Kế toán, kiểm toán - Presentation and disclosure in financial reporting

PREVIEW OF CHAPTER24Intermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield Identify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24Full disclosure principle calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader.Financial disasters at Mahindra Satyam (IND) and Société Générale (FRA) highlight the difficulty of implementing the full disclosure principle.FULL DISCLOSURE PRINCIPLELO 1ILLUSTRATION 24-1Types of Financial InformationLO 1FULL DISCLOSURE PRINCIPLEIncrease in Reporting RequirementsReasons:Complexity of the business environment.Necessity for timely information.Accounting as a control and monitoring device.LO 1FULL DISCLOSURE PRINCIPLEDifferential DisclosureLO 1FULL DISCLOSURE PRINCIPLEIASB has developed IFRS for small- and medium-sized entities (SMEs). SMEs is less complex in a number of ways:Topics not relevant for SMEs are omitted. Allows fewer accounting policy choices.Many principles for recognizing and measuring assets, liabilities, revenue, and expenses are simplified. Significantly fewer disclosures are required.Revisions to the IFRS for SMEs will be limited to once every three years.Identify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24NOTES TO THE FINANCIAL STATEMENTSLO 2Notes are the means of amplifying or explaining the items presented in the main body of the statements.Accounting PoliciesCompanies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies).In addition, companies must:Identify judgments made in the process of applying the accounting policies.Disclose information about assumptions made.Common NotesInventory Property, Plant, and Equipment Creditor Claims Equityholders’ Claims Contingencies and Commitments Fair ValuesDeferred Taxes, Pensions, and LeasesChanges in Accounting PrinciplesLO 2MAJOR DISCLOSURESNOTES TO THE FINANCIAL STATEMENTSIdentify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24Disclosure of Special Transactions or EventsDISCLOSURE ISSUESLO 3Related-party transactionsNature of relationship.Amount of transaction and outstanding balances.Provision for doubtful debts.Expense recognized during the period in respect of bad or doubtful debts due from related parties.Errors and fraud.Events after the Reporting Period (Subsequent Events)1 - Events that provide additional evidence about conditions that existed at the statement of financial position date.2 - Events that provide evidence about conditions that did not exist at the statement of financial position date.ILLUSTRATION 24-5Time Periods forSubsequent EventsDISCLOSURE ISSUESLO 3______ 1. Settlement of tax case at a cost considerably in excess of the amount expected at year-end.______ 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.E24-2 (Post-Balance-Sheet Events): 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.acbbcbDISCLOSURE ISSUESLO 3______ 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.ccacabE24-2 (Post-Balance-Sheet Events): 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.DISCLOSURE ISSUESLO 3Investors and investment analysts want income statement, statement of financial position, and cash flow information on the individual segments that compose the total income figure.ILLUSTRATION 24-7Segmented IncomeStatementReporting for Diversified CompaniesObjective of Reporting Segmented InformationTo 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:Better understand the enterprise’s performance.Better assess its prospects for future net cash flows.Make more informed judgments about the enterprise as a whole.DISCLOSURE ISSUESLO 3Basic PrinciplesIFRS 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).DISCLOSURE ISSUESLO 3Identifying Operating SegmentsAn operating segment is a component of an enterprise:That engages in business activities from which it earns revenues and incurs expenses.Whose operating results are regularly reviewed by the company’s chief operating decision maker.For which discrete financial information is available.DISCLOSURE ISSUESLO 3An operating segment is deemed significant and therefore a reportable segment if it satisfies one or more of the following quantitative thresholds.Its revenue is 10 percent or more of the combined revenue of all the company’s operating segments.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.Its identifiable assets are 10 percent or more of the combined assets of all operating segments.Identifying Operating SegmentsLO 3In applying these tests, the company must consider two additional factors. Segment data must explain a significant portion of the company’s business. Specifically, the segmented results must equal or exceed 75 percent of the combined sales to unaffiliated customers for the entire company. The IASB decided that 10 is a reasonable upper limit for the number of segments that a company must disclose.Identifying Operating SegmentsLO 3The company would apply the respective tests as follows.Revenue test: 10% x €2,150 = €215; C, D, and E meet this test.Identifying Operating SegmentsILLUSTRATION 24-7Data for Different Possible Reporting SegmentsLO 