1
Q
Framework: who has legal authority to establish US GAAP
A
SEC
2
Q
Framework: what is the single source of authoritative nongovernmental US GAAP
A
FASB Codification
3
Q
Framework: what literature is included in the Codification
A
- FASB
- SFAS
- Interpretations
- Technical Bulletins
- Staff Positions
- Staff Implementation Guides
- Statemetn No. 138 - EITF Abstracts and Topic D
- Derivative Implementation Group Issued
- Accounting Principles Board Opinions
- Accounting Research Bulletins
- AICPA
- Statements of Position
- Auditing and Accounting Guides
- Practice Bulletins
- Technical Inquiry Service (software) - SEC (RELEVANT portions)
- Reg S-X
- Financial Reporting Releases
- Accounting Series Releases
- Interpretive Releases
- Staff Accounting Bulletins
- EITF Topic D and SEC Staff Observer Comments
4
Q
Framework: how are new GAAP issued
A
- Majority of Board votes to issued Exposure Draft
- Exposure Draft issued to public
- Staff prepares an Accounting Standards Update
- Majority of Board vote to approve Update
Note: ASU is NOT GAAP
5
Q
Framework: what is the purpose of the IASB
A
develop a single set of high-quality, global accounting standards
6
Q
Framework: what is the IFRIC
A
International Financial Reporting Interpretations Committee (replaced SIC)
provides guidance on newly identified financial reporting issued not addressed by IFRS and assist IASB in international convergence
7
Q
Framework: what makes up International Financial Reporting Standards
A
- IAS
- IFRS
- SIC Interpretations
- IFRIC interpretations
8
Q
Framework: how are new IFRS issued
A
- (optional) discussion paper issued
- at least 9 members vote to issue an Exposure Draft
- Exposure Draft issued
- IASB drafts IFRS update
- at least 9 members approve new IFRS
9
Q
Framework: what is the Conceptual Framework for Financial Reportin
A
- joint project with IASB and FASB
- purpose: converge conceptual frameworks
- assist in developing future IFRSs, evaluating existing IFRSs, and reducing # of alternatives permitted by IFRS
Note: NOT an IFRS
Note: IFRS directs entities to reference this when developing accounting policies but GAAP prohibits referencing this
10
Q
Framework: what is the goal of the International Convergence of Accounting Standards
A
develop a single set of high-quality, international accounting standards that companies can use for both domestic and cross-border reporting
Note: supported by SEC
11
Q
Framework: who are the primary users of the F/S and what are their informational needs
A
- primary users: investors, lenders, creditors
- info needs: resources/claims, efficiency/effectiveness of management
Note: use accrual basis of accounting
Note: used to estimate FCF and value of entity
12
Q
Framework: what are the fundamental qualitative characteristics of useful financial info.
A
- Relevance (predictive, confirming, material)
2. Faithful representation (complete, neutral, free from error)
13
Q
Framework: what are the steps to apply the fundamental qualitative characteristics
A
- identify phenomena that has potential to be useful to users
- identify type of info that would be most relevant
- determine if info is available and can be faithfully represented
- if not –> repeat with next most relevant type of info
14
Q
Framework: what are the enhancing qualitative characteristics
A
- comparability
- verifiability
- timeliness
- understandability (aid from advisers = OK)
15
Q
Framework: what is the primary constraint in reporting
A
cost vs. benefit
Note: applied to financial reporting in general, NOT at the entity level
16
Q
Framework: what are the characteristics of nonbusiness organizations
A
- significant portion of resources come from contributions and grants
- operating purposes are other than to provide goods and services for profit
- lack ownership interest that allow a claim to resources
17
Q
Framework: who are the users of nonbusiness org. F/S and what are their information needs
A
Users:
- resource providers
- constituents
- governing and oversight bodies
- managers
Needs: info useful in making
- resources allocation decisions
- assessmetnsof services and ability to provide
- assessments of mgmt stewardship
- assessments of:
- resources
- obligations
- net resources
- organization performance
- nature of and relationship b/t inflows and outflows, service efforts and accomplishments, and liquidity
18
Q
Framework: what comprise a full set of financial statments
A
- Statement of Financial Position
- Statement of Earnings
- Statement of Comprehensive Income
- Statement of Cash Flows
- Statement of Changes in Owner’s Equity
19
Q
Framework: what are the fundamental recognition criteria
A
- definitions
- measurability
- relevance
- reliability
20
Q
Framework: what are the measurement attributes for assets and liabilities
A
- Historical cost = PP&E
- Current cost = Inventory
- NRV = AR
- Current Market Value = Marketable Securities
- PV of FCF = LT debt (bonds)
21
Q
Framework: what are the fundamental assumptions under GAAP
A
- Entity
- Going Concern
- Monetary Unit
- Periodicity
- Historical Cost
- Revenue Recognition Principle
- Earned
- Realized or Realizable - Matching Principle
- Accrual Accounting (no cash needed)
- Full Disclosure Principle (completeness)
- Conservatism Principle
22
Q
Framework: what are the fundamental assumptions under IFRS
A
- Going- Concern
2. Accrual
23
Q
Framework: what are the 5 elements of present value measurement
A
- estimate future cash flows
- expectations about timing variations of FCF
- time value of money (risk free rate)
- price for bearing uncertainty
- other factors (liquidity, market imperfections)
24
Q
Framework: What is the Traditional Approach to present value measuremnt
A
- one discount rate (IR selection is key)
- scheduled, known, payments
25
Framework: what is the Expected Cash Flow Approach to present value measurement
- uses only the risk-free rate of return
- uncertainties used to adjust FCF amounts
- expected cash flow (or weighted-average FCF) = range of possible cash flows each with a subjective probability assigned
26
Framework: what are the liability measurement considerations under the present value method
