36 E-Overview of US GAAP Storyboard v14 Reviewed HIRES Printversion

8/12/2019 36 E-Overview of US GAAP Storyboard v14 Reviewed HIRES Printversion

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COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

e-Overview of U.S. GAAP

Accounting & ReportingCOPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.CONFIDENTIAL. This material should not be shared nor distributed internally except to those employees of Philip Morris International Management SA or its affiliates, who need it, in order to perform their tasks onbehalf of their employer. Without the prior written permission, no part of this material may be used, reproduced or transmitted in any form or by any means, by or to any party outside of Philip Morris InternationalManagement SA and its affiliates.


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Improveawareness of key PMI

Finance concepts

Exchange bestpractices

Accelerate theintegration of new

employees

Increase yourfunctionalknowledge

Increase transparencyacross

different FinanceFunctions

Learn new skills

The Finance Academy is a learning and development platform to

Welcome to the PMI Finance Academy!


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Accounting &Reporting

The scope of the PMI Finance Academy is to cover the core PMI Finance skills of each functional area:

Investor Relations

Operations Finance SEC Reporting

Financial Planning &Reporting

Corporate Audit

M&A and StrategicPlanning

General

Tax Treasury

Internal ControlsGlobal Financial

Systems

Welcome to the PMI Finance Academy!

Accounting &

Reporting

The e-Overview of U.S. GAAP course provides you withAccounting & Reporting knowledge and skills.


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Course Information

The course will take approximately 60 minutes.

As you can see in the table of contents on the left, this course isstructured in 5 modules.

To complete this course successfully and obtain the certificate ofcompletion you need to work through the modules and correctly

answer at least 80% of questions in the assessment.

You can repeat this assessment until you reach the minimumrequired score.


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Course Objectives

Provide an overview of U.S. GAAP and explain the Financial Accounting Standards Board(FASB) Codification

Explain the standard setting process for U.S. GAAP

Explain how to report other comprehensive income

Explain presentation of income statement items

Describe the FASB Conceptual Framework

Define the basic elements of U.S. GAAP financial statements

This course will provide you with an overview of the U.S. General Accepted Accounting Principles

(GAAP). Upon completing this course you should be able to:


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This module will give you an introduction toU.S. GAAP

U.S. GAAP Overview and FASB Codification


7/42COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

What does it really mean

present fairly in conformity with

accounting principles generally accepted inthe United States?

Principles-

based

or

rules-based?

U.S. GAAP Introduction

Rules-based vs. principles-based

U.S. GAAP has often been accused of being rules-based, rather than principles-based. However, U.S.GAAP is driven by very similar principles as those set out in the International Financial Reporting Standards(IFRS) Framework.

Legalinfluences and the demand for sometimes quite narrow interpretation of theseprinciples, whether from lawyers, regulators or auditors, have caused several areas wherebright lines have developed in certain areas of U.S. GAAP.



Overview of Accounting Standards Codification (ASC)

Applicable to all nongovernmental entities

i.e. applies to both public and nonpublic entities applying U.S. GAAP

ASC is the single source of authoritative GAAP

Reorganized into 90 accounting topics within a consistent structure

Its purpose is not to create new accounting and reporting guidance

ASC included essential content from the old standards, while removing the nonessential content

Nonessential content may include redundant summaries, historical content, discussions ofprevious practice and constituent feedback summaries (all of which are usually contained inthe standards summary, basis for conclusions, or appendices sections)

However, material within these sections that the FASB deemed essential was incorporatedinto the ASC

The ASC officially became the single source of authoritative nongovernmental U.S. GAAP in July 2009

and was first applied for interim and annual periods ending after September 15, 2009.



How is the ASC Organized?

MainAr

eas

General principles Presentation FinancialStatementAccounts

BroadTransactions

Su

btopic Subsets of a topic and are generally distinguished by type or scope

(For example, Operating Leases and Capital Leases are two Subtopics of the Leases Topic. Every

Topic has at least one Subtopic.)

Section

Sections are standard across each Topic or Subtopic

Top

ics Relate to broad

conceptualmatters

Relate only topresentation

Assets

Liabilities

Equity Revenue

Expense

Usuallytransaction -oriented

Relate tomultiple f/saccounts



Sections

XXX-YY-05- Overview and Background

XXX-YY-10- Objectives

XXX-YY-15- Scope and Scope Exceptions

XXX-YY-20- Glossary

XXX-YY-25- Recognition

XXX-YY-30- Initial Measurement

XXX-YY-35- Subsequent Measurement

XXX-YY-40- Derecognition

XXX-YY-45- Other Presentation Matters

XXX-YY-50- Disclosure

XXX-YY-55- Implementation Guidance

XXX-YY-60- Relationships

XXX-YY-65- Transition and Open Effective Date Information

XXX-YY-70- Grandfathered Guidance

XXX-YY-75- XBRL Definitions

XXX-YY-00- Status

Where XXX represents the Topic

and YY represents Sub-Topic

All Sub-topics are organized into these sections. This ensures consistency throughout the Codification.



ASC Structure Class Example

PP&E360

Topic

(360)

OverallReal Estate

Sales

Subto

pics

Scope Derecognition Scope Derecognition

Sections

General General General General

Impairment orDisposal of LLAs

Impairment orDisposal of LLAs

Subsections

LLAs = Long Lived Assets

Topic 360 - Property, Plant and Equipment

This slide gives an example of how the ASC is organized.



U.S. GAAP Hierarchy

Apply the guidance from the FASB Codification for the specific transaction/ event inquestion.

1

If no specific guidance is available, apply other guidance from the Codification by

analogy (exception: except when other guidance specifically prohibits the guidance to thatparticular transaction or states that the guidance may not be applied by analogy).2

If neither 1 or 2 are possible, consider non-authoritative guidance (examples include:widely recognized industry practice, FASB Concept Statements, American Institute of CertifiedPublic Accountants (AICPA) Issue Papers, IFRS, AICPA Technical Practice Aids (TPAs),pronouncements by professional associations or regulatory agencies, and accounting textbooks,

handbooks and articles.

3

The appropriateness of non-authoritative guidance depends on its relevance to particularcircumstances, the specificity of the guidance, the general recognition of the issuer or author as anauthority and the extent of its use in practice!



This module will help you to understand how the Accounting StandardsCodification is set and amended

Standard Setting



How Is the ASC Amended?

Proposals Proposals

Two opportunities for publicconsultation (if DP has been issued)

Board Decision

Accounting Standards Update issued

Amendments made to ASC

Discussion Paper (DP) (Optional)

Exposure Draft (ED)

FASB Chairman decides whether or not to add

an issue to the Boards Technical agenda.Decision based on consideration of:

How widespread the issue is

Technical feasibility

Alternative solutions

Convergence possibilities

Practical consequences

Cooperative opportunities

Resources

Additional

Information

FASBAccountingStandardsCodificationToolsand Resources

TheASCisavailablefreetothepublicon-lineat:http://asc.fasb.org/

I n f r m t i n t / y

l rs

lidecode:Imgescode:

FASB tutorialsareavailabletoassist withfamiliarizingaccountantswiththeCodificationandhowtouseit for accountingresearch



This module will help you to understand the purpose of the FASBConceptual Framework

FASB Conceptual Framework



No. 1 No. 3No. 2

Overview of FASB Conceptual Framework

No. 4 No. 5 No. 6 No. 7

Statement of Financial Accounting Concepts (SFAC) No. 8:Conceptual Framework for Financial Reporting

Chapter 1: The objective ofgeneral purpose financial

reporting

Chapter 3: Qualitativecharacteristics of useful

financial information

Financial Reporting forNon Businesses (notcovered in course)

Recognition andMeasurement

Elements of FinancialStatements

Using Cash Flow (CF)information and

Present Value (PV) (notcovered in module)

Chapter 2:The

ReportingEntity



The objective of general purpose financial reporting is to providefinancial information about the reporting entity that is useful to existing

and potential investors, lenders and other creditors in making decisions

about providing resources to the entity. Those decisions involve buying,

selling or holding equity and debt instruments, and providing or settlingloans and other forms of credit.

SFAC 8: Objective of Financial Reporting

Who are the users of general purpose financial reporting?

What kind of information does general purpose financialreporting provide them with?



SFAC 8: Types of Financial Information

Claims against the entity

Resources of entity

How efficiently and effectively managementand the board have discharged their

responsibilities

Buy?Sell?Hold?

The types of financial information that a user needs in order to make resource allocation

decisions:



Materiality

PredictiveValue

ConfirmatoryValue

Complete NeutralFree from

error

SFAC 8: Qualitative Characteristics of UsefulFinancialInformation

RelevanceFaithful

representation

Comparability Timeliness Verifiability Understandability

The Framework introduces the 2 fundamentalcharacteristics as being:

If there are two ways of presenting information, both of which are considered relevant andfaithfully represented, then the enhancing characteristics may help determine whichway should be used:



Case Study: Prevention of Earnings Management

On February 3, 20X1 an employee filed a USD 2 million lawsuit against Stain Co. for damagessuffered after one of Stains plants exploded on December 29, 20X0.

Stains lawyers expect the company will have to pay an amount between USD 500,000 and USD 1million, however no amount within that range appears to be a better estimate than any other.

The employee has offered to settle the lawsuit for USD 900,000, but Stain will not agree to thesettlement. The financial statements are authorized for issue on February 17, 20X1.

What amount of liability, if any, should be recorded in the Companys

balance sheet at December 31, 20X0?

Case description



USD 500,000 if no amount within the range is more likely!

Solution: Prevention of Earnings Management

Solution

What amount of liability, if any, should be recorded in the Companys

balance sheet at December 31, 20X0?



This module will help you to define the elementsof the U.S. GAAP Financial Statement

Elements of U.S. GAAP Financial Statements


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Elements of Financial Statements(per Statement of Financial Accounting Concepts No. 6)

Revenues

Expenses

Gains

Losses

Assets

Liabilities

Equity

Investment by owners

Distributions to owners

Comprehensive incomeComprehensive income

What is this?


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PMI Internal and External Reporting Basic StructureIncome Statement

Above OCI: Underlying business (revenues, cost of sales, etc.)

Above OCI (non-recurring): Reporting adjustments: Accounts # 64916496, such as exit and impairment costs

= Operating Companies Income (OCI)(a)by segment

Below OCI: Amortization, corporate expenses/assessment

= Operating income

Interest, income taxes, minority interest

= Net earnings

(a) Note: In U.S. GAAP and in the course of this training the abbreviation OCI stands for Other Comprehensive Income which is a part of equity.


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Unamortized actuarial gains or losses, past service cost, and transition amount (for definedbenefit pension plans)

Currency Translation Adjustments (CTA) to reporting currency

Effective portion of gains/losses on derivative instrument that qualifies as a cash flow hedge

Effective portion of gains/losses on hedging instrument in hedge of net investment in a

foreign operation (included in CTA)

Unrealized gains/losses on available-for-sale securities

All these items may be shown either gross, or net of income tax (PMI method)

Components of Other Comprehensive Income (OCI)(1)

1. Note: OCI is the U.S. GAAP term. PMI uses the abbreviation OCE (Other Comprehensive Earnings)


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Required U.S. GAAP Financial Statements

Balance sheet (statement of financial position)

Income statement (statement of earnings)

Statement of comprehensive income (two alternativepresentation formats)

Changes in shareholders equity (may be presented as

a statement or in the notes)

Statement of cash flows

Notes to the financial statements

How many years are required for each statement for Securities and Exchange

Commission (SEC) registrants?


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Case Study: Current vs. Non-current

Wall Worthy began operations on January 1, 20X0. At this date they took out a EUR 10 million loanwith a one-time principal repayment due on June 30, 20X5.

Management of Wall Worthy has informed you that they have refinanced this debt on February 10,20X5 for a further five years and would like to continue to classify this debt as non-current on theirbalance sheet at December 31, 20X4.

