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 ID: 272937
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After 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 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 ASPE and IFRS, and what changes are expected in the near future.
OTHER MEASUREMENT AND DISCLOSURE ISSUES
2Slide3
Other Measurement and
Disclosure Issues3Disclosure IssuesThe importance of disclosure from a business perspectiveFull disclosure principleAccounting policiesSegmented reportingInterim reportingIFRS/ASPE ComparisonComparison of IFRS and ASPE
Looking ahead
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysisSlide4
Importance of Disclosure
Information 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 disclosureSlide5
The Full Disclosure Principle
The 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 overloadOver the past several decades, disclosures for public companies have significantly increased5Slide6
Types of Financial Information
6Slide7
Increase 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)7Slide8
Accounting Policies
The accounting policies of the entity must be disclosed as the first note or in a separate section preceding the notesThis note is called Summary of Significant Accounting Policies8Slide9
Illegal Acts
Illegal acts are defined by the CICA as “a violation of a domestic or foreign statutory law or government regulation attributable to the entity…or 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 required9Slide10
Segmented Reporting
Information 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 information10Slide11
Segmented Reporting
IFRS requires that the financial statements include selected information on a single basis of segmentationThe segments are evident from their organizational structure (operating segments)This method is called the management approachThis approach includes information the perspective of the chief operating decision maker11Slide12
Segmented Reporting
An 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 available12Slide13
Segmented Reporting
Operating 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 applicable13Slide14
Reportable Segments
An 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 criterionSlide15
Reportable Segments
15CriterionThresholdsRevenue 10 percent or more of the combined revenue of all operating segmentsIdentifiable assets 10 percent or more of the combined assets of all operating segments
Profit or loss
10
percent or more of the
greater of
:
(
a) the combined profit of all operating
segments not showing a loss
or
(b) the combined loss of all operating segments reporting a lossSlide16
Reportable Segments
Three other factors are considered in addition to the above tests:Segment results are 75% or more of combined sales to unrelated customersNo more than 10 segments are required to be disclosedSegment may be presented separately on grounds that separate information would be useful to users (even if not meet any of the tests)Slide17
Measurement Principles
The 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 are not required to be allocated among the segmentsSuch allocation is arbitrary and may not produce an objective division of costs among segments17Slide18
Required Segmented Information
IFRS 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)18Slide19
Interim Reporting
IFRS 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 reporting19Slide20
Interim Reporting
At 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 information20Slide21
Interim Reporting
The 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 comparatives21Slide22
Interim Reporting
Minimum 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 securities22Slide23
Interim Reporting
Minimum disclosure requirements include (cont’d): 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 period23Slide24
Interim Reporting Problem Areas
Changes 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 information24Slide25
Internet Financial Reporting
Companies 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 Internet25Slide26
Other Measurement and
Disclosure Issues26Disclosure IssuesThe importance of disclosure from a business perspectiveFull disclosure principleAccounting policiesSegmented reportingInterim reportingIFRS/ASPE ComparisonComparison of IFRS and ASPE
Looking ahead
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysisSlide27
Related Party Transactions
Related-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 contract27Slide28
Related Party Transactions
Measurement 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 transactionsUnder ASPE, some related-party transactions must be remeasured to the carrying amount of assets or services exchanged28Slide29
Related Party Transactions – Decision TreeSlide30
Related Party Transactions
The 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)30Slide31
Related Party Transactions – Example
Given: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 $12,00031Slide32
Related Party Transactions – Example
This transaction is not in 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 15,00032Slide33
Subsequent Events
Notes 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)33Financial statement periodSFP dateIssue dateSubsequent events periodSlide34
Subsequent Events
Two 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 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 34Slide35
Subsequent Events
Events that provide evidence about conditions that did not exist at statement of financial position 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 issuance35Slide36
Unincorporated Businesses
Key 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 not36Slide37
Other Measurement and
Disclosure Issues37Disclosure IssuesThe importance of disclosure from a business perspectiveFull disclosure principleAccounting policiesSegmented reportingInterim reportingIFRS/ASPE ComparisonComparison of IFRS and ASPE
Looking ahead
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysisSlide38
Auditor’s Report
Another 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 unqualified or clean opinion38Slide39
Auditor’s Opinion
The auditor can render or provide:An Unqualified (clean) opinion A Qualified opinionAn Adverse opinion (circumstances)A disclaimer of an opinion (no opinion can be given) 39Slide40
Unqualified Auditor’s Report
If 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 unqualified opinion is expressed40Slide41
Qualified Opinion
A 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 evidence41Slide42
Adverse Opinion
An adverse opinion is required if exceptions to fair presentation are so material that, in the independent auditor’s judgment, a qualified opinion is not justifiedThe financial statement as a whole are not presented according to GAAP42Slide43
Other Measurement and
Disclosure Issues43Disclosure IssuesThe importance of disclosure from a business perspectiveFull disclosure principleAccounting policiesSegmented reportingInterim reportingIFRS/ASPE ComparisonComparison of IFRS and ASPE
Looking ahead
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysisSlide44
Financial Statement Analysis
Understanding a company’s accounting policies and methods is important for financial statement analysisAccounting choices can affect recognition, measurement, presentation and trendsSlide45
Financial Statement Analysis
Financial statements have several limitations:Report 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 choicesSlide46
Ratio Analysis
Ratio analysis is an expression of the relationship between two numbersSlide47
Ratio AnalysisSlide48
Ratio AnalysisSlide49
Percentage Analysis
Percentage (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 salesSlide50
Financial Statement Analysis
Financial 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 intentionsSlide51
Other Measurement and
Disclosure Issues51Disclosure IssuesThe importance of disclosure from a business perspectiveFull disclosure principleAccounting policiesSegmented reportingInterim reportingIFRS/ASPE ComparisonComparison of IFRS and ASPE
Looking ahead
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysisSlide52
Looking Ahead
The profession must continue to develop a sound conceptual frameworkThis will help minimize the different presentations of the same or similar transactions52Slide53
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