3The company would apply the respective tests as follows.Operating profit (loss) test: 10% x €90 = €9 (the test is based on non-loss segments); A, C, D, and E meet this test.Identifying Operating SegmentsILLUSTRATION 24-7Data for Different Possible Reporting SegmentsLO 3The company would apply the respective tests as follows.Identifiable assets tests: 10% x €970 = €97; C, D, and E meet this test.Identifying Operating SegmentsILLUSTRATION 24-7Data for Different Possible Reporting SegmentsLO 3Reporting 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.Identifying Operating SegmentsILLUSTRATION 24-7Data for Different Possible Reporting SegmentsLO 375% of combined sales test: 75% x €2,150 = €1,612.50. The sales of A, C, D, and E total €2,000 (€100 + €700 + €300 + €900); therefore, the 75 percent test is met.Identifying Operating SegmentsILLUSTRATION 24-7Data for Different Possible Reporting SegmentsLO 3Segmented Information ReportedIASB requires that an enterprise report the following.General information about operating segments.Segment profit and loss and related information.Segment assets and liabilities.Reconciliations.Information about products and services and geographic areas.Major customers.DISCLOSURE ISSUESLO 3Identify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24Interim ReportsCover periods of less than one year. IFRS requires companies to follow the discrete approach.Treat each interim period as a separate accounting period. Follow the principles for deferrals and accruals used for annual reports. Report accounting transactions as they occur, and expense recognition should not change with the period of time covered.DISCLOSURE ISSUESLO 4Unique Problems of Interim ReportingIncome taxes.Seasonality.Continuing controversy - debate on the independent auditor’s involvement in interim reports.DISCLOSURE ISSUESLO 4Identify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24AUDITOR’S AND MANAGEMENT’S REPORTSUnmodified Opinion Auditor expresses the opinion that the financial statements are presented fairly in accordance with IFRS. Other opinions:QualifiedAdverseDisclaimerILLUSTRATION 24-13Auditor’s ReportAuditor’s ReportLO 5Certain circumstances, although they do not affect the auditor’s unqualified opinion, may require the auditor to add an explanatory paragraph to the audit report.Going ConcernLack of ConsistencyEmphasis of a MatterAUDITOR’S REPORTLO 5Qualified opinion contains an exception to the standard opinion. Usual circumstances may include:Scope limitation.Statements do not fairly present financial position or results of operations because of:Lack of conformity with accepted accounting principles and standards. Inadequate disclosure.AUDITOR’S REPORTLO 5Adverse opinion is required in any report in which the exceptions to fair presentation are so material that in the independent auditor’s judgment, a qualified opinion is not justified. Financial statements taken as a whole are not presented in accordance with IFRS. Rare because most companies change their accounting to conform with IFRS. Market regulators will not permit a company listed on an exchange to have an adverse opinion.AUDITOR’S REPORTLO 5Disclaimer of an opinion is appropriate when the auditor has gathered so little information on the financial statements that no opinion can be expressed.AUDITOR’S REPORTLO 5Identify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24Management commentary helps in the interpretation of the financial position, financial performance, and cash flows of a company. Such a report may include a review of the:Main factors and influences determining financial performance;Company’s sources of funding and its targeted ratio of liabilities to equity; andCompany’s resources not recognized in the statement of financial position in accordance with IFRS.MANAGEMENT’S REPORTLO 6Management’s Responsibilities for Financial StatementsManagement is responsible for preparing the financial statements and establishing and maintaining an effective system of internal controls. The auditor provides an independent assessment of whether the financial statements are prepared in accordance with IFRS.MANAGEMENT’S REPORTLO 6Identify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24Reporting on Financial Forecasts and ProjectionsFinancial 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.CURRENT REPORTING ISSUESLO 7Internet Financial ReportingA large proportion of companies’ websites contain links to their financial statements and other disclosures.Allows firms to communicate more easily and quickly with users.Allow users to take advantage of tools such as search engines and hyperlinks.Can help make financial reports more relevant by allowing companies to report expanded disaggregated data and more timely data.CURRENT REPORTING ISSUESLO 7Identify the major disclosures in the auditor’s report.Understand management’s responsibilities for financials.Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting.After studying this chapter, you should be able to:LEARNING OBJECTIVESReview the full disclosure principle and describe implementation problems.Explain the use of notes in financial statement preparation.Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. Describe the accounting problems associated with interim reporting.Presentation and Disclosure in Financial Reporting24Fraudulent Financial ReportingIntentional or reckless conduct, whether through act or omission, that results in materially misleading financial statements. Frauds involving such well-known companies as Parmalat (ITA), Mahindra Satyam (IND), and Société Générale (FRA) indicate that more must be done to address this issue.CURRENT REPORTING ISSUESLO 8Fraudulent Financial ReportingILLUSTRATION 24-19Trends in Reported FraudsLO 8Causes of Fraudulent Financial ReportingCommon causes are the desireto obtain a higher share price, to avoid default on a loan covenant, or to make a personal gain of some type (additional compensation, promotion).Fraudulent Financial ReportingLO 8Causes of Fraudulent Financial ReportingCommon opportunities for fraudulent financial reportingAbsence of a board of directors or audit committee.Weak or non-existent internal accounting controls. Unusual or complex transactions. Accounting estimates requiring significant judgment. Ineffective internal audit staffs.Fraudulent Financial ReportingLO 8DISCLOSUREU.S. GAAP and IFRS disclosure requirements are similar in many regards. The IFRS addressing various disclosure issues are IAS 24 (“Related Party Disclosures”), disclosure and recognition of post-statement of financial position events in IAS 10 (“Events after the Balance Sheet Date”), segment reporting IFRS provisions in IFRS 8 (“Operating Segments”), and interim reporting requirements in IAS 34 (“Interim Financial Reporting”).GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to disclosures.SimilaritiesU.S. 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 U.S. 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.GLOBAL ACCOUNTING INSIGHTSRelevant FactsSimilaritiesFollowing the recent issuance of IFRS 8, “Operating Segments,” the requirements under U.S. GAAP and IFRS are very similar. That is, both standards use the management approach to identify reportable segments, and similar segment disclosures are required. Neither U.S. GAAP nor IFRS require interim reports. Rather, the U.S. 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.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesDue to the narrower range of judgments allowed in more rules-based U.S. GAAP, note disclosures generally are less expansive under U.S. GAAP compared to IFRS. In the United States, there is a preference for one set of accepted accounting principles except in unusual situations. The FASB issues alternative guidance (within U.S. GAAP) for privately held companies with input from the Private Company Council. As indicated in the chapter, the IASB has developed a separate set of standards for small- and medium-sized entities (SMEs), which are designed to meet the needs of privately held companies.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesU.S. GAAP uses the date when financial statements are “issued” when determining the reporting of subsequent events. Subsequent (or post-statement of financial position) events under IFRS are evaluated through the date that financial instruments are “authorized for issue.” Also, for share dividends and splits in the subsequent period, U.S. GAAP adjusts but IFRS does not. U.S. GAAP has specific requirements to disclose the name of a related party; under IFRS, there is no specific requirement to disclose the name of the related party. Under U.S. GAAP, interim reports are prepared on an integral basis; IFRS generally follows the discrete approach.GLOBAL ACCOUNTING INSIGHTSOn the HorizonHans Hoogervorst, chairman of the IASB, recently noted: “High quality financial information is the lifeblood of market-based economies. If the blood is of poor quality, then the body shuts down and the patient dies. 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 U.S. GAAP are converging quickly. We have provided expanded discussion in the Global Accounting Insights to help you understand the issues surrounding convergence as they relate to intermediate accounting. After reading these discussions, you should realizeGLOBAL ACCOUNTING INSIGHTS(continued)On the Horizonthat IFRS and U.S. 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. Our hope is that the FASB and IASB can quickly complete their convergence efforts, resulting in a single set of high-quality accounting standards for use by companies around the world.GLOBAL ACCOUNTING INSIGHTSLO 9 Understand the approach to financial statement analysis.PERSPECTIVE ON FINANCIAL STATEMENT ANALYSISA logical approach to financial statement analysis is necessary, consisting of the following steps.Know the questions for which you want to find answers. Know the questions that particular ratios and comparisons are able to help answer. Match 1 and 2 above. By such a matching, the statement analysis will have a logical direction and purpose.APPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISAnalysis includes an understanding