ACCT3723 EXAM 3 CH 24: Full Disclosure in Financial Reporting

Unqualified (Clean) Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with GAAP May exclude an explanatory paragraph ex) going concern, lack of consistency

Full Disclosure Principle

Requires companies to report any financial facts significant enough to influence the judgment of an informed reader. - SEC: AK, 10k, 10q - GAAP: Financial statements and notes - Conceptual framework not GAAP

What are some common adjustments made in calculating non-GAAP earnings

Restructuring charges Costs related to mergers, acquisitions, or divestitures Impairment losses Gains/losses on the sale of property or investments Amortization of purchased intangibles Stock-based compensation

Proprietary Cost Concerns

Revealing information about investment opportunities or performance to competitors; can result in the misapplication of segment reporting standards

Adverse opinion

States financial statements are not prepared in accordance with GAAP

What are the types of audit opinions for financial statement audits?

Unqualified Qualified Adverse Disclaim

Operating Segment

a component of an enterprise for which discrete financial information about revenues and expenses is regularly reviewed by the CODM. Certain qualitative tests determine whether an operating segment is significant enough to warrant disclosure as a "reportable segment". An operating segment is deemed to be a reportable segment if its revenue, profit or loss, or identifiable assets exceed 10% of the entity's total revenue, profit or loss, or identifiable assets.

lack of consistency

due to a change in accounting principle such that comparability is affected even though the auditor concurs with the desirability of the change

Wide latitude in segment reporting standards

ex: defining segments and measuring segment performance reduces the comparability of segment disclosures across entities ex: no standard GAAP definition of profit or loss

Interim Reports

financial reports issued by a business enterprise for a period of less than one year. The SEC requires public companies to file quarterly reports on Form 10-Q that are similar in form and content to their annual reports (Form 10-K), but contain unaudited quarterly financial statements

going concern

financial statements are prepared with the expectation that a business will remain in operation indefinitely

The Private Securities Litigation Reform Act of 1995 (PSLRA)

provides that forward-looking statements made pursuant to the Securities Act of 1933 and the Exchange Act of 1934 are protected by "safe harbor" if the forecasts are made in good faith based on reasonable assumptions (can't be held liable)

ASC 280

requires that segment disclosures be provided under the "Management Approach", meaning that entities must disclose segment information on the basis used internally by the Chief Operating Decision Maker (CODM; usually the CEO) in assessing segment performance and making internal resource allocation decisions. - "Internal view of the enterprise" - Trade Off between flexibility / low cost and comparability

Qualified Opinion

scope limitiation

Earnings Per Share

- ASC 260 - Effect of dilutive securities - Disclose preferred dividends

Inventory

- ASC 330 - LCM vs LCNRV - Use of Retail / Dollar Value LIFO methods - Cost Flow Assumption (LIFO, FIFO, avg. cost)

Summary of Significant Accounting Policies

- Basis of consolidation: of an entity's subsidiaries - Use of estimates : necessary in accounting, actual may differ from estimates - Inventory pricing - Depreciation methods - Initial and subsequent measurement of intangible assets ------Only purchased intangibles, go on Balance Sheet -Revenue recognition ------ASC 606: When performance obligations are met

What are management's reports in the 1K, besides item 8?

- Business Description and Risk Factors (Item 1/1a) - Management's Discussion and Analysis (MD&A) (Item 7) Qualitative and quantitative discussion of financial performance - Management's Responsibilities for Financial Statements (Item 9a) Required under SOX

Differential Disclosure

- FASB private company council PEC): big GAAP vs Little GAAP SEC scaled down disclosure requirements for SRCs (smaller reporting companies, report under $100 mil in annual sales)

Discontinued Operations

- Gain / loss on disposal - Income / net loss from operations

Changes in Accounting Principle

- Reason for the change - Effect on retained earnings

What does ASC require of public companies with quarterly statements disclose?

- Sales, income tax provision, net income - Earnings per share - Discontinued operations - Contingencies - Changes in accounting estimates or principles - Significant changes in financial position

What does ASC require an enterprise to report about its reportable segments?

- Segment profit or loss : No GAAP definition > can exclude any expenses not used by the CODM - Certain components of segment profit or loss, if regularly reviewed by the CODM - Segment assets - Reconciliations of segment revenue, profit or loss, and total assets, to consolidated totals - Description of segment business activities

What are the basic objectives of segment reporting?

1. Better understand the company's performance. 2. Better assess its prospects for future net cash flows. 3. Make more informed judgments about the enterprise as a whole.

Things to Consider for Full Disclosure

1. Costs of Disclosure 2. Information Overload 3. Differential Disclosure

Segment information is vital for financial statement users, however, it has certain limitations:

1. Proprietary cost concerns 2. Wide latitude in segment reporting standards

What are common note disclosures?

1. Significant accounting policies 2. Earnings per share 3. Inventory 4. PPE 5. Intangible Assets 6. Creditor's Claims 7. Shareholder's Claims 8. Contingencies and commitments 9. Fair value estimates 10. Deferred Taxes 11. Pensions 12. Leases 13. Changes in accounting principle 14. Adoption of a new accounting guidance 15. Acquisitions and Dispositions 16. Related party transactions 17. Subsequent events 18. Segment Reporting 19. Discontinued operations

Disclaim Opinion

Auditor can't reach an opinion

scope limitation

A lack of evidence that may preclude the auditor from issuing a clean opinion, usually resulting from an inability to conduct an audit procedure considered necessary.

Segment Reporting

Conglomerate (i.e., diversified) entities must disclose disaggregated financial information about reportable business segments under ASC 280.

Costs of Disclosure

Consider the cost/benefit constraint from Chapter 2

Information Overload

Too much information is hard to absorb and understand

How do companies disclose forward looking information?

Earnings press releases (on 8k item 2.02 and 9.01 - any significant event) Conference calls (w/ analysts and institutional investors) Quarterly and annual reports (10Q and 10k)

Auditor's Reports (10k)

External accountants attest to the fairness of financial statements and the adequacy of internal controls

What does SEC Regulation G do?

It prohibits companies from disclosing non-GAAP measures more prominently than related GAAP measures, and requires that all non-GAAP measures be reconciled to a GAAP measure

Non GAAP Financial Measures

Many companies disclose performance measures that are not calculated in accordance with GAAP (e.g., adjusted earnings/EPS, core earnings, adjusted EBITDA, organic revenues, etc.). The primary purported motive for disclosure of non-GAAP measures is that GAAP net income often includes items which are non-recurring in nature and/or not useful for assessing an entity's prospects for future cash flows. However, opponents of non-GAAP reporting argue that such measures afford managers latitude to exclude income-decreasing items and present a more favorable view of firm performance.

Why is analysis of interim reporting difficult?

because interim reports are largely unaudited and there are varying philosophies on presentation. Although some standards exist for interim reporting, the subject is in need of a thorough review and analysis. The profession also continues to debate the extent of involvement an independent auditor should have with interim reports