CPA FAR - Module 4

Define Diluted EPS

Includes securities that may become common stock in the future, such as convertible stock and stock options, in addition to actual shares of common outstanding.

Disclosure Requirements EPS amounts (all after tax) must be disclosed for the following line items in the income statement: MODULE 4

MODULE 4

Review section 5 for examples

Review section 5 for examples

Review section 6 table

Review section 6 table

The 10-K is separated into four parts. The content of each part is outlined in the following chart: See Module 4 chart

See Module 4 chart

Form 10-Q-The financial statements presented are:

1. Balance sheet for the quarter and prior fiscal year end 2. Quarterly and year-to-date income statements for this quarter and the same period in the previous year 3. Cumulative year-to-date statements of cash flow for the current and prior fiscal years

Part 2 of Form S-1 includes information about the

cost of issuing and distributing the security, more detailed information about the directors and officers and additional financial statement schedules.

The amount of preferred stock dividends subtracted in the numerator of BEPS depends on whether the preferred stock is

cumulative or not, and if not, on the amount declared in the period.

The 1933 Securities Act requires publicly traded firms offering securities for sale to the public in primary and secondary markets to

file a registration statement, and to provide each investor with a proxy statement before each shareholders' meeting.

Revenue Recognition—If a loss is anticipated in quarter 3, the entire contract loss is recognized

in quarter 3

Interim Relates to Annual—when more than one interim period is affected by an expenditure for example, the related expense is recognized

in the periods benefited, rather than recognized in the period cash was paid.

The income earned on the capital investment must be related to the period for which the

investment was used by the firm.

Interim Period Length—Interim periods can be of any length

less than a year

SEC Proxy Statement - The report by which

management requests the right to vote through proxy for shareholders at meetings

Under GAAP, business segments are identified by employing a management approach. That is, segments are identified in the same manner that

management segments the company for purposes of making operating decisions. These segments are referred to as operating segments.

Form S-1 is the basic registration form for

new securities and it includes a list of required disclosures.

Contingent shares are considered

outstanding as of the date the conditions have been met.

Small registrations, under a certain monetary threshold or number of purchasers are considered to be

private placements and are exempt from certain disclosures.

A company that wants to sell debt or stock in interstate offerings to the general public is required to

register those securities with the SEC.

Reportable Segments—the 75% Rule—If this test is not met initially, more

reportable operating segments must be identified, even if the additional segments do not meet one of the three quantitative tests.

Expenses Directly Related to Revenue—Expenses directly related to revenue are recognized in the

same period as the related revenue.

Staff Accounting Bulletins (SAB)—These provide the SEC's current position on

technical issues

When a LIFO layer is liquidated in a particular interim period, the accounting depends on whether

the liquidation is expected to be restored by the end of the annual period.

Revenue Recognition—If a firm uses the percentage of completion method on long-term contracts, the profit recognized each quarter is based on

the percentage of completion at the end of each quarter.

The denominator of BEPS is the

weighted average (WA) shares outstanding during the period

Regulation S-K governs the form and content of nonfinancial statement disclosures. These disclosures are the content of the 10-K outside of the financial statements. The nonfinancial statement disclosures are

1. Description of the business 2. Description of stockholder matters 3. Management's discussion and analysis (MD&A) 4. Changes in and disagreements with accountants 5. Information on directors and management

Regardless of whether dividends are declared on cumulative preferred stock, one full year's dividends is subtracted from the numerator of BEPS because

no common dividends can be paid on these earnings before the preferred dividends are declared.

A two-for-one stock split doubles the

number of shares outstanding but the value of each share is halved.

Temporary declines in inventory are those expected to

reverse by year's end.

Define Basic EPS

Includes only actual common shares outstanding.

Simple capital structure—A simple capital structure is one in which the

corporation only has common stock outstanding or one in which the corporation has common stock and nonconvertible preferred stock outstanding.

If the corporation only has common stock outstanding, the Basic Earnings per Share (BEPS) is calculated by BEPS =

(Net Income)/(Weighted Average Common Shares Outstanding)

The underwriter provides marking and distribution of the securities. The underwriter is often contractually obligated to sell the securities under one of the following arrangements:

1. Firm commitment—The underwriter purchases the entire issue at a fixed price. 2. Best efforts—The underwriter sells as many shares as possible. 3. All or none—If the underwriter is unable to sell all (or a significant portion) then the issue may be canceled.

