Kế toán, kiểm toán - Chapter 23: Other measurement and disclosure issues

CHAPTER 23:OTHER MEASUREMENT AND DISCLOSURE ISSUES2CHAPTER 23: Other Measurement and Disclosure IssuesAfter studying this chapter, you should be able to:Understand the importance of disclosure from a business perspective.Review the full disclosure principle and describe problems of implementation.Explain the use of accounting policy notes in financial statement preparation.Describe the disclosure requirements for major segments of a business.Describe the accounting problems associated with interim reporting.Discuss the accounting issues for related-party transactions.Identify the difference between the two types of subsequent events.Identify the major considerations relating to bankruptcy and receivership. Identify the major disclosures found in the auditor’s report. Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis.Identify the major differences in accounting between IFRS and APSE, and what changes are expected in the near future.3Importance of DisclosureInformation disclosure is an important part of capital markets:Financial statements are only one source of information for investorsOther sources include:Annual information formsManagement’s discussion and analysis (MD&A)New releasesUsers must use caution because not all disclosure is good disclosure4The Full Disclosure PrincipleThe full disclosure principle calls for financial reporting of significant facts affecting the judgment of an informed readerThe problems of implementing this principle are costs of disclosure or information overloadMateriality also applies to note disclosures-obscuring material information with immaterial information makes it less understandableOver the past several decades, disclosures for public companies have significantly increased5Types of Financial Information6Increase in Reporting RequirementsReasons for increasing reporting requirements of public companies:Complexity of the business environment (e.g., derivatives, business combinations, pensions)Need for timely information (e.g., interim data, financial forecasts)Accounting used as a control and monitoring device (e.g., disclosure of management compensation, related-party transactions, errors and irregularities)7Accounting PoliciesThe accounting policies of the entity must be disclosed as the first note or in a separate “Summary of Significant Accounting Policies” section preceding the notes8Illegal ActsIllegal acts are defined as “a violation of a domestic or foreign statutory law or government regulation attributable to the entityor to management or employees acting on the entity’s behalf.”The item may require recognition in the statement of financial position or income statementNote disclosure may be required9Information on how the segment contributes to the total business operationsInvestors want information from the income statement, statement of financial position, and statement of cash flows about individual segmentsReporting segmented information helps users:Better understand the enterprise’s performanceBetter assess future net cash flows prospectsMake more informed judgments about the companyASPE does not provide guidance for reporting segmented informationSegmented Reporting10IFRS requires that the financial statements include selected information on a single basis of segmentation called the management approach (this approach includes information the perspective of the chief operating decision maker)The segments are evident from the way that management assesses the business based on its organizational structure (operating segments)Segmented Reporting11An operating segment is a component of an enterprise that:Engages in business activities from which it earns revenues and incurs expensesHas the chief operating decision maker regularly review results to:Assess performanceAllocate resourcesHas discrete financial information availableSegmented Reporting12Segmented ReportingOperating segments may be aggregated if they have the same basic characteristicsThe nature of the products and services providedThe nature of the production processThe type or class of customerThe methods of product or service distributionThe nature of the regulatory environment, if applicable IFRS requires that companies disclose judgements made in aggregating segments and briefly describe segments aggregated13Reportable SegmentsAn operating segment is significant and thus identified as a reportable segment if it satisfies one or more of the following criteria:The revenue criterionThe profit or loss criterionThe identifiable assets criterion14Reportable SegmentsCriterionThresholdsRevenue 10% or more of the combined revenue of all operating segmentsAssets 10% or more of the combined assets of all operating segments OperatingProfit or loss 10% or more of the greater of: (a) the combined operating profit of operating segments not showing a loss or (b) the combined operating loss of operating segments reporting a loss15Reportable SegmentsThree other factors are considered in addition to the above tests:Segment results are 75% or more of combined sales to unaffiliated customers for the entire enterpriseNo more than 10 segments are required to be disclosedA segment may be presented separately on grounds that separate information would be useful to users (even if none of the tests are met)16Measurement PrinciplesThe accounting principles used for segment reporting and for consolidated statements need not be the sameSome accounting principles may not apply at the segment levelFor example, common costs, also known as centrally incurred costs, are not required to be allocated among