Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 24 Full Disclosure in Financial Reporting This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Review the full disclosure principle and describe how it is implemented Discuss the disclosure requirements for related-party transactions, post-balance-sheet events, major business segments, and interim reporting Identify the major disclosures in the auditor’s report and understand management’s responsibilities for the financial statements Identify reporting issues related to fraudulent financial reporting and financial forecasts Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 24 (1 of 2) Full Disclosure In Financial Reporting Full Disclosure Principle • Increase in reporting requirements • Differential disclosure • Notes to the financial statements Disclosure Issues • Related parties • Post-balance-sheet events • Diversified companies • Interim reports Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 24 (2 of 2) Auditor's and Management’s Reports • Auditor's report • Management's reports Current Reporting Issues • Fraudulent financial reporting • Internet financial reporting • Reporting on forecasts and projections • Criteria for accounting and reporting choices Copyright ©2019 John Wiley & Sons, Inc Learning Objective Review the full disclosure principle and describe how it is implemented LO Copyright ©2019 John Wiley & Sons, Inc 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 Theranos highlight the difficulty of implementing the full disclosure principle LO Copyright ©2019 John Wiley & Sons, Inc Full Disclosure Principle Types of Financial Information LO Copyright ©2019 John Wiley & Sons, Inc Full Disclosure Principle Increase in Reporting Requirements Reasons: LO • Complexity of business environment • Necessity for timely information • Accounting as a control and monitoring device Copyright ©2019 John Wiley & Sons, Inc Full Disclosure Principle Differential Disclosure • “Big GAAP versus Little GAAP” • FASB has traditionally taken the position that there should be one set of GAAP • FASB is working with an advisory committee to explore ways that its standards can be more cost-effective for all companies, regardless of size LO Copyright ©2019 John Wiley & Sons, Inc 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 o first note or o separate Summary of Significant Accounting Policies section preceding the notes to the financial statements LO Copyright ©2019 John Wiley & Sons, Inc 10 Learning Objective Describe Techniques of Percentage Analysis LO Copyright ©2019 John Wiley & Sons, Inc 75 Appendix 24A: Basic Financial Statement Analysis Percentage (Common Size) Analysis LO Copyright ©2019 John Wiley & Sons, Inc 76 Appendix 24A: Basic Financial Statement Analysis Common Size Analysis – Income Statement LO Copyright ©2019 John Wiley & Sons, Inc 77 Learning Objective 10 Compare the Disclosure Requirements Under GA A P and I F R S LO 10 Copyright ©2019 John Wiley & Sons, Inc 78 IFRS Insights (1 of 10) Relevant Facts Similarities • GAAP and IFRS have similar standards on post-statement of financial position (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 10 Copyright ©2019 John Wiley & Sons, Inc 79 IFRS Insights (2 of 10) Relevant Facts Similarities • Following the 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 10 Copyright ©2019 John Wiley & Sons, Inc 80 IFRS Insights (3 of 10) Relevant Facts Differences • Due to the broader range of judgments allowed in more principles-based IFRS, note disclosures generally are more expansive under I FRS compared to G AAP • Subsequent (or post-statement of financial position) events under I FRS are evaluated through the date that financial instruments are “authorized for issue.” G AAP uses the date when financial statements are “issued.” Also, for share dividends and splits in the subsequent period, IFRS does not adjust but G AAP does • Under IFRS, there is no specific requirement to disclose the name of the related party, which is this case under G AAP • Under IFRS, interim reports are prepared on a discrete basis; G AAP generally follows the integral approach LO 10 Copyright ©2019 John Wiley & Sons, Inc 81 IFRS Insights (4 of 10) On The Horizon Hans Hoogervorst, chairperson of the I ASB, 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 I FRSs.” While the United States has yet to adopt I FRS, there is no question that IFRS and GAAP are converging quickly We have provided expanded discussion in the Global Views and I FRS Insights After reading these discussions, you should realize that I FRS 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, I FRS does not permit LIFO inventory accounting LO 10 Copyright ©2019 John Wiley & Sons, Inc 82 IFRS Insights (5 of 10) IFRS Self-Test Questions Which of the following is false? a In general, IFRS note disclosures are more expansive compared to G AAP 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 LO 10 Copyright ©2019 John Wiley & Sons, Inc 83 IFRS Insights (6 of 10) IFRS Self-Test Questions Which of the following is false? a In general, IFRS note disclosures are more expansive compared to G AAP 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 LO 10 Copyright ©2019 John Wiley & Sons, Inc 84 IFRS Insights (7 of 10) IFRS Self-Test Questions 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 LO 10 Copyright ©2019 John Wiley & Sons, Inc 85 IFRS Insights (8 of 10) IFRS Self-Test Questions 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 LO 10 Copyright ©2019 John Wiley & Sons, Inc 86 IFRS Insights (9 of 10) IFRS Self-Test Questions 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 LO 10 Copyright ©2019 John Wiley & Sons, Inc 87 IFRS Insights (10 of 10) IFRS Self-Test Questions 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 LO 10 Copyright ©2019 John Wiley & Sons, Inc 88 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 Copyright ©2019 John Wiley & Sons, Inc 89 ... 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... 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... 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