Assets
7
25
8
30
7
77
x 10%
7.7
Segment Disclosure
Which segments must be disclosed?
24-30

Enough segments have to be disclosed so that their
combined revenue is at least 75% of total revenue from
unaffiliated customers

Generally no more than 10 segments should be separately
disclosed since it gets too cluttered; if more than 10, then
combine most closely-related segments so only 10 reported

Foreign operations of at least 10% of total revenue or total
assets must be disclosed

Sales to foreign geographic regions of at least 10% of total
sales must be disclosed by region

Sales to a single customer of at least 10% of total sales
must be disclosed
Disclosure Issues
Materiality Test Illustration
Illustration 24-6
Data for Different Possible
Reporting Segments
Advance slide in
presentation
mode to reveal
answers.
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.
24-31
LO 3
Disclosure Issues
Materiality Test Illustration
Illustration 24-6
Data for Different Possible
Reporting Segments
The 75 percent test is computed as follows.
75% of combined sales test: 75% x $2,150 = $1,612.50.
Advance slide in
presentation
mode to reveal
answers.
The sales of A, C, D, and E total $2,000 ($100 + $700 + $300 + $900);
therefore, the 75 percent test is met.
24-32
LO 3
Disclosure Issues
Segmented Information Reported
1. General information about operating segments.
2. Segment profit and loss and related information.
3. Segment assets.
4. Reconciliations.
5. Information about products and services and geographic
areas.
6. Major customers.
24-33
LO 3
Disclosure Issues
Revenue of a segment includes
a. only sales to unaffiliated customers.
b. sales to unaffiliated customers and intersegment sales.
c. sales to unaffiliated customers and interest revenue.
d. sales to unaffiliated customers and other revenue and
gains.
24-34
LO 3
Disclosure Issues
The profession requires disaggregated information in the
following ways:
a. products or services.
b. geographic areas.
c. major customers.
d. all of these.
24-35
LO 3
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-36
Describe the accounting problems
associated with interim reporting.
Interim Reports
Interim Reports
Cover periods of less than one year.
E.g. quarterly (SEC’s 10-Q) or monthly.
Two viewpoints exist:
1. The discrete approach: each interim period is treated
as a separate accounting period
2. The integral approach: interim periods are an integral
part of the annual report
In most cases, companies should use the same accounting
principles for interim reports that they use for annual reports
(discrete approach).
24-37
Interim Reports
Unique Problems of Interim Reporting

Advertising, repairs, etc: no guidance, treatment varies

Year-end adjustments for bad debts, bonuses, pension costs, etc.
should be allocated retroactively to interim periods.

Income taxes: at quarter end, estimate annual rate and apply to
YTD income; then subtract expense recorded in previous quarters.

Extraordinary items: record fully in quarter of occurrence

Earnings per share: interim periods should stand alone

Inventory: gross profit method may only be used for interim
periods; temporary inventory price declines may be deferred

Seasonality issues
24-38
Example of Interim Income Tax
Calculations
Qtr
Taxable
Income
YTD
Taxable
Income
Est.
Annual
Tax Rate
YTD
Income
Tax
Income
Tax
Per Qtr
1
$50,000
$50,000
25%
$12,500
$12,500
2
$70,000
$120,000
22%
$26,400
$13,900*
3
$90,000
$210,000
20%
$42,000
$15,600**
Etc.
* $26,400 - $12,500
**$42,000 - $13,900 - $12,500
24-39
Disclosure Issues
In considering interim financial reporting, how does the
profession conclude that such reporting should be viewed?
a. As a "special" type of reporting that need not follow
generally accepted accounting principles.
b. As useful only if activity is evenly spread throughout the
year so that estimates are unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.
24-40
LO 4
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-41
Describe the accounting problems
associated with interim reporting.
Auditor’s and Management’s Reports
Auditor’s Report
Unmodified Opinion –
auditor expresses the
opinion that the financial
statements are presented
fairly in accordance with
GAAP. Other opinions:

