FAR Unit 5 - Financial Statement Disclosure

Operating segments may be aggregated if... (5.2)

1. Doing so is consistent with the objective 2. They have similar economic characteristics 3. They have similar products and services, production processes, classes of customers, distribution methods, and regulatory environments

Disclosures for reportable operating segments (5.3)

1. General information (like factors used to identify the reportable segments) 2. A measure of profit or loss and total assets for each reportable segment. (Items can include revenues, interest revenue and expense, depreciation, depletion, amortization, unusual items, equity of equity-based investees, income tax expense or benefit, extraordinary items, and other significant noncash items) 3. The investment in equity-based investees and total expenditures for additions to most long-lived assets for each reportable segment

Exceptions for reporting inventory at interim dates (5.3)

1. The gross profit method may be used for estimating COGS and inventory because a physical count at the interim date may not be feasible. 2. Use of LIFO at an interim date may cause a partial liquidation of the base period inventory level. IFRS difference - This is not an issued, because LIFO is not a permitted accounting policy under IFRS. 3. An inventory loss from a market decline may be deferred if no loss is expected for the year. However, LOSSES FROM NONTEMPORARY MARKET DECLINES MUST BE RECOGNIZED AT THE INTERIM DATE. If the loss happens to be recovered during the year in another quarter, it is treated as a change in estimate (prospectively). IFRS difference - For an interim period, an inventory loss from a market decline MUST be recognized even if no loss is reasonably expected for the year. Gains in the market value of inventory that are not recoveries of nontemporary declines are not recognized. You can't record a gain that exceeds the loss you previously marked down.

Related party required disclosures (5.4)

1. The nature of the relationship 2. A description of the transactions 3. The dollar amount of transactions 4. Amounts due to or from related parties at the end of the date of each balance sheet 5. Certain tax information if the entity is part of a group that files a consolidated tax return

Required disclosures for derivatives and hedging (5.8)

1. The objectives of hedging instruments, including each instrument's primary risk exposure. A distinction must be made between investments used for risk management or other purposes. 2. Information about the volume of derivatives 3. Location and gross fair values of reported derivatives 4. Location and amounts of gains and losses on derivatives and hedged items 5. Fair value hedging instruments and hedged items 6. Cash flow hedging instruments and hedged transactions

Interim period change in accounting principle (5.3)

A change is an accounting principle is retrospectively applied unless it is impractical to do so. The cumulative effect of the change on periods prior to those presented is reflected in the carrying amounts of assets, liabilities, and retained earnings at the beginning of the first period presented. All periods presented must be adjusted for period-specific effects! You must take into consideration the effect of the change minus income taxes related to the change ("gross effect minus income taxes")

Financial instrument definition (5.8)

A financial instrument is cash, evidence of ownership interest in an entity, or a contract that both (1) imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with the second entity and (2) conveys to the second entity a contractual right to the same.

Segments - interest (5.4)

A segment's interest revenue and interest expense are reported separately, generally.

Take-or-pay contract (5.5)

A take-or-pay contract requires one party to purchase a certain number of GOODS from the other party or else pay a penalty. Disclosure is required.

Throughput contract (5.5)

A throughput contract requires one party to purchase a certain amount of SERVICES. Disclosure is required.

Accounting policies (5.1)

Accounting policies are the specific principles and the methods of applying them used by the reporting entity. Management selects these policies as the most appropriate for fair presentation of financial statements.

Market risk (5.8)

An entity is encouraged, but not required, to disclose quantitative information about the market risks of instruments that is consistent with the way the entity manages those risks.

Operating segment (5.2)

An operating segment has three characteristics: 1. It is a business component of the entity that may earn revenues and incur expenses. 2. Its operating results are regularly reviewed by the entity's chief operating decision maker (CODM), or chief operating officer, for the purpose of resource allocation and performance assessment. 3. Its separate financial information is available.

When to disclose unconditional purchase obligations

An unconditional purchase obligation must be disclosed if: 1. It is either noncancelable or cancelable only (a) upon happening of a remote contingency, (b) with the permission of the other party, or (c) under terms that make continuation or replacement (but not cancellation) of the agreement reasonably assured. 2. It was negotiated as part of the financing arrangement for facilities that will provide contracted goods or services 3. It has a remaining term of more than 1 year

Interim period tax expense or benefit (5.3)

At the end of each interim period, the entity should estimate the annual effective tax rate and record interim period tax expense (benefit). Interim period tax expense/benefit = Estimated annual effective tax rate x YTD ordinary* income/loss - The tax expense/benefit recognized in previous interim periods * ordinary means excluding unusual or infrequent items, extraordinary items, and results of discontinued operations. You only recognize a tax BENEFIT for a loss early in the year if the benefits are expected to be realized during the year or recognizable as a deferred tax asset at year end. A valuation allowance must be recognized if it is more likely than not that a deferred tax asset will not be fully realized.

Seasonality (5.3)

Certain disclosures are mandatory for businesses that have material seasonal fluctuations. These businesses should consider supplementing interim reports with information for the 12-month period that ended at the interim date for the current and preceding years. This is different from reporting entities in industries not subject to seasonal fluctuations, because they are only required to present balance sheet info on Form 10Q for the most recent quarter end and the end of the preceding fiscal year.

Financial instrument disclosures (5.8)

Certain entities must disclose the FAIR VALUE of financial instruments. This rule applies whether or not they are recognized if (1) it is feasible to estimate such fair values and (2) the aggregated fair value is material. Must also disclosrue FV of all financial instruments for which estimation is practicable for interim periods.

Interim period change in accounting estimate (5.3)

Changes in accounting estimate (including a change in the estimated effective annual tax rate), is accounted for prospectively in the interim period in which the change is made and future periods, NOT retrospectively. Only material changes should be disclosed.

Summarized financial information (5.3)

Companies may report information at interim dates that is less detailed than information in annual statements. Required minimum disclosures include: 1. Sales or gross revenue, income tax benefit, extraordinary items, net income, and comprehensive income 2. Basic and diluted EPS for each period presented 3. Seasonal revenues, costs, or expenses 4 .Significant changes in estimates or income tax amounts 5. Disposal of a component of an entity and unusual or infrequent items 6. Contingent items Changes in accounting principles or estimates 7. Significant changes in financial position 8. Certain information about reportable operating segments 10. Certain information about defined benefit postretirement plans Must report current quarter info and YTD info for this year and the same data for the preceding year.

Reporting other costs and expenses at interim dates (5.3)

Costs and expenses are charged to income in interim periods as incurred or they are allocated among interim periods. Allocation is based on: 1. The benefits received 2. Estimates of time expired 3. Activities associated with the period Examples of allocation include gains and losses, quantity discounts, interest, rent, and property taxes, and advertising costs.

Credit risk (5.8)

Credit risk is the risk of accounting loss from a financial instrument because of the possible failure of another party to perform. With certain exceptions, an entity must disclose significant concentrations of credit risk arising from most financial instruments, whether from one counterparty or groups. Disclosure should be in either the body or the notes of the financial statements. Credit risk disclosures should include (1) information about the concentration, (2) the maximum loss due to credit risk, (3) the policy of requiring collateral or other security, and (4) the policy of entering into master netting arrangements to mitigate the credit risk.

Related parties (5.4)

Disclosure of material related party transactions is required. Related parties include: 1. Employee trusts managed by or under the trusteeship of the entity's management 2. Principal owners (those who have 10% or more of the voting rights), management, or members of their immediate families 3. Affiliates (an affiliate controls, is controlled by, or is under common control with an entity) 4. Equity-based investees 5. Any other entity if one party can significantly influence the other to the extent that one may be prevented from fully pursuing its interests 6. A party that can significantly influence the transacting parties or has an ownership interest in one and can significantly influence the other Transactions between an entity and its management, such as borrowings and lendings, must be disclosed. NOTE: SOX 2002 generally prohibits an issuers from extending credit to its directors and officers. Employees are NOT considered related parties. IFRS difference - IFRS entities must disclose the compensation of key management personnel in total and by components.

Unconditional purchase obligations - disclosure for RECORDED obligations (5.5)

Disclosure of the aggregate amount of payments for unconditional purchase obligations is required for recorded obligations for each of the past 5 years from the date of the latest balance sheet presented.

Significant risks and uncertainties (5.6)

Disclosures should be made at the balance sheet date about certain items that could significantly affect reported amounts in the near term (within 1 year of the balance sheet date) Disclosure risks and uncertainties related to: 1. Nature of operations - Entities must disclosure their (1) major products or services, (2) principal markets, (3) the locations of those markets. Entities should also disclosure (1) all industries in which they operate, (2) the relative importance of each, and (3) the basis for determining the relative importance. 2. Use of estimates - Conformity with GAAP requires management to use numerous estimates. Disclosure for significant estimates that are subject to REASONABLE POSSIBILITY of material change in the near term future is required. 3. Concentrations - This means vulnerability due to concentrations (i.e. when entities fail to diversify). Disclosure is required if management knows prior to the issuance of the financial statements that 1. The concentration exists at the balance sheet date 2. It makes the entity vulnerable to a near-term severe impact 3. Such impact is at least REASONABLY POSSIBLE in the near term (Examples include the volume of business with a certain customer, supplier, lender, etc.; revenue from certain products, services, or fund-raising events; the available suppliers of material, labor, services, or rights; and the market or geographic area where the entity operates.)

