acg exam 1

Financial forecasts

- set of future financial statements, given expected conditions

Two kinds of subsequent events

...provide additional evidence about a conditions that existed at the balance sheet date ...provide evidence about conditions that did not exist at the balance sheet date

The International Accounting Standards Committee (IASC) was founded in

1973

Annual report can be filed using either IFRS or the company's local GAAP on form

20-F

International Financial Reporting Standards (IFRS)

Attempt to create standard principles-based accounting determined by International Accounting Standards Board (IASB) Increased globalization requires improved comparability

Still the fact remains that _________ includes far more details at present than _______

U.S. GAAP, IFRS

Financial Forecasts Pros

better facilitates decision making already done so regulation improves quality

Insurance contracts, FASB: currently

currently contracts are recognized as insurance is provided, life insurance revenue recognized as due

Reporting for diversified companies should

disagreggrate results by operating segment

Selecting same criteria for segment disclosures referred to as the

management approach

Pros/Cons of full disclosure

more informed decision making, uncover fraud more costly, info overload

If foreign company has local GAAP,

must reconcile to GAAP

the 20-F allows

non-U.S. company to use IFRS as promulgated by the IASB or to retain its local GAAP reporting.

Disclosure of non-recognized events is not required for

non-accounting events or items disclosed some other way

Companies should disclose events when

non-disclosure would cause the financial statements to be misleading

The most important component of a registration statement is the

offer prospectus

In general, U.S. IFRS are considered to be more

principles-based

Safe Harbor Rule

protects company that makes an erroneous forecast as long as it was prepared on a reasonable basis

GAAP hierarchy

refers to how an entity identifies the sources of accounting principles and the framework for selecting the principles used in preparing financial statements

Classification & measurement of financial instruments: IASB

require entities to separately account for embedded derivatives and the financial instruments

In general, U.S. GAAP are considered to be more

rules-based

Financial projections

set of future financial statements, given hypothetical conditions

Impairment of financial instruments: The FASB has proposed an expected credit loss model that examines the amount of credit losses over

the full lifetime of a financial instrument.

Lease Accounting IASB:

the lease is a capital lease if the lease term is for a major part of the economic life of the asset (vague)

Thus one important issue that the SEC must face in considering removing LIFO

the potential costs incurred by firms to switch from LIFO to another method.

Proposed Insurance contracts approach

using a present value approach with any excess of expected premiums over expected claims amortized into income over the period the insurance is provided

Customer consideration model: revenue is recognized

when there is an increase in the contract asset or a decrease in the contract liability from satisfying performance obligations

the FASB Accounting Standards Codification (ASC)

will become the source of authoritative accounting and reporting standards for nongovernmental entities in the U.S.

Accounts receivable turnover

Activity Ratio Sales net of returns / avg. AR

Asset turnover

Activity Ratio Sals net of return / Avg. TA

Disclosure Issues

Related Party Transactions Post-Balance-Sheet Events (Subsequent Events) Reporting for Diversified (Conglomerate) Companies Management's Discussion and Analysis Forecasts and Projections Financial Statement Analysis

Inventory turnover

Activity Ratio COGS / Avg. Inv.

component depreciation

Break property into smaller, depreciable parts

Identifiable Assets Test

Report segments with identifiable assets greater than 10% of sum of all identifiable assets

Profit or Loss Test

Report segments with profits greater than 10% of Cum. profits or abs(Cum. losses)

Condorsement of IFRS

Converge what exists as much as possible (while minimizing costs) For new standards, add necessary provisions for use locally

Best solution to merge IFRS & GAAP

Convergence

Revenue Test

Report segments with revenues greater than 10% of Cum.

When a foreign company wants to sell shares on an United States based market, they file a

F-1

A first-time offer of securities by any non-U.S. company that comes under the definition of a "foreign private issuer" requires filing an

F1

2005-2009 IFRS adoption

FASB and IASB committed to convergence of U.S. GAAP and IFRS and identified key convergence projects

Lease classification difference

FASB believes that there are important differences between leases that convey the right to use versus an in-substance purchase. The IASB believes the asset should be classified according to the nature of the asset.

Full disclosure principle

Financial reports should include all financial facts that would influence the judgment of an informed reader

Financial Forecasts Cons

Forecasts always wrong provide incentives for earnings mgmt inaccurate forecasts penalized

Financial periods presented difference

GAAP: 2 years BS, 3 rest IFRS: 2 years for all

Balance sheet presentation difference

GAAP: Classified or Non-classified, dec. liquidity order IFRS: Classified format, inc. liquidity order

Statement of cash flows difference

GAAP: Direct or Indirect IFRS: Can begin with indirect, less guidance on operating, investing, and financing

PPE difference

GAAP: Historical cost IFRS: Historical cost or reevaluated amt

Development costs difference

GAAP: R&D expensed IFRS: R&D capitalized

Contingent liability difference

GAAP: Record if probable and estimable IFRS: Not recognized

fin. instruments difference

GAAP: accounting depends on type of instrument IFRS: accounting depends on cash flow from instrument