Qualified

Adverse

Disclaim
Illustration 24-13
Auditor’s Report
24-42
LO 5
Audit Reports
AUDITOR OPINIONS
Unmodified – everything is ok - there are no
modifications, i.e. financial statements are
stated according to GAAP in all material
respects (formerly called unqualified)
Qualified - everything is ok except for . . .
Adverse - everything is not ok - financial
statements are not fairly stated in all material
respects (corp’s receiving adverse opinions are
de-listed from exchanges by SEC)
Disclaimer - no opinion - auditors didn’t get a
chance for whatever reason to do enough of the
audit to form an opinion.
24-43
LO 5 Identify the major disclosures in the auditor’s report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Enron Corp.:
We have audited the accompanying consolidated balance sheet of
Enron Corp. (an Oregon corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated
statements of income, comprehensive income, cash flows and
changes in shareholders' equity for each of the three years in
the period ended December 31, 2000. These financial statements
are the responsibility of Enron Corp.'s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Enron Corp. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations, cash flows and changes in
shareholders' equity for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 18 to the consolidated financial
statements, Enron Corp. and subsidiaries changed its method of
accounting for costs of start-up activities and its method of
accounting for certain contracts involved in energy trading and
risk management activities in the first quarter of 1999.
Arthur Andersen LLP
Houston, Texas
23, 2001
February
24-44
Model Audit Report
The Shareholders:
We have eyeballed the ball park figures
on the statement of lies, retained
deficits and source and application of
executive petty cash. Our examination
included a general rationalization of the
accounting standards and such test of
the accounting records and other
unsupported entries as we considered
unavoidable, subject to the constraints
of our time budget and audit fee.
Our gut feeling is that these ball park
figures are solid numbers and we are fit
to roll with them, having been prepared
in accordance with generally accepted
corporate memos applied randomly on a
basis consistent with that of producing
a satisfactory profit.
Yours in haste,
Arthur Unknown, CPA
Siberia
February 30, 2010
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-45
Describe the accounting problems
associated with interim reporting.
Auditor’s and Management’s Reports
Management’s Report
Management’s Discussion and Analysis
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 and identifies significant events and uncertainties
that affect these three factors.
24-46
LO 6
Illustration 24-15
Management’s
Discussion and Analysis
24-47
LO 6
Auditor’s and Management’s Reports
The MD&A section of a company's annual report is to cover the
following three items:
a. income statement, balance sheet, and statement of
owners' equity.
b. income statement, balance sheet, and statement of cash
flows.
c. liquidity, capital resources, and results of operations.
d. changes in the stock price, mergers, and acquisitions.
24-48
LO 6
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.
24-49
LO 6
Illustration 24-16
Report on Management’s
Responsibilities
24-50
LO 6
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-51
Describe the accounting problems
associated with interim reporting.
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.
24-52
LO 7
Current Reporting Issues
Reporting on Financial Forecasts and Projections
Many investors and financial analysts would like the
SEC to make forward looking data a required
disclosure. But most companies are wary about
giving public estimates of the future for fear of
being sued if they are off. To encourage forward
looking data, the SEC has created a Safe Harbor
Rule, which provides protection from litigation as
long as the data was prepared on a reasonable basis
and in good faith. Still many companies say the
Safe Harbor Rule is not working.
24-53
LO 7 Identify issues related to financial forecasts and projections.
Current Reporting Issues
Which of the following best characterizes the difference between a
financial forecast and a financial projection?
a. Forecasts include a complete set of financial statements, while
projections include only summary financial data.
b. A forecast is normally for a full year or more and a projection
presents data for less than a year.
c.
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.
d. A forecast includes data which can be verified about future
expectations, while the data in a projection is not susceptible to
verification.
24-54
LO 7
Current Reporting Issues
Internet Financial Reporting
A large proportion of companies’ websites contain links to their
financial statements and other disclosures.
24-55

Allows firms to communicate more easily and quickly with
users.

Allow users to take advantage of tools such as search engines
and hyperlinks to quickly find information about the firm.