the segmentsSuch allocation is arbitrary and may not produce an objective division of costs among segments17Required Segmented InformationIFRS requires reporting of the following:General information about its reportable segmentsSegment profit and loss, assets, liabilities, and related informationReconciliation of segment revenues, profits and losses, and segment assets and liabilitiesThe amount of revenues from external customers for products and servicesInformation about geographical areas and if amounts are material, foreign information (e.g., revenue) must be disclosed by countryInformation about major customers (if 10% or more of revenue from one customer, must disclose)18Interim ReportingIFRS provides guidance but does not mandate which entities need to provide interim informationAnnual reports and interim reports must use the same accounting principles (e.g., inventory cost formula, revenue recognition) Costs and expenses other than product costs (i.e., period costs) are often recorded in the interim period as they are incurredASPE does not provide guidance on interim reporting19Interim ReportingAt a minimum, condensed statement of financial position, comprehensive income statement, statement of changes in equity, statement of cash flows, and selected notes are requiredEarnings per share (EPS) information is also required if the company must present this information in its annual information20Interim ReportingThe statement of financial position should be presented as at the end of the current interim period with a comparative statement of financial position as of the end of the immediately preceding fiscal yearThe income statement should be presented for the current interim period and interim year to date with comparatives The statement of changes in equity should be presented cumulatively for the current fiscal year to date with comparatives, and The statement of cash flows should be presented cumulatively for the current fiscal year to date with comparatives21Interim ReportsInterim reports are short term in nature, fostering controversy about the approach to information providedIFRS favours the discrete view in that each interim period is treated as its own separate accounting period, except for calculating income tax and payroll tax expenseThe integral view supports that the interim report is an integral part of the annual report and that deferrals and accruals should consider what will happen for the whole year22Interim ReportingMinimum disclosure requirements include: 1. Whether statements are in compliance with IFRS 2. Accounting policies and methods 3. Any seasonal or cyclical period considerations 4. Nature and amount of unusual items 5. Nature and amount of estimate changes 6. Issuances, repurchases, and repayments of debt and equity securities23Interim ReportingMinimum disclosure requirements include (continued): 7. Dividends paid 8. Information about reportable segments 9. Subsequent events 10. Changes in composition of entity 11. Any other information required for fair presentation and/or material to understanding of period24Interim Reporting Problem AreasChanges in AccountingChanges applied retroactively to prior interim periodsComparable interim periods from previous fiscal years also restated Earnings per shareEach interim period EPS is stand alone SeasonalityDefer recognition of costs and expenses only if it would also be appropriate at year-endContinuing ControversyAuditor’s involvement in the interim reporting processTimeliness of information25Internet Financial ReportingCompanies are increasingly disclosing financial information through websitesCorporations can reach more users using the InternetInternet reporting can make traditional reports more useful:Corporations can report more timely informationThey can also report disaggregated data, therefore financial reports are more relevant The major concerns are equality of access to electronic reports, and reliability of information distributed via the Internet26Related Party TransactionsRelated-party transactions arise when a business engages in transactions with another party that can significantly influence its policiesRelated party transactions are individually assessedRelated parties include the following:Companies or individuals with controlInvestors and investees with significant influence or joint controlCompany managementMembers of immediate familyThe other party in a management contract27Related Party TransactionsMeasurement is a major accounting and reporting issueA basic assumption is that the transactions are between arm’s length partiesIf this condition not met, should disclose that transaction is between related partiesShould report economic substance rather than legal form of transactions28ASPE Guidance Under ASPE, some related-party transactions must be remeasured to the carrying amount of assets or services exchanged if:The transaction is not in the normal course of businessThere is no substantive change in ownership, and/orThe exchange amount is not supported by independent evidence29Related Party Transactions – Decision Tree30Related Party TransactionsThe following disclosures are recommended:The nature of the relationshipDescription of the transactionsThe recorded amounts of transactionsMeasurement basis usedAmounts due from or due to related parties at the statement of financial position date, and terms and conditionsContractual obligations with related partiesContingencies involving related partiesUnder IFRS, management compensation and name of parent company (as well as ultimate controlling entity/individual)31Related Party Transactions – ExampleGiven:Assume