1. cost to settle
| 2. credit standing of company
27
Framework: what is the Catch-up Approach
adjust carrying amount of A or L to the present value determined using the revised estimates and discount using the original effective IR
28
I/S: what is the purpose and uses of the income statemetn
Purpose: provide information about the uses and sources of funds in the income process
Uses: (1) profitability, (2) value for investment purposes, (3) credit worthiness of the entity
29
I/S: what are unexpired costs and list examples
costs that will expire in the future and be charged (allocated in a systematic and rational manner or matched) against revenue in future periods
1. inventory --> COGS
2. Prepaid insurance --> Insurance expense
3. NBV fixed assets --> depreciation expense
30
I/S: define revenues and expenses and the method used for reporting
1. Revenue = reported at gross amounts less allowance for returns and discounts (given)
2. Expenses = (casts that only benefit the current period or the allocation of unexpired costs to the current period for the benefit received) reported at gross amount
** central operations of the busienss
31
I/S: define gains and losses and the method used for reporting
1. Gains: recognition of an asset either not in the ordinary course of business or without the incurrence of an expense
2. Losses: cost expiration either not in the ordinary course of business or without the generation of revenue
3. Method: NET
32
I/S: presentation order of major components of an Income Statement and Retained Earnings Statement
IDEA
1. Income/Loss from Continuing Operations
- individual like items shown gross of tax
- includes operating, non-operating activities, and income taxes
2. Income/Loss from Discontinued Operations
- NET OF TAX
3. Extraordinary Items
- NET OF TAX
- infrequent and unusual
4. Cumulative Effect of Change in Accounting Principle
- Statement of Retained Earnings
- NET OF TAX
- as of the beginning of the earliest period presented in the period of implementation of the new method
- only allowed if new method presents the F/S more fairly
33
I/S: describe the Multi-Step Income Statemetn
- operating revenues and expenses separately reported from non-operating revenue and expenses and other gains and losses (enhanced user info.)
34
I/S: what costs are included in inventory
1. purchase price
| 2. freight in
35
I/S: what costs are included in Selling Expenses
1. freight out
2. salaries and commissions
3. advertising
4. portion of building rent attributable to sales dept.
36
I/S: what costs are considered non-operating
1. auxiliary activities
| 2. interest expense
37
I/S: describe the Single Step Income Statemetn
- ONLY for Income from Continuing Operations
- total expenses (including income tax exp.) are subtracted from total revenues
- advantage: items do not appear to user to be classified as more important than others
38
I/S: what does the loss from discontinued operations and when are they recognized
1. gain/loss from actual operations
2. impairment loss
3. gain/loss on disposal
Recognized in period in which they occur
39
I/S: define a Component of an entity under GAAP and IFRS
Component: part of an entity (lowest level) for which operations and cash flows can be clearly distinguished both operationally and for financial reporting
GAAP:
1. operating segment
2. reportable segment
3. reporting unit
4. subsidiary
5. asset group (A&L in same transaction)
IFRS:
1. separate major line of business
2. geographical area of operations
3. subsidiary acquired exclusively with a view to resale
40
I/S: when is a component or disposal group classified as Held-For-Sale
1. management commits to a plan
2. component is available for immediate sale in its present condition
3. active program to locate a buyer has been initiated
4. sale is probable and expected to be complete within one year
5. actions required to complete the sale make it unlikely that plan will be withdrawn
Note: triggers impairment analysis in GAAP
41
I/S: what is the IFRS requirement when classifying a component as Held For Sale
1. remeasure assets and liabilities in accordance with applicable standards
2. reported at the lower of carrying value and FV less costs to sell
42
I/S: when is a component reported in discontinued operations
Either:
1) has been disposed of or
2) has been classified as held for sale
43
I/S: what conditions must be present for operation losses to be reported in discontinued operations
BOTH:
1) component eliminated (or will be) from ongoing operations
2) No significant continuing involvement
44
I/S: can discontinued operation impairment losses be reversed under GAAP
Yes. But not in excess of previously recognized cumulative loss
45
I/S: how is a component of discontinued operations valued
at lower of carrying value or (FV - costs to sell)
costs to sell: incremental direct costs to transact the sale
46
I/S: are components continued to be depreciated once classified as held for sale
No
47
I/S: how are subsequent adjustments to amounts previously reported in discontinued operations recognized
adjustments that are directly related to the disposal of a component in a prior period are classified in the current period in discontinued operations
directly related =
1) adjustment has a direct cause-and-effect relationship and
2) occur no later than one year after date of disposition transaction (unless out of mgmts control)
examples:
1. resolution of contingencies related to terms of disposal (purchase price adjustment, indemnification issues)
2. resolution of contingencies directly related to operations of component before disposition (warranty obligations, environmental responsibilities)
3. settlement of employee benefit plan obligations
48
I/S: what are the disclosure requirements related to discontinued operations
gain/loss disclosed in notes or on face
discontinued ops presented as a separate component of income, net of tax
49
I/S: list examples of exit or disposal costs
1. involuntary employee termination benefits
2. costs to terminate a contract that is NOT a capital lease
3. other costs associated with exit or disposal activities
- consolidate facilities
- relocate employees
50
I/S: what are the criteria for recognizing a liability for costs associated with exit or disposal activities
Entity's commitment to an exit or disposal plan, by itself, is NOT enough. Recognize liability when ALL:
1) obligating event has occurred
2) event results in a present obligations to transfer assets or provide services in the future and
3) entity has little or no discretion to avoid the future transfer of assets or providing of services
NOT INCLUDED; future operating losses (recognize in period incurred)
51
I/S: how is the liability associated with exit or disposal activities measured and presented
- measure at RV
- revisions are prospective
- present with associated activity
(a) if associated activity is discontinued operation = discontinued operation
(b) if associated activity is not = continuing operations
52
I/S: what are the required disclosures related to exit and disposal activities
In notes in period activity is initiated and all subsequent periods until activity is complete:
1. description of activity and estimated completion date
2. for each major cost:
- total amount expected to be incurred in period and cumulative incurred to date
- reconciliation of beginning and ending liability
3. line items on I/S where costs are aggregated
4. for each reportable segment: total costs expected, amount incurred in period and to date net of any adjustments with an explanation
5. statement that liability not recognized b/c FV can not be estimated
53
I/S: list example of extraordinary items
1. abandonment of or damage to a plant due to infrequent earthquake or flood
2. expropriation of plant by govt
3. prohibition of a product line by a newly enacted law or regulation
4. extinguishmetn of LT debt if unusual and infrequent
NOT INCLUDED:
1. sale or abandonment of PP&E used in business
2. large write-downs or write-offs of:
- A/R
- Inventories
- Intangibles (including goodwill)
- LT securities (permanent decline)
3. G/L from foreign currency transactions or translation
4. Losses from major strike by employees
5. LT debt extinguishment if part of common mgmt strategy
54
I/S: how are infrequent OR unusual items recognized in the I/S
- separate line item as part of income from continuing operations
- nature and financial effects should be disclosed
55
RE Stmt: list the 3 types of accounting changes and how they are accounted for
Reported NET OF TAX:
1. change in estimate = prospective
2. change in principle = retrospective
3. change in entity = restate
NOT: correction of error
56
RE Stmt: list examples of changes in accounting estimates
- changes in lives of fixed assets
- adjustments to yr-end accrual of officers' salaries and/or bonuses
- write-downs of obsolete inventory
- material nonrecurring IRS adjustments
- settlement of litigation
- change in FV estimate
- changes in acco. principle inseperable from changes in estimate
- -- demo costs
- -- installment method to immediate recognition
57
RE Stmt: when is a change in accounting principle allowed
Only if required by GAAP/IFRS or if the alternative is preferable and more fairly presents the information
Note: does not apply to nonrecurring transactions or events
58
RE Stmt: define Direct Effects of changes in accounting principle
adjustments that would be necessary to restate the F/S of prior periods
59
RE Stmt: how are changes in accounting principle presented
REPORT NET OF TAX
1. Non-comparative F/S:
- adjust beginning RE
- cumulative effect of change is equal to the difference b/t the amount of beginning RE in the period of change and what the RE would have been if the accounting change had been retroactively applied to all prior periods
- includes direct effects
- includes only the indirect effects entered into the accounting records
2. Comparative F/S:
- cumulative effect is equal to the difference b/t beginning RE in the FIRST period presented and what RE would have been if the new principle had been applied to all prior periods
- restate all prior period F/S that are presented
60
RE Stmt: how many F/S should be presented under IFRS when an entity makes a change in accounting principle
3 B/S
| 2 of all others
61
RE Stmt: what are the exceptions to the general rules recognized from a change in accounting principle
1. TO LIFO --> prospectively
- beginning inventory of year of change is first LIFO layer
2. Impracticable
3. change in depreciation method --> change in estimate
62
RE Stmt: how is the cumulative effect of a change in accounting principle calculated
cumulative effect = difference b/t
1) RE at beginning of EARLIEST period presented and
2) RE that would have been reported at beginning of earliest period if new principle had been applied retrospectively for all prior periods by recognizing only the direct effects and related income tax
63
RE Stmt: which change in accounting principle does IFRS NOT recognize
change in entity
64
RE Stmt: describe common error corrections
1. errors in recognition
2. errors in measurement
3. errors in presentation
4. errors in disclosure resulting from
- math mistakes
- mistakes in application of GAAP
- oversight or misuse of facts that existed at time F/S were prepared
65
RE Stmt: how is an error correction presented
1. comparative F/S presented
(a) correct the information if the year is presented
(b) adjust beginning RE of earliest year presented if year is NOT presented
2. comparative F/S NOT presented: adjust opening balance of RE NET OF TAX
Note: IFRS allows prospective treatment if impracticable to estimate
66
OCI: define comprehensive income
- all changes in equity (net assets) during a period from transactions and other events/circumstance from non-owner sources
- does not include changes in equity from investments or distributions to owners
NI + OCI = Comprehensive Income
67
OCI: define otehr comprehensive income
items of revenue, expense, gains, losses included in comprehensive income but excluded from net income
68
OCI: list the components of OCI (PUFER)
P = pension adjustments (change in funded status due to:
- gains or losses
- prior service costs