Can help make financial reports more relevant by allowing
companies to report expanded disaggregated data and more
timely data.
LO 7
24-56
LO 7
24
Full Disclosure in
Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Review the full disclosure principle and
describe implementation problems.
5.
Identify the major disclosures in the
auditor’s report.
2.
Explain the use of notes in financial
statement preparation.
6.
Understand management’s responsibilities
for financials.
3.
Discuss the disclosure requirements for
related-party transactions, post-balancesheet events, and major business
segments.
7.
Identify issues related to financial forecasts
and projections.
8.
Describe the profession’s response to
fraudulent financial reporting.
4.
24-57
Describe the accounting problems
associated with interim reporting.
Current Reporting Issues
Fraudulent Financial Reporting
Intentional or reckless conduct, whether act or omission, that
results in materially misleading financial statements.
Frauds involving such well-known companies as Enron,
WorldCom, Adelphia, and Tyco indicate that more must be
done to address this issue.
24-58
LO 8
Quality of Earnings
24-59
59
Fraudulent Financial Reporting
Source: Recent
global survey of
over 3,000
executives from
54 countries
documented
the types of
economic
crimes.
Illustration 24-17
Types of Economic Crime
24-60
LO 8
Fraudulent Financial Reporting
A wide range of
economic
crimes are
reported.
Illustration 24-18
Trends in Reported Fraud
24-61
LO 8
Fraudulent Financial Reporting
Causes of Fraudulent Financial Reporting
Common causes are the desire
24-62
►
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
Fraudulent Financial Reporting
Causes of Fraudulent Financial Reporting
Common opportunities for fraudulent financial reporting
24-63
►
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
24-64
LO 8
FASB Codification

GAAP came from the FASB one statement at time,
which created some problems:




24-65
Omnibus statements may affect many different areas of
accounting
Statements often amend previous ones
This makes it a nightmare to research accounting rules on a
particular topic
The FASB recently created an online resource called
Codification Research System (or Codification for
short), which replaces the old-style, numbered
FASBs http://asc.fasb.org/home
FASB Codification



24-66
The Codification
integrates authoritative
U.S. GAAP and is now
considered the official
source of all U.S. GAAP.
Unfortunately, full
research access requires
that a fee be paid (basic
access is free but you
have to register)
Fortunately for you, WWU
has paid the fee.
FASB Codification
Example of
Codification
structure
24-67
APPENDIX
24A
BASIC FINANCIAL STATEMENT ANALYSIS
Perspective on Financial Statement Analysis
A logical approach to financial statement analysis is necessary,
consisting of the following steps.
1. Know the questions for which you want to find answers.
2. Know the questions that particular ratios and comparisons
are able to help answer.
3. Match 1 and 2 above. By such a matching, the statement
analysis will have a logical direction and purpose.
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LO 9 Understand the approach to financial statement analysis.
APPENDIX
24A
BASIC FINANCIAL STATEMENT ANALYSIS
Perspective on Financial Statement Analysis
Analysis includes an understanding that
1. Financial statements report on the past.
2. Single ratio by itself is not likely to be very useful.
3. Awareness of the limitations of accounting numbers used in
an analysis.
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LO 9
APPENDIX
24A
BASIC FINANCIAL STATEMENT ANALYSIS
Ratio Analysis
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LO 10 Identify major analytic ratios and describe their calculation.
APPENDIX
24A
Ratio Analysis
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BASIC FINANCIAL STATEMENT ANALYSIS
Illustration 24A-1
LO 10
APPENDIX
24A
Ratio Analysis
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BASIC FINANCIAL STATEMENT ANALYSIS
Illustration 24A-1
LO 10
APPENDIX
24A
Ratio Analysis
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BASIC FINANCIAL STATEMENT ANALYSIS
Illustration 24A-1
APPENDIX
24A
Ratio Analysis
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BASIC FINANCIAL STATEMENT ANALYSIS
Illustration 24A-1
LO 10
APPENDIX
24A
BASIC FINANCIAL STATEMENT ANALYSIS
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.
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LO 11 Explain the limitations of ratio analysis.
APPENDIX
24A
BASIC FINANCIAL STATEMENT ANALYSIS
Comparative Analysis
Illustration 24A-2
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LO 12 Describe techniques of comparative analysis.
Horizontal Analysis
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77
APPENDIX
24A
BASIC FINANCIAL STATEMENT ANALYSIS
Percentage (Common Size) Analysis
Illustration 24A-3
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LO 13 Describe techniques of percentage analysis.
APPENDIX
24A
BASIC FINANCIAL STATEMENT ANALYSIS
Percentage (Common Size) Analysis
Illustration 24A-4
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LO 13
RELEVANT FACTS - Similarities
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
GAAP and IFRS have similar standards on subsequent events. That is,
under both sets of standards, events that occurred after the statement of
financial position date, and which provide additional evidence of
conditions that existed at the statement of financial position date, are
recognized in the financial statements.

