Disclosure in Financial Reporting

Management's Discussion and Analysis

Mandated by the SEC, this section of the annual report covers three financial aspects of an enterprise's business: liquidity, capital resources, and results of operations. In it, management highlights favorable or unfavorable trends and identifies significant events and uncertainties that affect these three factors.

Operating Segment

A component of an enterprise (1) that engages in business activities from which it earns revenues and incurs expenses, (2) whose operating results are regularly reviewed by the company's chief operating decision maker to assess segment performance and to allocate resources to the segment, and (3) for which discrete financial information is available that is generated by or based on the internal financial reporting system.

financial forecast

A set of prospective financial statements that present to the best of the responsible party's knowledge and belief, a company's expected financial position, results of operations, and cash flows.

Full Disclosure Principle

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

common size analysis

Also called vertical analysis, the proportional expression of each financial statement item in a given period to a base figure, with the result that all of the elements within each statement are expressed in percentages of some common number and always add up to 100 percent.

Adverse Opinion

An auditor's report in which the exceptions to fair presentation are so material that in the independent auditor's judgment, the financial statements taken as a whole are not in accordance with GAAP. Adverse opinions are rare; the SEC will not permit a company listed on an exchange to file statements with an adverse opinion.

Qualified Opinion

An auditor's report that contains an exception to the standard opinion, but usually not of sufficient magnitude to invalidate the statements as a whole.

Nonrecognized Subsequent Events

An event that provides evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date; adjustment of the financial statements is not necessary.

Disclaimer of Opinion

Appropriate when the auditor has gathered so little information on the financial statements that no opinion can be expressed.

fraudulent financial reporting

Defined as "intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements."

interim reports

Financial reports that cover periods of less than one year, such as a quarterly reports on Form 10-Q.

management approach

How a company can meet the segmented reporting objective, by providing financial statements segmented based on how the company's operations are managed.

Financial Projections

Prospective financial statements that present to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows.

percentage analysis

Reducing a series of related amounts to a series of percentages of a given base, e.g., expressing all items in an income statement as a percentage of sales.

post balance sheet events

Significant financial events that took place after the formal balance sheet date but before final issuance and that may materially affect the company's financial position. Also referred to as subsequent events. Some post-balance-sheet events require adjustments to the accounts. Notes to the financial statements should explain post-balance-sheet events.

differential disclosure

The FASB, in recognizing that certain disclosure requirements are costly and unnecessary for certain companies, has eliminated reporting requirements for nonpublic enterprises in such areas as fair values of financial instruments and segment reporting.

Safe Harbor Rule

The SEC-provided protection to a company that presents an erroneous forecast, as long as that company prepared the forecast on a reasonable basis and disclosed it in good faith.

discrete approach

The belief that companies should treat each interim period as a separate accounting period.

Integral Approach

The belief that the interim report is an integral part of the annual report and that deferrals and accruals in an interim report should take into consideration what will happen for the entire year.

vertical analysis

The proportional expression of each financial statement item in a given period to a base figure.

horizontal analysis

The proportionate change over a period of time.

accounting policies

The specific accounting principles and methods a company currently uses and considers most appropriate to present fairly its financial statements.

Comparative Analysis

The use of the same information for two or more different dates or periods, so that like items may be compared.

common cost

Those incurred for the benefit of more than one segment and whose interrelated nature prevents a completely objective division of costs among segments.

Illegal Acts

Violations of laws and regulations, such as illegal political contributions, bribes, and kickbacks. If a company derives revenue from an illegal act that is considered material in relation to the financial statements, this information should be disclosed.

Seasonality

When most of a company's sales are concentrated in a short period of the year, while certain costs are spread more equally throughout the year. A good example is the case of retailers, as much of their sales occur in the holiday season.

Accounting errors

are unintentional mistakes

Recognized Subsequent Events

event that provides additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements. Recognized subsequent events require adjustments to the financial statements.

Objective of reporting segmented information

is to provide information about the different types of business activities in which an enterprise engages and the different economic environments in which it operates

Examples of nonrecognized subsequents events

(a)Sale of a bond or capital stock issued after the balance sheet date. (b)A business combination that occurs after the balance sheet date. (c)Settlement of litigation when the event giving rise to the claim took place after the balance sheet date. (d)Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date. (e)Losses on receivables resulting from conditions (such as a customer's major casualty) arising after the balance sheet date. (f)Changes in the quoted market prices of securities or foreign exchange rates after the balance sheet date. (g)Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date

fraud

(misappropriation of assets and fraudulent financial reporting) involves intentional distortions of financial statements

Reasons for this increase in disclosure requirements are varied. Some of them are:

1. Complexity of the business environment 2. Necessity for timely information 3. Accounting as a control and monitoring device

Regarding disclosure, companies should report the following interim data at a minimum.

1.Sales or gross revenues, provision for income taxes, and net income. 2.Basic and diluted earnings per share where appropriate. 3.Seasonal revenue, cost, or expenses. 4.Significant changes in estimates or provisions for income taxes. 5.Disposal of a component of a business, and unusual or infrequently occurring items. 6.Contingent items. 7.Changes in accounting principles or estimates. 8.Significant changes in financial position.

GAAP requires the following disclosures of material related-party transactions

1.The nature of the relationship(s) involved. 2.A description of the transactions (including transactions to which no amounts or nominal amounts were ascribed) for each of the periods for which income statements are presented. 3.The dollar amounts of transactions for each of the periods for which income statements are presented. 4.Amounts due from or to related parties as of the date of each balance sheet presented