- net transition of assets or obligations
Note: IFRS - certain actuarial G/L may be included in OCI and are NOT reclassified to net income
U = unrealized G/L on AFS securities (including those of a debt security transferred into AFS from HTM)
F = foreign currency items
1. foreign currency translation adjustments
2. G/L on foreign currency transactions designated as effective economic hedges of Net Investment in Foreign Entity
E = effective portion of cash flow hedges (until cash flows associated with hedged items are realized)
R = revaluation SURPLUS (IFRS only)
- NOT reclassified to net income in subsequent periods
- may be transferred directly to retained earnings when related asset is used or de-recognized
69
OCI: what is the purpose of reclassification adjustments
- to avoid double counting
70
OCI: what is Accumulated Other Comprehensive Income
in Accumulated Other Comprehensive Income
- AOCI is a component of equity
- AOCI includes the total of OCI for period and prior periods
- OCI is closed to this account each period
71
OCI: how is Comprehensive Income reported in the F/S
- do NOT report on a per-share basis
- does NOT apply to NFP
- Option #1: single statement of comprehensive income (starts with revenue)
- Option #2: two-statement approach (starts with net Income)
72
OCI: how are the components of OCI reported in the F/S
- components may be reported either:
1) net of tax or
2) before related tax effects with one amount sown for aggregate effect
- the amount of each income tax expense or benefit allocated to each component must be disclosed either on face of F/S or in notes
73
OCI: what are the required disclosures for OCI
1. tax effects of each component
2. changes accumulated balances of each component
3. total AOCI in B/S
4. reclassification adjustments
- changes in AOCI balances by component with separate disclosure of (1) reclassification adjustments and (2) current-period OCI
- significant items reclassified out of AOCI must be disclosed
-
74
F/S Notes: describe the Summary of Significant Accounting Principles
- integral part of F/S
- preferred presentation is 1st or 2nd note
- policies presented should not be duplicated
Note: IFRS requires an explicit and unreserved statement of compliance with IFRS in notes
identify and describe:
- measurement bases
- accounting principles and methods
- criteria
- policies
- pricing
examples include:
1. basis of consolidation
2. depreciation methods
3. amortization of intangibles
4. inventory pricing
5. accounting for LT contracts
6. revenue recognition from franchising/leasing
NOT INCLUDED in this note:
1. composition of accounts
2. dollar amounts in accounts balances
3. details relating to changes in accounting principles
4. dates of maturity and amounts of LT debt
5. yearly computation of depr/depl/amort
75
F/S Notes: list examples of information contained in remaining notes to the F/S
- information relevant to decision makers
- disclose facts not presented in "summary of significant accounting policies" or in F/Ss
examples:
1. changes in OE (C/S, APIC, RE, T/S, stock dividends, etc.)
2. required marketable securities disclosure including carrying value and gross unrealized G/L
3. contingency losses
4. contractual obligations (including restrictions on specific A or L)
- off-B/S financing like operating leases
5. pension plan description
6. post-B/S disclosures of certain material events that occurred before the F/S were issued
7. Correction of errors
8. Discontinued segments
76
F/S Notes: define "related parties"
1. affiliates of an entity
2. entities accounted for using the equity method (investments in affiliates and joint ventures)
3. parent or subsidiary entities or subsidiaries of a common parent
4. trusts for the benefit of employees (i.e. pension and profit-sharing trusts that are managed by or under the trusteeship of mgmt)
5. management of an entity and their immediate family members
6. GAAP Only: principal owners (own 10%+ voting interest of an entity) and their immediate family members
77
F/S Notes: list examples of related party transactions
1. sales/purchases/transfers of real/personal property
2. services received or furnished (i.e. accounting, management, engineering, legal)
3. use of property and equipment by lease or otherwise
4. borrowings, lendings,guarantees
5. maintenance of a compensating bank balance for the benefit of a related party
6. intra-entity billings based on allocation of common costs
7. fillings of consolidated tax returns
78
F/S Notes: what are the required related party disclosures under GAAP
1. Material related party trasnactions
- excludes: compensation arrangements, expense allowances, similar items in ordinary course of business
- nature of relationship
- description of the transactions for each period
- dollar amounts of transactions for each period
- amounts due to/from related parties at each B/S date
- name of the related party if necessary to understand relationship
2. related party notes/accounts receivable
- shown separately
3. control relationship (even i there were no transactions)
79
F/S Notes: what are the required related party disclosures under IFRS
1. material related party transactions
- nature of relationship
- description of the transactions for each period
- dollar amounts of transactions for each period
- amounts due to/from related parties at each B/S date
- allowance for bad debts related to amounts due from related parties
- bad debt expense and/or write-offs of debts due from related parties
2. compensation arrangements of key management personnel in total and for each
- short-term employee benefits
- post-employment benefits
- other LT benefits
- termination benefits
- share-based payments
Note: SEC requires this outside of F/S
3. related party notes/accounts receivable
- shown separately
4. Control relationships
- even if no transactions
- name of parent and, if different, ultimate controlling party
80
F/S Notes: what are the required disclosures for risks and uncertainties under GAAP
1. nature of operations
- major products/services
- principal markets (and location)
- relative importance of multiple businesses
