23

INTERMEDIATE
ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 23
Other
Measurement
and Disclosure
Issues
Prepared by:
Lisa Harvey, CPA, CA
Rotman School of Management,
University of Toronto
CHAPTE
23
R
OTHER MEASUREMENT AND DISCLOSURE ISSUES
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 auditors 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.
Copyright John Wiley & Sons Canada, 2
Ltd.
Other Measurement and
Disclosure Issues
Disclosure Other Auditors Financial IFRS/ASPE

Issues Measurement Reports Statement Comparison
Analysis Comparison of
The Issues Unqualified IFRS and
importance of Related-party opinions An overview of ASPE
disclosure from transactions financial Looking ahead
a business Qualified statement
Subsequent
perspective opinions an analysis
events
Full disclosure disclaimers of Financial
principle opinion statement
Accounting Adverse analysis
policies opinions techniques
Segmented Limitations of
reporting financial
statement
Interim
analysis
reporting

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Importance of Disclosure
Information disclosure is an important part

of capital markets:
Financial statements are only one source of
information for investors
Other sources include:
Annual information forms
Managements discussion and analysis (MD&A)
New releases
Users must use caution because not all
disclosure is good disclosure
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The Full Disclosure
Principle
The full disclosure principle calls for financial
reporting of significant facts affecting the
judgment of an informed reader
The problems of implementing this principle are
costs of disclosure or information overload
Over the past several decades, disclosures for
public companies have significantly increased

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Types of Financial
Information

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Increase in
Reporting Requirements
Reasons 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)

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Accounting Policies
The accounting policies of the entity must be

disclosed as the first note or in a separate
section preceding the notes
This note is called Summary of Significant Accounting
Policies

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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 entityor to management or
employees acting on the entitys behalf.
The item may require recognition in the
statement of financial position or income
statement
Note disclosure may be required
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Segmented Reporting
Information on how the segment contributes to

the total business operations
Investors want information from the income
statement, statement of financial position, and
statement of cash flows about individual
segments
Reporting segmented information helps users:
1. Better understand the enterprises performance
2. Better assess future net cash flows prospects
3. Make more informed judgments about the company
ASPE does not provide guidance for reporting
segmented information
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Segmented Reporting
IFRS requires that the financial statements

include selected information on a single
basis of segmentation
The segments are evident from their
organizational structure (operating
segments)
This method is called the management
approach
This approach includes information the
perspective of the chief operating decision
maker Copyright John Wiley & Sons Canada, 11
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Segmented Reporting
An operating segment is a component of

an enterprise that:
1. Engages in business activities from which it
earns revenues and incurs expenses
2. Has the chief operating decision maker
regularly review results to:
Assess performance
Allocate resources
3. Has discrete financial information available

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Segmented Reporting
Operating segments may be aggregated if they

have the same basic characteristics
1. The nature of the products and services provided
2. The nature of the production process
3. The type or class of customer
4. The methods of product or service distribution
5. The nature of the regulatory environment, if
applicable

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Reportable Segments
An operating segment is significant and

thus identified as a reportable segment if it
satisfies one or more of the following
criteria:
1. The revenue criterion
2. The profit or loss criterion
3. The identifiable assets criterion

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Reportable Segments
Criterion Thresholds
Revenue 10 percent or more of the combined
revenue 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 loss
Identifiable assets 10 percent or more of the combined

assets of all operating segments
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Reportable Segments
Three other factors are considered in addition to the

above tests:
1. Segment results are 75% or more of combined sales
to unrelated customers
2. No more than 10 segments are required to be
disclosed
3. Segment may be presented separately on grounds
that separate information would be useful to users
(even if not meet any of the tests)

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Measurement Principles
The accounting principles used for

segment reporting and for consolidated
statements need not be the same
Some accounting principles may not apply
at the segment level
For example, common costs are not required
to be allocated among the segments
Such allocation is arbitrary and may not produce an
objective division of costs among segments

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Required Segmented
Information
IFRS requires reporting of the following:
1. General information about its reportable segments
2. Segment profit and loss, assets, liabilities, and related
information
3. Reconciliation of segment revenues, profits and
losses, and segment assets and liabilities
4. The amount of revenues from external customers for
products and services
5. Information about geographical areas and if amounts
are material, foreign information (e.g. revenue) must
be disclosed by country
6. Information about major customers (if 10% or more of
revenue from one customer, must disclose)
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Interim Reporting
IFRS provides guidance but does not mandate

which entities need to provide interim
information
Annual 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 incurred
ASPE does not provide guidance on interim
reporting
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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 required
Earnings per share (EPS) information is
also required if the company must present
this information in its annual information

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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 year
The 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
comparatives
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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 securities
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Interim Reporting
Minimum disclosure requirements include

(contd):
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 period

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Interim Reporting Problem
Areas
1. Changes in Accounting
Changes applied retroactively to prior interim periods
Comparable interim periods from previous fiscal years also
restated
2. Earnings per share
Each interim period EPS is stand alone
3. Seasonality
Defer recognition of costs and expenses only if it would
also be appropriate at year-end
4. Continuing Controversy
Auditors involvement in the interim reporting process
Timeliness of information

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Internet Financial
Reporting
Companies are increasingly disclosing financial
information through websites
Corporations can reach more users using the Internet
Internet reporting can make traditional reports more
useful:
Corporations can report more timely information
They 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
Internet

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Disclosure Issues

Subsequent
events
Full disclosure disclaimers of Financial
principle opinion statement
reporting financial
statement
Interim
analysis
reporting

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Related Party Transactions
Related-party transactions arise when a business

engages in transactions with another party that can
significantly influence its policies
Related party transactions are individually assessed
Related parties include the following:
Companies or individuals with control
Investors and investees with significant influence or joint control
Company management
Members of immediate family
The other party in a management contract

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Measurement is a major accounting and reporting

issue
A basic assumption is that the transactions are
between arms length parties
If this condition not met, should disclose that
transaction is between related parties
Should report economic substance rather than legal
form of transactions
Under ASPE, some related-party transactions must
be remeasured to the carrying amount of assets or
services exchanged

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Decision Tree

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The following disclosures are recommended:
1. The nature of the relationship
2. Description of the transactions
3. The recorded amounts of transactions
4. Measurement basis used
5. Amounts due from or due to related parties at the statement
of financial position date, and terms and conditions
6. Contractual obligations with related parties
7. Contingencies involving related parties
8. Under IFRS, management compensation and name of parent
company (as well as ultimate controlling entity/individual)

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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 $12,000

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Example
This transaction is not in normal operations and does not
change ownership interests
Therefore, must be measured at carrying value; journal

entry required by Knudson:
PP&E 12,000
Retained Earnings 3,000
Land 15,000

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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)
Financial statement period Subsequent events period
SFP date Issue date

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Subsequent Events
Two types of post-statement of financial position

events must be disclosed:
1. 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 customers
bankruptcy, where customers poor financial
condition existed at the statement of financial
position date
Settlement of litigation if event giving rise to
litigation existed prior to statement of financial
position date
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Subsequent Events
2.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 loss
A purchase of a business
Changes in foreign exchange rates
A bond or share issuance
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Unincorporated Businesses
Key accounting issues include:

1. Clear definition of the business entity
Statements should clearly report the business
name and that the business is not incorporated
2. Clear reporting of any amounts accruing to the
owners
3. There is no provision for income taxes
ASPE provides specific guidance for
unincorporated business but IFRS does not

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Disclosure Issues

Subsequent
events
Full disclosure disclaimers Financial
principle of opinion statement
reporting financial
statement
Interim
analysis
reporting

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Auditors Report
Another important source of information is the

auditors report
The auditor conducts an independent
examination of a companys accounting data to
determine whether the financial statements are
prepared fairly in accordance with the applicable
financial reporting framework
The auditors report reflects the auditors
conclusions
In most cases, the auditor issues a standard
unqualified or clean opinion
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Auditors Opinion
The auditor can render or provide:

1. An Unqualified (clean) opinion
2. A Qualified opinion
3. An Adverse opinion (circumstances)
4. A disclaimer of an opinion (no opinion
can be given)

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Unqualified Auditors
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
expressed

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Qualified Opinion
A qualified opinion contains an exception to the

standard opinion
That is, except for the effects of the matter
related to the qualification, the financial
statements are fairly presented in accordance
with GAAP
It may also relate to a scope limitation; that is,
where the auditor has not been able to obtain
sufficient and appropriate audit evidence

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Adverse Opinion
An adverse opinion is required if

exceptions to fair presentation are so
material that, in the independent auditors
judgment, a qualified opinion is not
justified
The financial statement as a whole are not
presented according to GAAP

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Disclosure Issues

Subsequent
events
reporting financial
statement
Interim
analysis
reporting

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Financial Statement
Analysis
Understanding a companys accounting
policies and methods is important for
financial statement analysis
Accounting choices can affect recognition,
measurement, presentation and trends