A prospectus describes the issuing company, the business operations and risks, the financial statements, and the expected use of the proceeds. The basic financial statements requirements are:

1. Two years of balance sheets 2. Three years of income statements, statements of cash flow, and statements of shareholders' equity 3. The financial statements must be audited. 4. Prior statements are presented on a comparative basis. 5. The SEC requires five years of selected financial information.

Registration requires extensive disclosures about the

company, management, and the intended use of the proceeds from the issue

The Division of Enforcement—When there is a violation of a securities law, this division

completes the investigation and takes appropriate actions. This division makes recommendations to the Justice Department concerning any punishments or potential criminal prosecution.

Shares that are issuable for little or no cash consideration upon satisfaction of certain conditions are

contingent shares

Definition of a Security Section 2.1 of the 1933 Act defines a security as:

"Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest, or participation in any profit-sharing agreement, collateral trust certificate, reorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt of, guarantee of, or warrant or right to subscribe to or to purchase any of the foregoing."

The Diluted Earnings per Share is calculated by DEPS=

(Net Income Available to Common Adjusted for Effects of PCS)/(Weighted Average Common Shares Plus Shares Issuable from PCS)

If the company has common stock and nonconvertible preferred stock outstanding, the Basic Earnings per Share is calculated by BEPS=

(Net Income Available to Common)/(Weighted Average Common Shares Outstanding) OR BEPS= (Net Income− Preferred Stock Dividend)/(Weighted Average Common Shares Outstanding)

Regulation S-X governs the form and content of financial statements and financial statement disclosures. These include:

1. Income statement 2. Balance sheet 3. Changes in shareholders equity 4. Cash flow statement 5. Footnotes to financial statements 6. Qualification of accountants

SEC Annual Filing - Form

10-K

SEC Quarterly Filing - Form

10-Q

Form 10-Q reports the quarterly information to the SEC within

45 days of the end of the quarter.

SEC Report significant events affecting the company - Form

8-K

Reportable Segments—Required Disclosures—The required disclosures for reportable segments include the following

A. Factors used to identify operating segments B. General information about the products and services of the operating segments C. Internal and external sales revenue D. A measure of profit or loss, and total assets E. The nature of differences between the measurement of segment quantitative information such as income and assets, and the measurement of the firm's reported quantitative information F. Interest revenue G. Interest expense H. Depreciation, depletion, and amortization expense I. Other significant noncash items J. Unusual or infrequent items K. Equity in net income of investees, in which the investment is accounted for under the equity method L. Income tax expense or benefit M. Reconciliation of the totals of segment revenues, reported profit or loss, assets, and other significant items to the total for the firm as a whole N. Capital expenditures

Interim Relates to Annual—When investors read an interim report, they are interested in evaluating the interim period as it relates to the

annual period

A company with a complex capital structure is required to disclose the

Basic Earnings per Share and the Diluted Earnings per Share. This is called dual EPS reporting.

The Office of the Chief Accountant has oversight of the

FASB and AICPA and is the voice of the SEC regarding standard-setting issues.

In general, firms must use the same accounting methods for interim reporting as they do for

annual reporting

The Sarbanes-Oxley Act of 2002 (SOX) contains provisions to enhance

corporate governance and to mitigate financial accounting abuses.

Contingency—If the contingency is a future earnings level, no contingent shares are included in the WA of BEPS because the contingency cannot be met until

a future period

The Office of the Chief Accountant of the SEC is the most important office for standard setting. This office houses the technical expertise on

accounting principles, auditing standards and financial disclosure requirements. This office also issues position papers for the SEC to consider and is the link between the SEC and the accounting profession.

Basic EPS is the EPS based only on

actual transactions for the year.

The SEC regulates the issuance of securities by publicly traded companies and regulation of the trading of those securities on secondary markets. The SEC's intent is to ensure that there is

adequate information in the public domain before firms issue securities and before those securities are subsequently traded.

All nonreportable segments are grouped into an

all other category and their results are combined for reconciliation purposes.

Revenue Recognition—Revenues are recognized in each interim period, as they would be in an annual period. Revenues earned and realizable in

an interim period are recognized in that interim period.

There are two EPS figures that firms disclose:

basic and diluted.

The Foreign Corrupt Practices Act of 1977 prohibits

bribes of foreign governmental or political officials for the purpose of securing contracts or business.

Revenue Recognition—The assumptions and computations leading to the quarterly EPS amount reflect the

circumstances within each interim period separately, rather than estimations of year-end circumstances.

A complex capital structure typically includes

common stock, along with equity contracts and convertible securities. These securities may become common stock in the future and thus must be included in an EPS figure so that users can assess the impact of these potential changes on EPS.

Noncumulative preferred stock—Receives dividends only if

declared

When the SEC determines that a firm has reported in such a way that GAAP has been violated, it sends a

deficiency letter to the firm. If not resolved, the SEC can then stop the trading of the firm's securities. If warranted the Department of Justice becomes involved and criminal charges for violations of the securities laws are filed.

The intent of the securities laws is, in part, to regulate the

disclosure of financial information by firms issuing publicly traded securities.

Tax Effect—There is no tax effect to consider for preferred stock dividends because

dividends paid are not deductible for tax purposes.

The SEC's EDGAR database facilitates the collections, validations, and indexing of financial statement information. The purpose of EDGAR is to increase the

efficiency of the securities markets by providing timely and accessible data.

Declines in Inventory Application to Interim Reports—The decline in the value of the inventory is determined by applying

either the lower of cost or net realizable value

Proxy statements are materials sent to the shareholders for vote. Proxy materials can address things such as

election of directors, changes in the corporate charter, issuance of new securities, plans for a major business combination etc.

Accounting and Auditing Enforcement Releases (AAER)—These report the

enforcement actions that have been taken against accountants, brokers, or others.

Revenue Recognition—Earnings Per Share (EPS) is reported under the discrete view. Each quarterly EPS amount reflects only

the events of that quarter.

The Division of Investment Management—This division oversees

the investment advisers and investment companies under the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

The Division of Trading and Markets—This division oversees

the secondary markets, exchanges, brokers, and dealers.

Reportable Segments—the 75% Rule—The total external revenue reported by reportable segments must be at least 75% of the company's _____

total consolidated revenues.

The 1934 Securities Act regulates the

trading of securities after they are issued and provides the requirements for periodic reporting and disclosures.

Operating segments must have three characteristics.

1. The segment is involved in revenue producing and expense incurring activities. 2. The operating results of the segment are reviewed by the company's chief operating decision maker on a regular basis. 3. There is discrete financial information available for the segment.

The general rule for expense recognition is:

1. If the cost or expense has no relationship to other quarters, recognize the entire expense in the quarter in which the cost was incurred a. These items have no relationship to interim periods other than the one in which they occurred. b. Arbitrary allocation of these items to other quarters is not permitted. 2. If the cost or expense benefits other quarters or interim periods, allocate the cost to those other quarters and recognize the appropriate amount of expense in those quarters. a. These expenses are allocated to the interim periods benefited even though some may be paid in full in one interim period, because they benefit more than one interim period. b. Repairs and maintenance expenditures may be cyclical with significant expenditures in one quarter benefiting the entire year. If the expenditures are planned to cover an annual period, then each interim period should recognize only its portion of the total expenditure as expense.

Filing Deadlines. Filing deadlines depend on the size of the company. Company size is as follows:

1. Large accelerated filer—A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more; 2. Accelerated filer—A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates that is $75 million or more but less than $700 million; 3. Nonaccelerated filer—A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates less than $75 million.

The SEC allows reduced disclosures for "smaller reporting companies" (SRC). An SRC is one that has:

1. Less than $250 million in public float as of the last business day of the most recent second fiscal quarter, or 2. No public float or public float less than $700 million AND annual revenues less than $100 million in the most recent fiscal year.

A foreign private issuer is any foreign issuer other than a foreign government, except an issuer that meets the following conditions (Rule 205, Securities Act 1933):

1. More than 50% of the outstanding voting securities are directly or indirectly owned by residents of the United States and 2. Any of the following: a. The majority of its executive officers or directors are U.S. citizens or residents. b. More than 50% of the assets of the issuer are located in the United States. c. The business of the issuer is administered principally in the United States.

Other Required Disclosures—If the following information is not already provided through the required segment information, firms must separately disclose the following:

1. Revenues from external customers from each product and service or groups of similar products or services 2. Revenues from the home country of the firm and from all foreign countries in total. If the revenues from one foreign country are material, then those revenues are to be disclosed separately. 3. The same disclosure as B above is required for long-lived assets other than financial instruments, long-term customer relationships with a financial institution, mortgage and other servicing rights, and deferred tax assets. 4. Major customers: If the revenue from a single customer amounts to 10% or more of the firm's revenues, this fact must be disclosed, including the amount of revenues from each such customer, and the operating segment or segments that earn that revenue. The identity of the customer need not be disclosed.

The SEC has five commissioners appointed by the president of the United States and five divisions

1. The Division of Corporation Finance 2. The Division of Enforcement 3. The Division of Trading and Markets 4. The Division of Investment Management 5. The Division of Economic and Risk Analysis

The Sarbanes-Oxley Act of 2002 (SOX) A few of the significant provisions related to financial reporting are presented below.