2. use of estimates (with inclusion of a statement)
3. certain SIGNIFICANT estimates
- when it is reasonably possible that an estimate will change in near term, and change will be material = disclose estimate of effect
- examples:
(a) inventory or equipment subject to rapid technological obsolescence
(b) deferred tax asset valuation losses
(c) capitalized computer software costs
(d) loan valuation allowances
(e) litigation-related obligations
(f) amounts reported for LT obligations such as pension and post-retirement
(g) amounts reported in LT contracts
4. current vulnerability due to certain concentrations (when entity is exposed to risk that could be mitigated through diversification)
- examples:
(a) concentration in volume of business transacted with a single individual
(b) concentrations in revenue from products/svcs/fund-raising events
(c) concentrations in the supply of resources
(d) concentrations in market or geography
- disclosure requirements: disclose when ALL
(A) concentration exists at F/S date
(B) concentration makes entity vulnerable to risk of a near-term severe impact (significant financially disruptive effect on normal function of an entity) AND
(C) it is at least reasonably possible that the events will occur in the near term
Note: GAAP does not require disclosure of judgments, only significant estimates
81
F/S Notes: compare IFRS "risk and uncertainty" disclosure to GAAP
- narrower; focus on sources of estimation uncertainty
- IFRS requires disclosure of judgments and estimates
- disclose assumptions made a/b future and other major sources of estimation uncertainty at end of reporting period that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year
- include details of the nature and carrying amount of these A & L
82
Interim: when are interim F/S required
- neither IFRS nor GAAP require interim F/S
| - SEC requires quarterly reporting
83
Interim: what accounting principles should be used in interim F/S
those used in the most recent annual report unless a change in accounting principle is adopted in the current year
Note: GAAP allows certain principles and practices to be modified (i.e. cost allocation)
Note: IFRS requires cost to be recognized in period incurred
84
Interim: describe the recognition of revenues and expenses in interim reporting
- costs and expenses that clearly benefit more than one period are allocated to periods affected
- revenues recognized in period in which they were earned and realized or realizable
Note: a total for Comprehensive Income must be reported
85
Interim: what characteristic do interim F/S emphasize
- timeliness over reliability
| - mark "unaudited" (viewed as integral part of annual F/S)
86
Interim: what are the minimum # of interim F/S required under IFRS
1) condensed B/S x 2
- as of end of current interim period
- as of end of preceding financial year
2) stmt of Comprehensive Income x 4
- current interim period
- cumulative year-to-date
- comparable periods for preceding financial year
3) stmt of Changes in OE x 2
- cumulatively for current financial year
- comparable year-to-date period for preceding year
4) CFS x 2
- current financial year-to-date
- comparable year-to-date period for preceding year
Note: GAAP does not establish a minimum
87
Interim: how are income taxes calculated for interim F/S
= (year-to-date income) x (est. effective tax rate for year) - previously recognized tax provision
- used effective tax rate expected to be applicable for full fiscal year
- effective tax rate should reflect ALL tax planning alternatives
Note: IFRS allows substantially enacted tax rates
Note: GAAP only allows enacted tax rates
88
Interim: what inventory estimation methods used for interim F/S require reconciliation with annual physical inventory (??)
- gross profit method
- retail inventory method
- other method different from that used in annual inventory valuation
disclose:
- method used
- any material differences when reconciled with annual physical inventory
89
Interim: how is the liquidation of a LIFO base layer recognized in interim F/S
- if it will be corrected by end of year: value at expected cost of replacement
- COGS for the period should include the expected replacement cost and NOT the cost of the baseperiod LIFO inventory
90
Interim: how are permanent declines and temporary declines in inventory recognized in interim F/S
- permanent: recognize in interim period in which they occur (market increases in subsequent periods recognized up to previously recognized loss)
- temporary: do not recognize
91
Interim: how are seasonal revenue variations recognized in interim F/S
- material variations: disclose in interim F/S
| - large seasonal changes: disclose results for full year which ends at interim date
92
Interim: how are unusual and infrequent transactions recognized in interim F/S
report separately in interim F/S if material
93
Interim: what are the disclosures required for interim F/S under GAAP and IFRS
- similar to annual F/S
- see page F1 - 49 for list
- IFRS requires that nature and amount of a change in estimate made in Q4 be disclosed in note to annual F/S if a separate financial report for Q4 is not prepared
- GAAP requires disclosure in a note to annual F/S (if Q4 financial report is not prepared) of Q4 activity related to:
(a) changes in accounting principle
(b) discontinued operations
(c) extraordinary, unusual, infrequent items
94
Segment: what is the objective of segment reporting and what are the required disclosures
Objective: provide info on business activities and the economic environment to help users:
- better understand enterprise's performance
- better assess its prospects for FCF
- make more informed judgments about enterprise as a whole
Disclosures:
- segment P or L
- segment assets
- related items
- segment liabilities (IFRS)
- NOT SEGMENT CASH FLOWS
95
Segment: required disclosure for ALL public enterprises
1. operating segments (annual and interim)
2. products and services
3. geographic areas
4. major customers
96
Segment: what accounting principles are used for segment reporting
- same principles as main F/S
- must reconcile to related aggregate amounts in F/S