thatFinancial statements report on the past. Single ratio by itself is not likely to be very useful. Awareness of the limitations of accounting numbers used in an analysis.APPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLO 9FINANCIAL STATEMENT ANALYSISLO 10 Identify major analytic ratios and describe their calculation.APPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLIQUIDITY RATIOS. Measures of the company’s short-run ability to pay its maturing obligations.ACTIVITY RATIOS. Measures of how effectively the company is using the assets employed.PROFITABILITY RATIOS. Measures of the degree of success or failure of a given company or division for a given period of time.COVERAGE RATIOS. Measures of the degree of protection for long-term creditors and investors.ILLUSTRATION 24A-1RATIO ANALYSISAPPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLO 10ILLUSTRATION 24A-1RATIO ANALYSISAPPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLO 10RATIO ANALYSISAPPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLO 10ILLUSTRATION 24A-1RATIO ANALYSISAPPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLO 10ILLUSTRATION 24A-1LO 11 Explain the 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.Limitations of Ratio AnalysisAPPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLO 12 Describe techniques of comparative analysis.COMPARATIVE ANALYSIS APPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISILLUSTRATION 24A-2Condensed ComparativeFinancial InformationLO 13 Describe techniques of percentage analysis.PERCENTAGE (COMMON SIZE) ANALYSISAPPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISILLUSTRATION 24A-3Horizontal PercentageAnalysisAPPENDIX 24ABASIC FINANCIAL STATEMENT ANALYSISLO 13PERCENTAGE (COMMON SIZE) ANALYSISILLUSTRATION 24A-4Vertical Percentage AnalysisIFRS 1 requires that information in a company’s first IFRS statements be transparent, provide a suitable starting point, and have a cost that does not exceed the benefits. Overriding principle in converting from national GAAP to IFRS (the conversion process) is full retrospective application of all IFRS.LO 14 Describe the guidelines for first-time adoption of IFRS.APPENDIX 24BFIRST-TIME ADOPTION OF IFRSObjective is to present financial statements as if company always reported on IFRS. To achieve this objective, a company must:Identify the timing for its first IFRS statements.Prepare an opening statement of financial position at the date of transition to IFRS.Select accounting policies that comply with IFRS, and apply these policies retrospectively.Consider whether to apply any optional exemptions and apply mandatory exceptions.Make extensive disclosure to explain the transition to IFRS.LO 14APPENDIX 24BFIRST-TIME ADOPTION OF IFRSGENERAL GUIDELINESOnce a company decides to convert to IFRS, it must decide on the following dates—transition date and reporting date.LO 14Relevant DatesILLUSTRATION 24B-1First-Time Adoption TimelineAPPENDIX 24BFIRST-TIME ADOPTION OF IFRSProcess involves the following steps:Include all assets and liabilities that IFRS requires.Exclude any assets and liabilities that IFRS does not permit.Classify all assets, liabilities, and equity in accordance with IFRS.Measure all assets and liabilities according to IFRS. LO 15 Describe the implementation steps for preparing the opening IFRS statement of financial position.Opening IFRS Statement of Financial PositionAPPENDIX 24BFIRST-TIME ADOPTION OF IFRSIMPLEMENTATION STEPSThe Board identified three areas in which companies are prohibited from retrospective application in first-time adoption of IFRS:Estimates.Hedge accounting.Non-controlling interests.LO 16 Describe the exemptions to retrospective application in first-time adoption of IFRS.APPENDIX 24BFIRST-TIME ADOPTION OF IFRSExemptions from Retrospective TreatmentLO 16 Describe the exemptions to retrospective application in first-time adoption of IFRS.ILLUSTRATION 24B-3Elective Exemption fromRetrospective TreatmentAPPENDIX 24BFIRST-TIME ADOPTION OF IFRSExemptions from Retrospective TreatmentLO 17 Describe the presentation and disclosure requirements for first-time adoption of IFRS.An entity’s first IFRS financial statements shall include: three statements of financial position,two statements of comprehensive income, two separate income statements (if presented), two statements of cash flows, and two statements of changes in equity and related notes, including comparative information.APPENDIX 24BFIRST-TIME ADOPTION OF IFRSPresentation and DisclosureLO 17 Describe the presentation and disclosure requirements for first-time adoption of IFRS.A company’s first IFRS financial statements shall include reconciliations of:Its equity reported in accordance with previous GAAP to its equity in accordance with IFRS at the transition date.Its total comprehensive income in accordance with IFRS to total comprehensive income in accordance with previous GAAP for the same period. APPENDIX 24BFIRST-TIME ADOPTION OF IFRSPresentation and DisclosureCopyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright 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