Income statement presentation difference

GAAP: expenditures listed by function IFRS: expenditures listed by function or nature

Inventory difference

GAAP: lower of cost or MV; LIFO allowed IFRS: lower of cost of NRV; LIFO prohibited

Leases difference

GAAP: operating vs capital leases differ IFRS: operating vs capital leases same presentation

Insurance contracts difference

GAAP: profit recog. by type of contract IFRS: profit recog. by timing of pmts and risk of pmt

Unusual items difference

GAAP: reported on IS & notes IFRS: reporting on IS is optional, notes are required

Initially, the IASC made decisions on accounting issues and reported them in the form of

IAS

Component Depreciation difference

IFRS requires, GAAP allows

Recognized subsequent events

Information that the accountant would have recorded, had it been known before the books were closed

In January 2001, the IASC announced formation of the

International Accounting Standards Board (IASB)

Standard setter for IFRS is the

International Accounting Standards Board (IASB)

IASB is responsible for issuing standards known as

International Financial Reporting Standards (IFRS)

Newer standards are called:

International Financial Reporting Standards IFRS

Segment Disclosure - Cons

Investor needs to be knowledgeable about more industries to avoid misinterpretation "Enemies" (e.g., competitors) may use information against company Managers may avoid risks (even when they are worth it) for fear of how loss will look when disaggregated Accounting at segment level is not always meaningful Preparing disclosures is hard

Segment Disclosure - Pros

Investors can better forecast future profits and cash flows Investors can better estimate the overall worth of a company Absence of segment disclosure puts non-diversified companies at disadvantage

Current cash debt coverage

Liquidity ratio Net cash provided by operating activities / Average current liabilities

Current Ratio

Liquidity ratio current assets / current liab.

Quick ratio

Liquidity ratio current assets / current liab. (Excluding Inv.)

Convergence Approach

Maintain local standards and work with IASB to converge standards over time

Management Disclosures include

Management's Discussion and Analysis Management's Responsibility for Financial Statements

Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were issued, are described below. What effect do these subsequent events have on 2017 net income? A liability, estimated at $160,000 at December 31, 2017, was settled on February 26, 2018, at $170,000. A flood loss of $80,000 occurred on March 1, 2018.

Net income will decrease by $20,000 ($170,000 - $150,000) as a result of the adjustment of the liability. The settlement of the liability is the type of subsequent event which provides additional evidence about conditions that existed at the balance sheet date. The flood loss ($80,000) is an event that provides evidence about conditions that did not exist at the balance sheet date but are subsequent to that date and does not require adjustment of the financial statements.

Requires disclosure? Legislation

No

Requires disclosure? Management changes

No

Requires disclosure? Product changes

No

Requires disclosure? Strikes / Unionization

No

Requires disclosure? Unionization

No

US concerns about the IASB

No government agency oversees IASB 25% of financing came from major accounting firms

If foreign company has IFRS filing,

No reconciliation

Endorsement Approach

Pick and choose which parts of IFRS to incorporate into local standards

U.S. Generally Accepted Accounting Principles (GAAP)

Primarily rules-based standards of accounting determined by the Financial Accounting Standards Board (FASB)

How does management split the company when making decisions?

Products and services Geography Legal entity Customer type

Profitability Ratios: Operations

Profit margin on sales ROA

ROA

Profitability NI / Avg. TA

Profit margin on sales

Profitability NI / Net Sales

Liquidity Ratios

Ratios that measure the company's short-term ability to pay its maturing obligations.

subsequent events that require adjustment to the fin stmt

Recognized subsequent events

non-recognized subsequent events provide evidence

about conditions that did not exist at the balance sheet date

Segment is significant if it passes one or more of the following tests:

Revenue Test Profit or Loss Test Identifiable Assets Test And sum of reported segments ≥ 75% And number of segments ≤ 10

"Active" Convergence Projects

Revenue recognition - fully converged Leases - discontinued Insurance costs - discontinued Financial Instruments - partial convergence

When a domestic company wants to sell shares on an United States based market, they file a

S-1

a firm can choose to report its local GAAP not IFRS as long as

The firm may either (1) reconcile net income and the shareholders' equity, thus showing earnings based on U.S. GAAP; or (2) fully disclose all financial information required of U.S. firms, including such detailed information as segmental disclosures.

Requires disclosure? Business combinations

Yes

Requires disclosure? Losses due to natural disasters

Yes

Requires disclosure? New significant commitments

Yes

Requires disclosure? Sale of bond or stock

Yes

Impairment of financial instruments: The IASB has proposed an expected credit loss model that examines the amount of credit losses over

a 12-month period for estimating losses

operating segment

a component of the business that: Earns revenues and incurs expenses Has its results reviewed regularly by the chief operating decision-maker (e.g., COO, CEO, etc.) Generates distinct financial information

recognized subsequent events provide additional evidence about

a conditions that existed at the balance sheet date

Revenue is recognized only when

a performance obligation is satisfied by transferring goods or services.

Insurance contracts, IASB: the profit element of insurance contacts is divided into two components:

a risk element and a contract margin.