- inter-company transactions are NOT eliminated
97
Segment: who is not required to present segment F/S
1. NFP
2. Non-public (private)
3. separate F/S of members of a consolidated group if both the separate company statements and the consolidated or combined F/S are included in the same financial report
98
Segment: define an operating segment
a component of an enterprise:
- engages in business activities from which it may earn revenues and incur expenses (including transactions with other components)
- whose operating results are regularly reviewed by the enterprises's Chief Operating Decision Maker
- for which discrete financial information is available
99
Segment: what method is used for defining a segment
Management Approach Method
100
Segment: list 2 examples of enterprises that are not operating segments
1. corporate headquarters
| 2. pension plan
101
Segment: define a reportable segment
- operating segment of an enterprise that meet the criteria for separate reporting
- operating segments that exhibit similar LT financial performance may be aggregated into one operating segment if:
1. aggregation is consistent with objective of segment reporting
2. segments have similar economic characteristics
3. segments are similar in
- products and services
- processes
- type or class of customer
- methods to distribute products
- regulatory environment
102
Segment: what are the quantitative thresholds for reprotable segments
1. 10% test
- all revenues (both internal and external; excluding interest income on advances and loans to other segments)
- reported profit or loss: absolute value of reported P/L is GREATER, in absolute amount of
1. combined reported profit
2. combined reported loss
- assets (reviewed by chief operating decision maker)
2. 75% test - "reporting sufficiency"
- total of external (consolidated) revenue reported by operating segments must be equal to 75% of external (consolidated) revenue
- all other segments that are not reportable are combined and disclosed in an "all other segments" categor
103
Segment: what are the 2 exceptions to segment recognition
1. operating segment deemed reportable in immediately preceding period but does not meet criteria in current period may continue to be reported if management judges segment to have continuing significance
2. operating segment not deemed reportable in prior period meets criteria for reportability in current period, segment data for prior periods presented should be restated to reflect the new segment
104
Segment: how is segment profit or loss calculated
Revenues (internal and external)
Less: directly traceable costs
Less: reasonably allocated costs by COO
= operating profit (loss)
Note: only include income and expense in profit/loss if reported to chief operating decision maker
NOT INCLUDED:
1. general corporate revenues and expenses
2. interest expense
3. income taxes
4. equity in earnings and losses of unconsolidated subsidiary (under equity method)
5. gains or losses from discontinued operations
extraordinary items
6. minority interest
105
Segment: what are the reportable segment disclosures
1. identifying factors (basis of organization, etc.)
2. products and services
3. profit or loss: individually for -
- revenue from external customers
- revenue from internal
- interest revenue and expense
- depreciation/depletion/amortization
- equity in net income of investee (equity method)
- income tax expense or benefit
- extraordinary items
- significant noncash items
- unusual items
4. Assets
- amount of investment in equity method investee
- total expenditures for:
- -- additions to long-lived assets
- -- LT customer relationships
- -- mortgage and other servicing rights
- -- deferred policy acquisition costs
- -- deferred tax assets
5. Liabilities (IFRS only)
6. Measurement Criteria
- basis of accounting for internal transactions
- nature of any differences b/t segments' P&L and enterprises consolidated
- nature of any differences b/t segments assets and enterprises' consolidated
- nature of any changes from prior periods in the measurement methods used
- nature and effect of asymmetrical allocations
7. Reconciliations (segmetn --> consolidated)
- revenues
- measure of P&L
- assets
- liabilities (IFRS)
- other significant items
106
Segment: what are the enterprise-wide disclosures required for all public companies
1. products and services
- revenues from external customers from each or
- statment that it is impracticable to calcualte that
2. Geographic areas
- revenues (domicile, foreign (total & individual), and basis for attributing revenues each country)
- Long-lived assets (domicile country, all foreign in total, individual foreign if material)
3. Major customers
- provides 10%+ revenue to a single segment
- disclose this fact
- disclose amount of revenue from each customer
- disclose identity of segment
- do NOT need to disclose identity of major customer
107
Development-Stage: define a development-stage enterprise
- GAAP
- enterprise which either:
1) principal operations have not yet commenced or
2) principal operations have generated insignificant amount of revenue or loss
- during this stage, company devotes most activities and resources toward establishing the business
108
Development-Stage:how are start-up or organizational costs recognized
- expensed immediately
| - conservatism
109
Development-Stage:list the additional disclosures required for development-stage enterprises
- development stage enterprises follow same financial principles as any other enterprise PLUS
1) identify F/S as those of development-stage
2) B/S: describe cumulative net losses as "deficit accumulated during the development stage"
3) I/S:
- revenues and expenses for each period presented
- present a cumulative amount from company's inception
4) CFS:
- cumulative amounts of cash inflows and outflows since inception
- current amounts of cash inflows and outflows for each period presented
5) Stmt of OE:
- #/date/$ of shares issued
- if noncash consideration is involved:
- -- describe nature of consideration
- -- describe basis for its valuation
110
IFRS Adopt: define an entity's first IFRS F/S
