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Chapter 24 - Presentation and disclosure in financial reporting. After studying this chapter, you should be able to: Review the full disclosure principle and describe implementation problems; Explain the use of notes in financial statement preparation; Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments;...
24-1 PREVIEW OF CHAPTER 24 Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 24-2 24 Presentation and Disclosure in Financial Reporting LEARNING OBJECTIVES After studying this chapter, you should be able to: Review the full disclosure principle and describe implementation problems Explain the use of notes in financial statement preparation Discuss the disclosure requirements for relatedparty transactions, subsequent events, and major business segments. 24-3 Describe the accounting problems associated with interim reporting Identify the major disclosures in the auditor’s report Understand management’s responsibilities for financials Identify issues related to financial forecasts and projections. Describe the profession’s response to fraudulent financial reporting FULL DISCLOSURE PRINCIPLE Full disclosure principle calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader Financial disasters at Mahindra Satyam (IND) and Société Générale (FRA) highlight the difficulty of implementing the full disclosure principle 24-4 LO 1 FULL DISCLOSURE PRINCIPLE 24-5 ILLUSTRATION 241 Types of Financial Information LO 1 FULL DISCLOSURE PRINCIPLE Increase in Reporting Requirements Reasons: uComplexity of the business environment uNecessity for timely information uAccounting as a control and monitoring device 24-6 LO 1 FULL DISCLOSURE PRINCIPLE Differential Disclosure IASB has developed IFRS for small and mediumsized entities (SMEs). SMEs is less complex in a number of ways: uTopics not relevant for SMEs are omitted. uAllows fewer accounting policy choices uMany principles for recognizing and measuring assets, liabilities, revenue, and expenses are simplified. uSignificantly fewer disclosures are required uRevisions to the IFRS for SMEs will be limited to once every three years 24-7 LO 1 24 Presentation and Disclosure in Financial Reporting LEARNING OBJECTIVES After studying this chapter, you should be able to: Review the full disclosure principle and describe implementation problems Identify the major disclosures in the auditor’s report Explain the use of notes in financial statement preparation Understand management’s responsibilities for financials Discuss the disclosure requirements for relatedparty transactions, subsequent events, and major business segments. Identify issues related to financial forecasts and projections. Describe the accounting problems associated with interim reporting 24-8 Describe the profession’s response to fraudulent financial reporting NOTES TO THE FINANCIAL STATEMENTS Notes are the means of amplifying or explaining the items presented in the main body of the statements Accounting Policies Companies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies) In addition, companies must: Identify judgments made in the process of applying the accounting policies Disclose information about assumptions made 24-9 LO 2 NOTES TO THE FINANCIAL STATEMENTS Common Notes uInventory MAJOR DISCLOSURES uProperty, Plant, and Equipment uCreditor Claims uEquityholders’ Claims uContingencies and Commitments uFair Values uDeferred Taxes, Pensions, and Leases uChanges in Accounting Principles 24-10 LO 2 APPENDIX 24A BASIC FINANCIAL STATEMENT ANALYSIS RATIO ANALYSIS 24-60 ILLUSTRATION 24A1 LO 10 APPENDIX 24A BASIC FINANCIAL STATEMENT ANALYSIS RATIO ANALYSIS 24-61 ILLUSTRATION 24A-1 LO 10 APPENDIX 24A BASIC FINANCIAL STATEMENT ANALYSIS Limitations of Ratio Analysis uBased on historical cost. uUse of estimates uAchieving comparability among firms in a given industry uSubstantial amount of important information is not included in a company’s financial statements 24-62 LO 11 Explain the limitations of ratio analysis APPENDIX 24A BASIC FINANCIAL STATEMENT ANALYSIS COMPARATIVE ANALYSIS 24-63 ILLUSTRATION 24A2 Condensed Comparative Financial Information LO 12 Describe techniques of comparative analysis APPENDIX 24A BASIC FINANCIAL STATEMENT ANALYSIS PERCENTAGE (COMMON SIZE) ANALYSIS ILLUSTRATION 24A3 Horizontal Percentage Analysis 24-64 LO 13 Describe techniques of percentage analysis APPENDIX 24A BASIC FINANCIAL STATEMENT ANALYSIS PERCENTAGE (COMMON SIZE) ANALYSIS 24-65 ILLUSTRATION 24A4 Vertical Percentage Analysis LO 13 APPENDIX 24B FIRSTTIME ADOPTION OF IFRS IFRS 1 requires that information in a company’s first IFRS statements be transparent, provide a suitable starting point, and have a cost that does not exceed the benefits. Overriding principle in converting from national GAAP to IFRS (the conversion process) is full retrospective application of all IFRS 24-66 LO 14 Describe the guidelines for firsttime adoption of IFRS APPENDIX 24B FIRSTTIME ADOPTION OF IFRS GENERAL GUIDELINES Objective is to present financial statements as if company always reported on IFRS. To achieve this objective, a company must: 24-67 Identify the timing for its first IFRS statements Prepare an opening statement of financial position at the date of transition to IFRS Select accounting policies that comply with IFRS, and apply these policies retrospectively Consider whether to apply any optional exemptions and apply mandatory exceptions Make extensive disclosure to explain the transition to IFRS LO 14 APPENDIX 24B FIRSTTIME ADOPTION OF IFRS Relevant Dates Once a company decides to convert to IFRS, it must decide on the following dates—transition date and reporting date ILLUSTRATION 24B1 FirstTime Adoption Timeline 24-68 LO 14 APPENDIX 24B FIRSTTIME ADOPTION OF IFRS IMPLEMENTATION STEPS Opening IFRS Statement of Financial Position Process involves the following steps: Include all assets and liabilities that IFRS requires Exclude any assets and liabilities that IFRS does not permit 24-69 Classify all assets, liabilities, and equity in accordance with IFRS Measure all assets and liabilities according to IFRS. LO 15 Describe the implementation steps for preparing the opening IFRS statement of financial position APPENDIX 24B FIRSTTIME ADOPTION OF IFRS Exemptions from Retrospective Treatment The Board identified three areas in which companies are prohibited from retrospective application in firsttime adoption of IFRS: 24-70 Estimates Hedge accounting Noncontrolling interests LO 16 Describe the exemptions to retrospective application in firsttime adoption of IFRS APPENDIX 24B FIRSTTIME ADOPTION OF IFRS Exemptions from Retrospective Treatment ILLUSTRATION 24B3 Elective Exemption from Retrospective Treatment 24-71 LO 16 Describe the exemptions to retrospective application in firsttime adoption of IFRS APPENDIX 24B FIRSTTIME ADOPTION OF IFRS Presentation and Disclosure An entity’s first IFRS financial statements shall include: uthree statements of financial position, utwo statements of comprehensive income, utwo separate income statements (if presented), utwo statements of cash flows, and utwo statements of changes in equity and related notes, including comparative information 24-72 LO 17 Describe the presentation and disclosure requirements for firsttime adoption of IFRS APPENDIX 24B FIRSTTIME ADOPTION OF IFRS Presentation and Disclosure A company’s first IFRS financial statements shall include reconciliations of: uIts equity reported in accordance with previous GAAP to its equity in accordance with IFRS at the transition date uIts total comprehensive income in accordance with IFRS to total comprehensive income in accordance with previous GAAP for the same period. 24-73 LO 17 Describe the presentation and disclosure requirements for firsttime adoption of IFRS COPYRIGHT Copyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 24-74 ...PREVIEW OF CHAPTER 24 Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 2 4- 2 24 Presentation and Disclosure in Financial Reporting LEARNING OBJECTIVES After studying this chapter, you should be able to:... Générale (FRA) highlight the difficulty of implementing the full disclosure principle 2 4- 4 LO 1 FULL DISCLOSURE PRINCIPLE 2 4- 5 ILLUSTRATION 24 1 Types of Financial Information LO 1 FULL DISCLOSURE PRINCIPLE Increase in Reporting Requirements... uDeferred Taxes, Pensions, and Leases uChanges in Accounting Principles 2 4- 10 LO 2 24 Presentation and Disclosure in Financial Reporting LEARNING OBJECTIVES After studying this chapter, you should be able to: