Chapter 24-1
Full Disclosure: Concepts and PracticesFull Disclosure: Concepts and PracticesFull Disclosure: Concepts and Practices
Chapter Chapter
2424Intermediate Accounting
12th Edition
Kieso, Weygandt, and Warfield
Prepared by Coby Harmon, University of California, Santa Barbara
Chapter 24-2
1. Review the full disclosure principle and describe implementation problems.
2. Explain the use of notes in financial statement preparation.
3. Discuss the disclosure requirements for major business segments.
4. Describe the accounting problems associated with interim reporting.
5. Identify the major disclosures in the auditor’s report.
6. Understand management’s responsibilities for financials.
7. Identify issues related to financial forecasts and projections.
8. Describe the profession’s response to fraudulent financial reporting.
Learning ObjectivesLearning ObjectivesLearning Objectives
Chapter 24-3
Accounting Accounting policiespolicies
Common Common notesnotes
Full Full Disclosure Disclosure PrinciplePrinciple
Notes to Notes to Financial Financial
StatementsStatements
Disclosure Disclosure IssuesIssues
AuditorAuditor ’’s and s and ManagementManagement ’’s s
ReportReport
Current Current Reporting Reporting
IssuesIssues
Increase in Increase in reporting reporting requirementsrequirements
Differential Differential disclosuredisclosure
Special Special transactions transactions or eventsor events
PostPost--balancebalance--sheet eventssheet events
Diversified Diversified companiescompanies
Interim Interim reportsreports
AuditorAuditor’’s s reportreport
ManagementManagement’’s s reportsreports
Reporting on Reporting on forecasts and forecasts and projectionsprojections
Internet financial Internet financial reportingreporting
Fraudulent Fraudulent financial financial reportingreporting
Criteria for Criteria for accounting and accounting and reporting reporting choiceschoices
Full Disclosure in Financial ReportingFull Disclosure in Financial ReportingFull Disclosure in Financial Reporting
Chapter 24-4
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 Global Crossing highlight
the difficulty of implementing the full disclosure
principle.
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure PrincipleFull Disclosure PrincipleFull Disclosure Principle
Chapter 24-5
ExamplesExamples
�� Accounting Accounting PoliciesPolicies
�� ContingenciesContingencies
�� Inventory Inventory MethodsMethods
�� Shares Shares OutstandingOutstanding
�� Alternative Alternative MeasuresMeasures
Financial Financial StatementsStatements
Notes to Notes to Financial Financial
StatementsStatements
Supplementary Supplementary InformationInformation
Other Means Other Means of Financial of Financial ReportingReporting
Other Other InformationInformation
Balance sheetBalance sheet
Statement of Statement of IncomeIncome
Statement of Statement of Cash FlowsCash Flows
Statement of Statement of Changes in Changes in StockholdersStockholders’’EquityEquity
Examples:Examples:
�� Changing Changing Prices Prices DisclosuresDisclosures
�� Oil and Gas Oil and Gas Reserves Reserves InformationInformation
Examples:Examples:
�� Management Management Discussion Discussion and Analysisand Analysis
�� Letters to Letters to StockholdersStockholders
Examples:Examples:
�� Competition Competition and Order and Order Backlog in SEC Backlog in SEC FormsForms
�� Analysts' Analysts' reportsreports
�� Economic Economic StatisticsStatistics
�� ArticlesArticles
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure PrincipleFull Disclosure PrincipleFull Disclosure Principle
Basic Financial StatementsBasic Financial Statements
Affected by Existing FASB StandardsAffected by Existing FASB Standards
Financial ReportingFinancial Reporting
All Information Useful for Investment, Credit, and Similar DecisAll Information Useful for Investment, Credit, and Similar Decisionsions
Illustration 24-1
Chapter 24-6
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.
Full Disclosure PrincipleFull Disclosure PrincipleFull Disclosure Principle
Chapter 24-7
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.
Full Disclosure PrincipleFull Disclosure PrincipleFull Disclosure Principle
Chapter 24-8
Notes are the means of amplifying or explaining
the items presented in the main body of the
statements.
LO 2 Explain the use of notes in financial statement preparation.
Notes to the Financial StatementsNotes to the Financial StatementsNotes to the Financial Statements
Accounting Policies
Companies should present a statement
identifying the accounting policies adopted
(Summary of Significant Accounting Policies).
Chapter 24-9
Common Notes
Inventory
Property, Plant, and Equipment
Creditor Claims
Equity Holders’ Claims
Contingencies and Commitments
Deferred Taxes, Pensions, and Leases
Changes in Accounting Principles
LO 2 Explain the use of notes in financial statement preparation.
Notes to the Financial StatementsNotes to the Financial StatementsNotes to the Financial Statements
Chapter 24-10
Disclosure of Special Transactions or Events
Related-party transactions
Illegal acts
LO 2 Explain the use of notes in financial statement preparation.
Disclosure IssuesDisclosure IssuesDisclosure Issues
Chapter 24-11
Post-Balance-Sheet Events (Subsequent Events)
LO 2 Explain the use of notes in financial statement preparation.
Disclosure IssuesDisclosure IssuesDisclosure Issues
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.
Chapter 24-12
Reporting for Diversified Companies
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure IssuesDisclosure IssuesDisclosure Issues
Investors and investment analysts income
statement, balance sheet, and cash flow
information on the individual segments that
compose the total income figure.
Chapter 24-13
Objective of Reporting Segmented Information
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure IssuesDisclosure IssuesDisclosure Issues
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).
Chapter 24-14
Segmented Information Reported
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure IssuesDisclosure IssuesDisclosure Issues
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.
Chapter 24-15
Interim Reports
LO 4 Describe the accounting problems associated with interim reporting.
Disclosure IssuesDisclosure IssuesDisclosure Issues
Cover periods of less than one year.
Two viewpoints exist:
1. The discrete approach
2. The integral approach
Companies should use the same accounting principles for interim reports that they use for annual reports.
Chapter 24-16
Unique Problems of Interim Reporting
LO 4 Describe the accounting problems associated with interim reporting.
Disclosure IssuesDisclosure IssuesDisclosure Issues
(1) Advertising and similar costs
(2) Expenses subject to year-end adjustment
(3) Income taxes
(4) Extraordinary items
(5) Earnings per share
(6) Seasonality
Chapter 24-17 LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s ReportsAuditorAuditor’’s and Managements and Management’’s Reportss 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
DisclaimIllustration 24-14
Chapter 24-18 LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s ReportsAuditorAuditor’’s and Managements and Management’’s Reportss Reports
Management’s Report
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.
Chapter 24-19 LO 6 Understand management’s responsibilities for financials.
Auditor’s and Management’s ReportsAuditorAuditor’’s and Managements and Management’’s Reportss 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.
Chapter 24-20 LO 7 Identify issues related to financial forecasts and projections.
Current Reporting IssuesCurrent Reporting IssuesCurrent 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
Chapter 24-21 LO 8 Describe the profession’s response to fraudulent financial reporting.
Current Reporting IssuesCurrent Reporting IssuesCurrent 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.
Chapter 24-22
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