First annual F/S in which the entity makes an explicit and unreserved statement of compliance with IFRS and adopts IFRS
Previous F/S:
- entity presented most recent F/S in accordance with non-IFRS requirements or without explicit statement of compliance with ALL IFRS
- entity prepared F/S in accordance to IFRS for internal use only
- prepared without preparing a complete set of statements required by IFRS
- did not present F/S for previous period
111
IFRS Adopt: identify the statements and and required number of each for opening IFRS F/S
1. B/S x3
2. Comp. Income x2
3. I/S x2 (if using 2-statement approach)
4. CFS x2
5. Changes in OE x2
6. Notes
112
IFRS Adopt: what is the date of transition to IFRS
date on opening B/S (beginning of prior period)
113
IFRS Adopt: how are assets and liabilities recognized in opening IFRS F/S
- adjustments needed to restate A&L in conformity with IFRS should be made DIRECTLY TO RETAINED EARNINGS at date of transition to IFRS
- Financial A&L: may be valued at FV through P&L
- LT Assets: may use fair value as deemed cost of fixed assets, investment property, or intangible assets and disclose
(a) total of those FVs
(b) total adjustments
- Investments In Subsidiaries, Joint Ventures, Associates: entity must disclose -
(a) total for which deemed cost is equal to carrying value
(b) total for which deemed cost is FV
(c) total adjustment to carrying amounts
114
IFRS Adopt: what accounting policies are applied to the opening IFRS F/S
- entity must use same accounting policies in opening IFRS B/S and ALL PERIODS PRESENTED
- IFRS allows limited exemptions where cost of initial application exceeds benefit
- IFRS prohibits retrospective application of certain principles that would require judgment by mgmt except:
- derecognition of financial A&L
- hedge accounting
- NCI
- Classification and measurement of financial assets
- embedded derivatives
115
IFRS Adopt: how are accounting estimates recognized in opening IFRS F/S
estimates used on date of transition should be consistent with those for same date made under previous GAAP after adjustment for any differences in accounting policies
116
IFRS Adopt: what are the required disclosure in opening IFRS F/S
- how the transition affected its reported financial position, financial performance, and cash flows
- reconciliation of its equity reported under previous GAAP to its equity under IFRS for:
(a) date of transition and
(2) end of last period presented in entity's most recent annual GAAP F/S
- reconciliation of total comprehensive income under IFRS to total under GAAP for latest period in most recent F/S
- disclosures related to recognition of impairment losses if these losses or reversals were recognized for the first time when preparing opening IFRS B/S
- similar reconciliations for any interim financial report presented as part of period covered by first IFRS statments
117
SEC: what information is included in a Securities Offering Registration Statement
1. Disclosures about the securities being offered
2. relationship of the new securities to the company's other securities
3. Information similar to that filed in the annual filing
4. AUDITED financial statements
5. description of business risk factors
118
SEC: what information is included in Form 10-K and when is it due
- Filed annually by US registered companies (issuers)
Information includes:
- financial disclosures
- summary of financial data
- MD&A
- AUDITED F/S
Due:
- large accelerated filers: 60 days after fiscal year end
- accelerated filers: 75 days after year end
- all others: 90 days after year end
119
SEC: define a "large accelerated filer" and a "accelerated filer"
1. Large Accelerated Filer: issuer with a worldwide market value outstanding common equity held by non-affiliates of $700 million or more as of the last business day of the issuers most recently completed second quarter
2. Accelerated Filer: issuer with a worldwide market value outstanding common equity held by non-affiliates of $75 million or more but less than $700 million
120
SEC: what information is included in a Form 10-Q and when is it due
- filed quarterly by US registered companies
Information:
- UNaudited F/S
- interim period MD&A
- certain disclosures
Due:
- large accelerated filers: 40 days
- all others: 45 days
121
SEC: what information is included in Form 11-K
annual report of a company's employee benefit plans
122
SEC: what information is included in Form 20-F and Form 40-F (Canadian)
- filed annually be foreign private issuers
- similar to Form 10-K
Information:
- financial disclosures
- summary of financial data
- MD&A
- AUDITED F/S
Note: F/S must be prepared using GAAP or IFRS or reconciled to GAAP if another comprehensive body of accounting principles is used
123
SEC: what information is included in Form 6-K
- filed semi-annually by foreign private issuers
- similar to Form 10-Q
Information:
- UNaudited F/S
- interim period MD&A
- certain disclosures
124
SEC: what information is included in Form 8-K
- reports major corporate events
examples:
1. corporate asset acquisitions or disposals
2. changes in securities and trading markets
3. changes to accountants or financial statements
4. changes in corporate governance or management
125
SEC: what information is included in Forms 3, 4 and 5
- forms required to be filed by directors, officers, or beneficial owners of more than 10% of a class of EQUITY securities of a registered company
126
SEC: what general information is included in Regulation S-X
sets forth the form and content of and requirements for interim and annual financial statements to be filed with the SEC
127
SEC: what are the requirements for interim F/S under Regulation S-X
1. reviewed by independent public accountant and review report filed with the F/S
2. statements and periods presented:
- Balance Sheet:
(a) as of end of most recent fiscal quarter
(b) as of end of preceding fiscal year
(c & d) corresponding, preceding fiscal quarter and year ONLY if necessary to understand the impact of seasonal fluctuations
- Income Stmt:
(a) most recent fiscal quarter
(b) period b/t end of preceding fiscal year and end of most recent fiscal quarter
(c & d) corresponding periods of preceding fiscal year
(e & f) OPTIONAL - cumulative 12-month period ended during the most recent fiscal quarter and for the corresponding preceding period
- CFS:
(a) period b/t end of preceding fiscal year and end of most recent fiscal quarter
(b) corresponding period for preceding fiscal year
(c & d) OPTIONAL: cumulative 12-month period ended during the most recent fiscal quarter and for the corresponding preceding period
3. Statements in the notes:
- statement that interim F/S reflect adjustments necessary to fairly state the results of the interim period
- statement that adjustments that include estimated provisions for bonus and profit sharing arrangements are normal and recurring
- detailed description of nature and amount of adjustments that are NOT normal recurring adjustments
4. Condensed F/S = OK
5. Disclosures: sufficient to not be misleading
- omitted disclosures:
(a) summary of significant accounting policies
(b) details of accounts that have not changed significantly since the end of the most recent fiscal year
(c) detailed annual disclosures
- required disclosures:
(a) material contingencies
(b) events subsequent to the end of the most recent fiscal year that have a material impact on entity
> change in accounting principals (date & reasons)
> changes in estimated
> change in status of LT contracts
> significant new borrowings/modification of financing arrangements
> business combinations or dispositions
128
SEC: what are the requirements for annual F/S under Regulation S-X
1. F/S must be audited by independent public accounting and report must be filed with F/S
2. Periods Presented:
- B/S: 2 most recent fiscal years
- I/S, Change in OE, CFS: 3 fiscal years preceding date of most recent audited B/S
Note: IFRS requires 2 of all statements
3. Disclosures
- dividends per share and in total for each class of shares
- principles of consolidation or combination
- assets subject to lien
- defaults with respect to any issue of security or credit agreement if the default or breach existed at B/S date and has not been subsequently cured
- preferred shares disclosures
- significant changes in bonds, mortgages, or similar debt
- restrictions that limit the payments of dividends
- summarized financial info. of subsidiaries NOT consolidated and 50% or less owned entities
- income tax expense
- warrants or rights outstanding
- related party transactions that affect the F/S
- repurchase and reverse repurchase agreements
- accounting policies for derivative instruments
129
SEC: define XBRL, XML, and HTML
XBRL: (extensible business reporting language) is a royalty-free, open specification for software that uses XML data tags to describe financial info. for business and financial reporting; tell computers HOW to INTERPRET the context of the text
XML: extensible markup language
HTML: predecessor to XBRL, tells computers how to display text
130
SEC: define an XBRL "tag"
- tag: machine readable code that gives standard definition for each line item in an I/S, CFS, B/S or other financial or non-financial data (including data contained in notes to F/S)
- include descriptive labels, definitions, references to GAAP and other elements that provide contextual info. that allow data to be recognized and processed by software
131
SEC: define an XBRL taxonomy and list examples
- taxonomy: defines the specific tags used for individual items of business and financial data
- examples:
1. XBRL US GAAP Financial Reporting Taxonomy (maintained and updated by FASB and Financial Accounting Foundation)
2. XBRL IFRS Taxaonomy (maintained by IFRS Foundation and supported by XBRL Quality Review Team and Advisory Council)
3. Global Ledger Taxonomy (independent of other reproting standards that permits flexible, mult-national consolidation)
4. Industry Specific Taxonomies (commercial and industrial, banking and savings, real estate, insurance, broker/dealer)
5. Company Specific Tags
132
SEC: define an XBRL instance documetn
an XBRL formatted document that contains tagged data
133
SEC: what is the SEC Interactive Data Rule
- requires US public companies and foreign private issuers to present F/S and any applicable F/S schedules in an exhibit prepared using XBRL
- required for registration statements, quarterly and annual reports, 6-K, 8-K,
- tagged disclosures must include the primary F/S, notes, and F/S schedules
- ** primary F/S must be tagged in detail
- F/S schedule and footnote tagging is broken into 4 levels:
(1) Level 1: each complete footnote and schedule is tagged as a single block of text
(2) Level 2: each significant accounting policy within the significant accounting policies footnote is tagged as a single block of test
(3) Level 3: each table within each footnote or schedule is tagged as a separate block of text
(4) Level 4: within each footnote or schedule, each amount is required to be separately tagged
134
SEC: what is the Modified Liability provision to the Interactive Data Rule
- XBRL exhibits submitted to SEC are subject to modified liability for 24 months from time filer is first required to submit interactive data files
- provision terminates completely on Oct 31, 2014
- interactive data filers are protected from liability for failure to comply with the tagging requirements if failure occurred despite filer's good faith effort and filer corrected the failure promptly
135
SEC: what is the 30-day Grace Period provision of the Interactive Data Rule
2 Parts:
- each company's initial interactive data exhibit will be required within 30 days after the EARLIER of the (a) due date or (b) filing date of the related report or registration statement
- filers also receive grace period for the first filing required to have footnotes and schedules tagged using all levels of detail
136
SEC: when must a company post interactive data to the filer's corporate web site
no later than the end of the calendar day on the which the filer filed or was required to file the registration statement or report with the SEC (whichever is earlier)
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