Financial statements are authorized for issue on February 15, 20X5.

Is the classif ic at ion o f this l iabi l i ty as non-cur rent at December 31,

20X4 proper und er U.S. GAAP?

Case description


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Yes, It is.

Solution: Current vs. Non-current

Is the classif ic at ion o f this l iabi l i ty as non-cur rent at December 31,

20X4 proper und er U.S. GAAP?

Solution


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Definitions: Operating Income and Expense

Operating ExpenseExpensesassociated with running a business

but not considered directlyapplicable to the current line ofgoods & services being sold.

These include sales and marketing,R&D, general and administrative.


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This module will help you to understand the presentation of financialstatements

Presentation of the Financial Statements


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Income Statement Presentation

Income statement presentation

issues are often times a policyelection by companies that require

disclosure.

G. Anthony Lopez, SEC, 2005 AICPA National

Conference on SEC Developments


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Income Statement Requirements(SEC Rule S-X 210.5-03)

Net sales and gross revenues

Costs and expenses applicable to sales and revenues

Other operating costs and expenses

Selling, general and administrative expenses

Other general expenses

Net sales of tangible products (gross sales less discounts, returns and allowances)

Cost of tangible goods sold

Provision for doubtful accounts


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Non-operating income

Interest and amortization of debt discount and expense

Non-operating expenses

Income or loss before income tax expense and appropriate items below

Income tax expense

Equity in earnings of unconsolidated subsidiaries

Income or loss from continuing operations

Discontinued operations

Income or loss before extraordinary items and cumulative effects of changes in accountingprinciples

Extraordinary items, less applicable tax (hardly ever used!)

Net income or loss

Net income attributable to the noncontrolling interest

Net income attributable to the controlling interest

Earnings per share data

Income Statement Requirements(SEC Rule S-X 210.5-03)


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Basic Earnings Per Share

Net profit or lossattributable to ordinary shareholdersafter deducting preference dividends

(numerator)

Weighted average number ofordinary shares outstanding

during the period (denominator)

Basic Earnings Per Share


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Case Study: Change in Accounting Principles andEstimates

Donuts-R-Us Inc. (DRU) has a three-year profit-sharing plan for its top executives. The executives getup to 40%of their base salary if net income under U.S. GAAP exceeds EUR 150 million in any givenyear.

In 20X1, DRU only had net income of EUR 120 million and fell short of the top target. In 20X2, DRUchanged its depreciation method from the usage method (based on number of donuts made) to the

straight-line method. DRU applied this change retrospectively and, on a restated basis, had EUR 150millionin net income for 20X1.

Therefore, DRU also restated its 20X1 financial statements for the effect of the additional bonuscompensation expense.

Please adv ise Donu ts-R-Us.

Case description


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This treatment is incorrect!

Donuts-R-Us must follow the requirements of FASB ASC Topic 250- Accounting Changes anderror corrections.

Remarks

A change in the depreciation method is a change in estimate. It is not a change in accounting

principle.

A change in estimate must be accounted for prospectively. For changes in depreciation method, the change must be preferable and disclosure about the

preferability is required.

Please adv ise Donu ts-R-Us.

Solution

Solution: Change in Accounting Principles andEstimates


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Voluntary changes in accounting principle

Impracticable

Accounting Changes and Error Corrections

After every reasonable effort,

unable to apply requirement

Assumptions aboutmanagements intent in prior

period cannot beindependently substantiated

Requires significant estimatesand impossible to objectivelydistinguish information about

circumstances at that time and

that would have been availablewhen financial statements for

that period were issued

Retrospective application unless impracticable

Exclude indirect effects of retrospective application to the prior periods

Applies to new pronouncements if no specific guidance given

Change in depreciation method = change in estimate

Change must be preferable and disclosure about the preferability of change is required


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Congratulations!

You have successfully completed the course!

PRINTThe course has been produced in partnership with PMI Learning.


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36 E-Overview of US GAAP Storyboard v14 Reviewed HIRES Printversion

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