Knudson Limited sells land worth $20,000 (with a carrying value of $15,000) to Bay Limited (a related party)In exchange, Bay Limited transfers a building that has a NBV of $12,00032Related Party Transactions – ExampleThis transaction is not in the course of normal operations, and does not change ownership interestsTherefore, must be measured at carrying value; journal entry required by Knudson:PP&E 12,000Retained Earnings 3,000 Land 15,000The difference between carrying amounts is booked to equity33Subsequent EventsNotes to the financial statements must explain any significant financial events that occurred after the statement of financial position (SFP) date, but before the date of issue (under IFRS, date of financial statement completion)Financial statement periodSFP dateIssue dateSubsequent events period34Subsequent EventsTwo types of post-statement of financial position events must be disclosed:Events that provide additional evidence about conditions that existed at statement of financial position date and therefore require adjustment Examples: loss on accounts receivable due to customer’s bankruptcy, where customer’s poor financial condition existed at the statement of financial position dateSettlement of litigation if event giving rise to litigation existed prior to statement of financial position date 35Subsequent EventsEvents that provide evidence about conditions that did not exist at statement of financial position date but arise subsequent to that date and do not require adjustment Examples:A fire or flood resulting in a lossA purchase of a businessChanges in foreign exchange ratesA bond or share issuance36Unincorporated BusinessesKey accounting issues include:Clear definition of the business entityStatements should clearly report the business name and that the business is not incorporatedClear reporting of any amounts accruing to the ownersThere is no provision for income taxesASPE provides specific guidance for unincorporated business but IFRS does not37Bankruptcy and ReceivershipBankruptcy is a legal process that occurs when a company (or individual) is unable to pay its debtsCompanies facing bankruptcy can make a proposal to their creditors to pay a percentage of what was owed at the time of the proposal, or they can request an extension to the timing of debt payment 38Bankruptcy and Receivership39ReceivershipA receivership process is often started by a single creditor, or group of secured creditors when a company has defaulted on a loanA receiver acts on behalf of the creditor(s)The main categories of creditors affected in a bankruptcy or receivership are:Secured creditorsPreferred creditorsUnsecured creditors40Auditor’s ReportAnother important source of information is the auditor’s reportThe auditor conducts an independent examination of a company’s accounting data to determine whether the financial statements are prepared fairly in accordance with the applicable financial reporting frameworkThe auditor’s report reflects the auditor’s conclusionsIn most cases, the auditor issues a standard unmodified opinion41Auditor’s OpinionThe auditor can render or provide:An Unmodified opinion A Qualified opinionAn Adverse opinion (circumstances)A Disclaimer of an opinion (no opinion can be given) 42Unmodified Auditor’s ReportIf the auditor is satisfied that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in accordance with GAAP, an unmodified opinion is expressed43Qualified OpinionA qualified opinion contains an exception to the standard opinionThat is, except for the effects of the matter related to the qualification, the financial statements are fairly presented in accordance with GAAPIt may also relate to a scope limitation; that is, where the auditor has not been able to obtain sufficient and appropriate audit evidence44Adverse OpinionAn adverse opinion is required if exceptions to fair presentation are so material and pervasive that, in the independent auditor’s judgment, a qualified opinion is not justifiedThe financial statements taken as a whole are not presented according to GAAP45Financial Statement AnalysisUnderstanding a company’s accounting policies and methods is important for financial statement analysisAccounting choices can affect recognition, measurement, presentation and trends46Financial Statement AnalysisFinancial statements have several limitations:They report on past informationRatio and trend analysis do not provide details about “why” things are as they areA ratio is not useful on its ownThere are limitations to the accounting information due to accounting policy choices47Ratio AnalysisRatio analysis is an expression of the relationship between two numbers48Ratio Analysis49Ratio Analysis50Percentage AnalysisPercentage (common-size) analysis converts a series of related amounts to a series of percentages of a given baseThere are two types:Horizontal analysis: proportionate change over a period of timeFor example, year over year fluctuationsVertical analysis: proportional expression of each item in a given period to a base figureFor example, items in the income statement as a percentage of sales51Financial Statement AnalysisFinancial statement analysis also has limitations due to the many sources of uncertainty such as:Nature and role of the financial statementsNature of business operations portrayedLimitations of measurement and disclosuresManagement’s motives and intentions52Looking AheadDisclosures required under ASPE generally are less extensive than those required by IFRSThe profession must continue to develop a sound conceptual frameworkThis will help minimize the different presentations of the same or similar transactions53