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Financial Statement
Analysis
Financial statements have several
limitations:
1. Report past information
2. Ratio and trend analysis do not provide
details about why things are as they are
3. A ratio is not useful on its own
4. There are limitations to the accounting
information due to accounting policy choices

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Ratio Analysis
Ratio analysis is an expression of the

relationship between two numbers

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Ratio Analysis

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Ratio Analysis

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Percentage Analysis
Percentage (common-size) analysis converts a

series of related amounts to a series of
percentages of a given base
There are two types:
1. Horizontal analysis: proportionate change over a
period of time
For example, year over year fluctuations
2. Vertical analysis: proportional expression of each item
in a given period to a base figure
For example, items in the income statement as a percentage
of sales

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Financial Statement
Analysis
Financial statement analysis also has
limitations due to the many sources of
uncertainty such as:
Nature and role of the financial statements
Nature of business operations portrayed
Limitations of measurement and disclosures
Managements motives and intentions

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Disclosure Issues

Subsequent
events
reporting financial
statement
Interim
analysis
reporting

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Looking Ahead
The profession must continue to develop a

sound conceptual framework
This will help minimize the different
presentations of the same or similar
transactions

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COPYRIGHT
Copyright 2013 John Wiley & Sons Canada, Ltd. All

rights reserved. Reproduction or translation of this
work beyond that permitted by Access Copyright (The
Canadian Copyright Licensing Agency) is unlawful.
Requests for further information should be addressed
to the Permissions Department, John Wiley & Sons
Canada, Ltd. The purchaser may make back-up copies
for his or her own use only and not for distribution or
resale. The author and the publisher assume no
responsibility for errors, omissions, or damages
caused by the use of these programs or from the use
of the information contained herein.

Ltd.

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INTERMEDIATE

After studying this chapter, you should be able to:

Disclosure Other Auditors Financial IFRS/ASPE

Copyright John Wiley & Sons Canada, 3

Information disclosure is an important part

Copyright John Wiley & Sons Canada, 5

Copyright John Wiley & Sons Canada, 6

Copyright John Wiley & Sons Canada, 7

The accounting policies of the entity must be

Copyright John Wiley & Sons Canada, 8

Illegal acts are defined by the CICA as a

Information on how the segment contributes to

IFRS requires that the financial statements

An operating segment is a component of

Copyright John Wiley & Sons Canada, 12

Operating segments may be aggregated if they

Copyright John Wiley & Sons Canada, 13

An operating segment is significant and

Copyright John Wiley & Sons Canada, 14

Profit or loss 10 percent or more of the greater of:

Identifiable assets 10 percent or more of the combined

Three other factors are considered in addition to the

Copyright John Wiley & Sons Canada, 16

The accounting principles used for

Copyright John Wiley & Sons Canada, 17

IFRS provides guidance but does not mandate

At a minimum, condensed statement of

Copyright John Wiley & Sons Canada, 20

The statement of financial position should be presented

Minimum disclosure requirements include:

Minimum disclosure requirements include

Copyright John Wiley & Sons Canada, 23

Copyright John Wiley & Sons Canada, 24

Copyright John Wiley & Sons Canada, 25

Disclosure Other Auditors Financial IFRS/ASPE

Copyright John Wiley & Sons Canada, 26

Related-party transactions arise when a business

Copyright John Wiley & Sons Canada, 27

Measurement is a major accounting and reporting

Copyright John Wiley & Sons Canada, 28

Copyright John Wiley & Sons Canada, 29

Copyright John Wiley & Sons Canada, 30

Copyright John Wiley & Sons Canada, 31

Therefore, must be measured at carrying value; journal

Copyright John Wiley & Sons Canada, 32

Notes to the financial statements must

SFP date Issue date

Copyright John Wiley & Sons Canada, 33

Two types of post-statement of financial position

2.Events that provide evidence about

Key accounting issues include:

Copyright John Wiley & Sons Canada, 36

Disclosure Other Auditors Financial IFRS/ASPE

Copyright John Wiley & Sons Canada, 37

Another important source of information is the

The auditor can render or provide:

Copyright John Wiley & Sons Canada, 39

Copyright John Wiley & Sons Canada, 40

A qualified opinion contains an exception to the

Copyright John Wiley & Sons Canada, 41

An adverse opinion is required if

Copyright John Wiley & Sons Canada, 42

Disclosure Other Auditors Financial IFRS/ASPE