Like GAAP, IFRS 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.
LO 14 Compare the disclosure requirements under GAAP and IFRS.
RELEVANT FACTS - Similarities
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
Following the recent issuance of IFRS 8, “Operating Segments,” the
requirements under IFRS and GAAP are very similar. That is, both
standards use the management approach to identify reportable
segments, and similar segment disclosures are required.

Neither GAAP nor IFRS require interim reports. Rather, the SEC and
securities exchanges outside the United States establish the rules. In the
United States, interim reports generally are provided on a quarterly
basis; outside the United States, six-month interim reports are common.
LO 14
RELEVANT FACTS - Differences
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
Due to the broader range of judgments allowed in more principles-based
IFRS, note disclosures generally are more expansive under IFRS
compared to GAAP.

Subsequent (or post-statement of financial position) events under IFRS
are evaluated through the date that financial instruments are “authorized
for issue.” GAAP uses the date when financial statements are “issued.”
Also, for share dividends and splits in the subsequent period, IFRS does
not adjust but GAAP does.

Under IFRS, there is no specific requirement to disclose the name of the
related party, which is this case under GAAP.
LO 14
ON THE HORIZON
Hans Hoogervorst, chairperson of the IASB, recently noted: “High quality
financial information is the lifeblood of market-based economies. It is the same
with financial reporting. If investors cannot trust the numbers, then financial
markets stop working. For market-based economies, that is really bad news. It
is an essential public good for market-based economies. . . . And in the past
10 years, most of the world’s economies—developed and emerging—have
embraced IFRSs.” While the United States has yet to adopt IFRS, there is no
question that IFRS and GAAP are converging quickly. We have provided
expanded discussion in the International Perspectives and IFRS Insights. After
reading these discussions, you should realize that IFRS and GAAP are very
similar in many areas, with differences in those areas revolving around some
minor technical points. In other situations, the differences are major; for
example, IFRS does not permit LIFO inventory accounting.
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LO 14
IFRS SELF-TEST QUESTION
Which of the following is false?
a. In general, IFRS note disclosures are more expansive
compared to GAAP.
b. GAAP and IFRS have similar standards on subsequent events.
c.
Both IFRS and GAAP require interim reports although the
reporting frequency varies.
d. Segment reporting requirements are very similar under IFRS
and GAAP.
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LO 14
IFRS SELF-TEST QUESTION
Subsequent events are reviewed through which date under IFRS?
a. Statement of financial position date.
b. Sixty days after the year-end date.
c.
Date of independent auditor’s opinion.
d. Authorization date of the financial statements.
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LO 14
IFRS SELF-TEST QUESTION
Under IFRS, share dividends declared after the statement of financial
position date but before the end of the subsequent events period are:
a. accounted for similar to errors as a prior period adjustment.
b. adjusted subsequent events, because they are paid from prior
year earnings.
c.
not adjusted in the current year’s financial statements.
d. recognized on a prospective basis from the date of declaration.
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LO 14
Copyright
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