Accounting policies presentation and disclosure (5.1)

Entities must disclose all significant accounting policies as an integral part of the financial statements. The preferred presentation is a summary of accounting policies in a separate section preceding the notes or in the initial note. Disclosure of accounting policies should not duplicate details presented elsewhere. Commonly required disclosures about policies include: 1. Basis of consolidation 2. Depreciation methods 3. Amortization of intangible assets (excluding goodwill, which is not amortizable) 4. Inventory pricing 5. Recognition of profit on long-term construction-type contracts 6. Recognition of revenue from franchising and leasing operations 7. Policy for determining which items are cash equivalents

Entity-wide disclosures (5.9)

Entity-wide disclosures must be provided only if they are not given in the reportable operating segment info. Examples include: 1. Revenues from external customers for each product and service (or group of similar products and services) are reported if feasible. 2. Info about geographic areas if feasible including external revenue attributed to the home country vs. foreign countries, material external revenues attributable to an individual foreign country, the basis for attributing revenue from external customers, and certain information about assets. 3. If 10% or more of total entity revenue comes from sales to any single customer, that fact, the amount from each customer, and the segments reporting the revenue must be disclosed. This does NOT apply if a single customer provides 10% or more of a particular operating segment's revenue.

Unconditional purchase obligations - disclosure for UNRECORDED obligations (5.5)

If an unconditional purchase obligation is not recorded, certain disclosures are required. They include: 1. The nature and term of the obligation 2. The variable components of the obligation 3. The amounts purchased under the obligation 4. Amount of the fixed and determinable portion of the obligation at the latest balance sheet date, and, if determinable, for each of the 5 succeeding fiscal years The imputed interest necessary to reduce the unconditional purchase obligation to its present value is ENCOURAGED but not required.

Quantitative thresholds determine whether or not operating segments must be disclosed separately (5.2)

If at least ONE of the quantitative thresholds are met, operating segments MUST be disclosed separately. The thresholds include: 1. Revenue test - >= 10% o0f all operating segments 2. Asset test - >= 10% of all operating segments 3. Profit (loss) test - >= 10% of greater of absolute sum or (1) all profitable operatings segments or (2) all loss-reporting operating segments (you separate entity reported profits and losses into different buckets and take 10% of the larger bucket). The first step in applying this test is to classify the segments into those reporting profits and those operating reporting losses and then sum the amounts!

Practicality limit (5.2)

If the # of reportable segments increases above 10, the entity may decide it has reached a practical limit. (see page 166)

Segments - interim period information (5.7)

Interim period information is disclosed in condensed financial statements.

Interim financial reporting (5.3)

Interim reporting is required for publicly traded companies, but there are minimum disclosure requirements and it's mostly just summarized interim information. Thus, the usefulness of interim financial info is limited. Their best qualitative characteristic is timeliness. They emphasize timeliness over reliability.

Segments - reconciliations (5.6)

Reconciliations to the consolidated amounts must be provided for the total reportable segments' amounts for significant items of info disclosed, which should be separately identified and described.

Prior interim period adjustments (5.3)

Regarding adjustment or settlement of (1) litigation, (2) income taxes, (3) renegotiation proceedings, or (4) utility revenue under rate-making processes... All or part of the adjustment or settlement must relate specifically to a prior interim period of the current year. Moreover, its effect must be material and the amount must have become reasonably estimable only in the current interim period. For the portion of the adjustment that is allocable to the CURRENT period, it is included in net income for that period. For the portion of the adjustment that is allocable to PRIOR periods, the financial statements for the period periods are restated to include their allocable portion of the adjustment.

Segments - restatements (5.8)

Restatement is required if changes in internal organization cause the composition of the reportable segments to change. Only restate if you can feasibly do so. Entities can chose not to restate prior periods, but the current period must disclose comparative info under the new and old basis of segmentation if feasible.

Unconditional purchase obligations - background (5.5)

Sometimes used to ensure a steady supply of inventory from a company's supplier. However, because no party has performed the contract, the purchaser must not accrue a liability and vice versa -->> Grey area! To address the grey area, FASB requires certain disclosures.

Subsequent events (5.7)

Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance or availability for issuance of the financial statements.

Interim disclosures (5.3)

The following are separately disclosed, included in interim-period net income, and not prorated over the year: 1. Extraordinary items 2. Gains or losses from disposal of a component of an entity 3. Material unusual or infrequent items

Segment reporting (5.2)

The objective of operating segment reporting is to provide information about the different business activities of the entity and the economic environments in which it operates. Note that disclosure of information is not required if it is not prepared for internal use, and reporting it would not be feasible.

Recognized subsequent events (5.7)

This type of subsequent event provides additional information about CONDITIONS THAT EXIST AT THE BALANCE SHEET DATE, including the estimates inherent in statement preparation. These events must be recognized. Examples include (1) the settlement of litigation for an amount differing from the liability recorded in the statements and (2) a loss on a receivable resulting from a customer's bankruptcy.

Unrecognized subsequent events (5.7)

This type of subsequent event provides information about conditions that did NOT exist at the date of the balance sheet. These events do not require recognition, but some of them require disclosure. Examples of events that require disclosure include: 1. Sale of a bond or capital stock issue 2. A business combination 3. Settlement of litigation when the event resulting in the claim occurred after the balance sheet date 4. Loss of plant or inventories as a result of a fire or natural disaster 5. Losses on receivables resulting from conditions occurring after the balance sheet date

When you DON'T have to disclosure unconditional purchase obligations

You do NOT have to disclosure unconditional purchase obligations that are cancellable upon payment of a nominal penalty. This is because it is NOT unconditional...