1. The SEC requires registrants to have annual audits of their financial statements. The auditing firm must be registered with the Public Company Accounting Oversight Board (PCAOB), a private-sector organization created by the 2002 Sarbanes-Oxley Act. The PCAOB provides oversight of registered auditing firms. 2. Auditors are prohibited from providing nonaudit services to audit clients. 3. Audit committees are required to be composed of nonmanagement members of the board of directors, and the chair has to have financial experience. 4. Annual filing must include a management's report on the internal controls. This report must attest to the existence and effectiveness of the company's internal controls over corporate reporting. 5. There are Increased penalties for fraud and white-collar crime. Willfully failing to maintain audit records for five years is a felony. Criminal charges can be brought against corporate officers who fail to certify financial reports or who willfully certify statements they know do not comply with SOX.

Laws Administered by the SEC

1. The Securities Acts of 1933 and 1934 2. The Public Utility Holding Company Act of 1935 3. Trust Indenture Act of 1939 4. Investment Company Act of 1940 5. Investment Advisors' Act of 1940 6. Securities Investor Protection Act of 1970 7. Sarbanes-Oxley Act of 2002

The income tax expense for each interim period is computed as follows:

1. The annual rate to be applied to income from continuing operations is re-estimated each quarter. 2. That rate is applied to total interim income through the end of the current quarter, yielding total estimated tax to date. 3. The income tax reported in previous quarters is subtracted from the results in the second step to yield the income tax expense for the current quarter. 4. This procedure is a good example of the integral view of interim reporting—the interim period is an integral part of an annual period.

Aggregation of Two or More Segments For the quantitative tests, two or more segments can be aggregated provided this aggregation is consistent with the objective of segment reporting, and the segments are similar in each of the following areas:

1. The nature of products and services 2. The nature of the production processes 3. Customer type or class 4. Distribution methods for products and services 5. The nature of the regulatory environment

Identification of Reportable Segments—Quantitative Tests—A reportable segment is one that meets one or more of the following three quantitative tests.

1. The operating segment's revenue from all sources is 10% or more of the combined revenues of all of the company's reported operating segments. 2. The operating segment's operating profit or loss is 10% or more of the greater of the following two amounts. Operating profit is pretax. a. The combined operating profit of all operating segments that did not report an operating loss b. The combined loss of all operating segments that did report an operating loss 3. The operating segment's identifiable assets are 10% or more of the combined assets of all operating segments.

Reportable Segments—the 75% Rule—There is no stated limit on the number of reportable segments, but as a practical matter, if the number reaches

ten, then the firm should assess whether adding more segments is worth the cost.

The Division of Corporation Finance—This division oversees

the compliance with the securities acts and examines all filings made by publicly held companies. All filings go to this division.

Division of Economic and Risk Analysis—This division was created in 2009 in response to the credit market crisis. The purpose of the division is to

integrate financial economics and data analytics into the core mission of the SEC

Regulation S-X helps reduce redundancy in reporting by allowing for

integrated disclosures whereby a company may satisfy certain Form 10-K disclosure requirements by referencing its shareholder annual report as long as that report includes the required disclosures.

Form 8-K reports significant events affecting the company such as

material impairment, bankruptcy, entry or termination of a definitive agreement, changes in the registrant's CPA, changes in control etc.

Cumulative means that if a year's preferred dividend is not paid (skipped),

no other dividends may be paid before the skipped dividends (dividends in arrears) are paid.

Financial Reporting Releases (FRR)—These are

ormal pronouncements and are the highest-ranking authoritative source of accounting for public companies.

The securities that may become common stock in the future are called

potential common stock (PCS) or potentially dilutive securities.

Diluted EPS is a "worst-case" figure reflecting the

potential dilution of stock options and convertible securities.

"The mission of the U.S. Securities and Exchange Commission is to

protect investors, maintain fair, orderly, and efficient markets, and facilitate capital information"

Permanent declines in inventory are those not expected to

reverse in the current year are recognized as losses in the interim periods in which they occur.

The SEC is a member of the International Organization of Securities Commissions (IOSCO), which consists of more than 100

securities regulatory agencies or exchanges across the globe.

The reason for weighting the shares is that

shares outstanding a longer portion of the year represent capital investment that has been working longer for the firm than shares outstanding a shorter portion of the year.

Part 1 on Form S-1 is the prospectus that is

supplied to each potential purchaser of the security.