Ch24: Full Disclosure in Financial Reporting

Full Disclosure Principle Increase in reporting requirements Differential disclosure

Notes to Financial Statements Accounting policies Common notes

Disclosure Issues

Auditors and Managements Report

Current Reporting Issues

Special transactions or events Post-balancesheet events Diversified companies

Auditors report
Managements reports

Reporting on forecasts and projections Internet financial reporting Fraudulent financial reporting Criteria for accounting and reporting choices

Interim reports

Chapter 24-1

Full Disclosure Principle

Full disclosure principle :
Report any financial facts significant enough to influence the judgment of an informed reader.

Implementation issues :
1. Cost of disclosure/ Information overload 2. Increase in reporting requirements by SEC, FASB 3. Differential disclosure: Big GAAP vs. Small GAAP

Chapter 24-2

Notes to the Financial Statements

Notes: the means of full disclosure and providing
qualitative and supplementary data

Accounting Policies
Companies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies).

Common Notes

Inventory ; Property, Plant and Equipment; Creditor Claims ; Equity Holders Claims; Contingencies and Commitments; Deferred Taxes, Pensions, and Leases Changes in Accounting Principles
Chapter 24-3

Disclosure Issues
Disclosure of Special Transactions or Events
Related-party transactions
(1) Not an arms length or free-market basis (2) Disclosure requirements :SFAS 57 Nature of relationship Description of transaction Dollar amount s involved

Illegal acts
Chapter 24-4

Disclosure Issues
Post-Balance-Sheet Events (Subsequent Events)

1 - Events that provide additional evidence about conditions that existed at the balance sheet date (Recognized subsequent event) => adjustments to F/S
Chapter 24-5

2 - Events that provide evidence about conditions that did not exist at the balance sheet date (Nonrecognized subsequent event) => note disclosure, if necessary

Disclosure Issues
Reporting for Diversified Companies
1.

Investors and investment analysts want financial statement information on the individual segments of the company.
Pros and cons: Aggregated information vs. Disaggregated information. How to disaggregate?: Based on how the companys operations are managed (Operating Segment).

2.

3.

Chapter 24-6

Disclosure Issues
Qualifications for a reportable segment
1. A segment is reportable if it meets any one of:

Revenue test: if its total revenue is 10% or more of the companys total revenue.
Profit (loss) test: if its profit (loss) is greater than 10% of total profit (loss) for all segments that reported profit (loss). Asset test: if its assets are 10% or more of all operating segments. 2. Limit of 10 segments and the sales of all the segments must be at least 75% of the companys total sales.

Chapter 24-7

Disclosure Issues
Interim Reports
1. Cover periods of less than one year

2.Two viewpoints exist:

(1) The discrete approach (2) The integral approach 3. Companies should use the same accounting principles for interim reports that they use for annual reports.
Chapter 24-8

Disclosure Issues
Unique Problems of Interim Reporting
(1) Advertising and similar costs

(2) Expenses subject to year-end adjustment

(3) Income taxes (4) Extraordinary items (5) Earnings per share (6) Seasonality
Chapter 24-9

Thank You
Chapter 24-10