ch 3 - the statement of financial position and financial disclosures

8/12/2019 Ch 3 - The Statement of Financial Position and Financial Disclosures

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THE STATEMENT OF

FINANCIAL POSITION AND

FINANCIAL DISCLOSURES

Chapter 3

2013 The McGraw-Hill Companies, Inc.


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Slide 2

Coverage

LO(Learning Objective)5,6,7

Page 121-129


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Slide 3

Basic Principles or Underlying Guidelines ofAccounting

Including:4 Qualities

4 Principles

2 Constraints


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Slide 4

4 Qualities: GAAP identifymajor characteristics of

information

Relevant Information Affects the decision of its users.

Reliable Information Is trusted by users.

ComparableInformation

Is helpful in contrastingorganizations.

C5

Consistent

Information

requires a company to use the sameaccounting methods period after period

so that financial statements arecomparable across periods


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Slide 5

4 PRINCIPLES OF ACCOUNTING

Cost PrincipleAccounting information is based on

actual cost. Actual cost isconsidered objective.

Revenue Recognition PrincipleRecognize revenue when it is earned.

Matching PrincipleA company must record its expenses

incurred to generate the revenue reported.

Full Disclosure PrincipleA company is required to report thedetails behind financial statementsthat would impact users decisions.

C5


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Slide 6

Concept of materiality: An item is

material if knowledge of the item might

reasonably influence the decisions of usersof financial statements.

2 CONSTRAINTS:CONSTRAINT 1: MATERIALITY


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Slide 7

GOODS DAMAGED OROBSOLETE(chapter 6)

Example of application or use of conservatism inaccounting: assets valuation and write-off

C 1 2 CONSTRAINTS:CONSTRAINT 2: CONSERVATISM

Concept of CONSERVATISM (is also known

as PRUDENCE concept): the general concept ofrecognizing expensesand liabilitiesas soon as possible

when there is uncertainty about the outcome, but to onlyrecognize revenuesand assetswhen they are assured of

being received.
http://www.accountingtools.com/definition-expensehttp://www.accountingtools.com/definition-liabilityhttp://www.accountingtools.com/definition-revenuehttp://www.accountingtools.com/definition-assethttp://www.accountingtools.com/definition-assethttp://www.accountingtools.com/definition-revenuehttp://www.accountingtools.com/definition-liabilityhttp://www.accountingtools.com/definition-expense


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3-8

Learning Objective 5

Explain the purposeof financial statementdisclosures


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Disclosure Notes

What is the basic accounting principle guidingthe Disclosure Notes?

Any constraint of this accounting principle?


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Disclosure Notes

1.Summary ofSignificant

Accounting Policies

Conveys valuable informationabout the companys choices from

among various alternative

accounting methods. *

2.Subsequent EventsA signi ficant development thattakes place after the companys

financial year-end but before the

financial statements are issued.

3. Noteworthy Events

and Transactions

Transactions or events that are

potentially important to evaluating

a companys f inancial statements


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2. Subsequent Events


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Example 1: Wal-Mart Stores, Inc.: DividendsDeclared

On March 3, 2011, our Board of Directorsapproved an increase in the annual dividend for

fiscal 2012 to $1.46 per share, an increase ofapproximately 21% over the dividends paid infiscal 2011. Dividends per share were $1.21and $1.09 in fiscal 2011 and 2010, respectively.For the fiscal year ending January 31, 2012, theannual dividend will be paid in four quarterlyinstallments.


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Example 2: Earthquake in Japan On March 11, 2011, an earthquake of 9.0 magnitude

occurred near the Northeastern coast of Japan,creating extremely destructive tsunami waves. The

earthquake and tsunami waves caused extensivedamage in Northeastern Japan and also affected otherregions in Japan through a lack of electricity, water andtransportation. We are currently unable to estimate thevalue of damages and the corresponding insurancerecovery regarding our business in Japan, although wedo not believe that any damages would be material toour financial position.


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2. Discussion:

Accounting of Subsequent Events

Situation 1: The IASB requires that companiesadjust the reported amount of assets andliabilities (in the financial statements table) ifevents occurring after the balance sheet date

provide additional information about conditionsthat existed at the balance sheet date.


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2. Discussion:

Accounting of Subsequent Events

Situation 2: Disclosure Notes should bemade of significant subsequent events even ifthose events do not impact the valuationsreported in the balance sheet.

Situation 3: No need of Disclosure Notes fornon-significant subsequent events


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2. Subsequent Events--Discussion

Which situation is the following subsequentevents?

Major customer went bankrupt due to adeteriorating financial condition


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Company sustained extensive hurricanedamage to one of its plants


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Company lost a major lawsuit that had beenpending for two years


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Increasing U.S. trade deficit may have impacton companys overseas sales.


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Company sold a large block of preferred stock


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Companys controller resigned and wasreplaced by an audit manager from thecompanys audit firm


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3. Noteworthy Events and Transactions

Transactions or events that are potentiallyimportant to evaluating a companys

financial statements, including:

1. related-party transactions

2. errors, and fraud

3.Any important information not included in

the financial statements tables, e.g.,

additional information to support summarytotals; contingent liability; segment

information


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Related-Party Transactions DisclosureRelated-party transactions require disclosure of thenature of the relationship, a description of thetransaction, and any dollar amounts involved .


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Example of Notes of Related-Party TransactionsDisclosure-- GlaxoSmithKline plc

GSK held a 18.1% interest in Quest Diagnostics Inc. at 31stDecember 2010 (2009 16.8%). The Group and QuestDiagnostics are parties to a long-term contractual relationshipunder which Quest Diagnostics is the primary provider of clinicallaboratory testing to support the Groups clinical trials testingrequirements worldwide.

During 2010, Quest Diagnostics provided services of 41 million(2009 47 million) to the Group. At 31st December 2010, thebalance payable by GSK to Quest Diagnostics was 10 million(2009 10 million).

Subsequent to the year-end, GSK sold its entire shareholding inQuest Diagnostics Inc. The sale comprised a secondary publicoffering and an accompanying repurchase of shares by QuestDiagnostics which together are expected to generate grossproceeds of 0.7 billion after tax.


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Errors, and Fraud

Both result in misstatement in financialstatements.

What is the main difference between Errors andFraud?


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Additional information to support summarytotals, e.g.

Breakdown of property, plant, and equipment (PPE), long-term

debt Main difference between financial accounting income and tax

income

Notes of long-term leases: length of the lease and future payments

Pension plan and plan for coverage of medical benefits

Slide 27


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Slide 27

Probability of future sacrifice . . .

ReasonablyProbable Possible Remote

Record the Disclose the

Can be contingent liabi lity in the No

Estimated liability. notes to the action.

financial stmts.

Disclose the Disclose the

Cannot be l iabi l ity in the l iabi l ity in the No

Estimated notes to the notes to the action.financial stmts. financial stmts.

Amou

nt...

3. Noteworthy Events and

Transactions

Contingent Liabilities: Potential obligation that depends on afuture event arising out of a past transaction or event, e.g.,Potential Legal Claims, Debt Guarantees

C 3


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Segment Information

Firm should disclose geographic segmentinformation and segment information of major

product or customer


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3-29


Explain the purpose of

the managementdiscussion andanalysis disclosure.

Slide 30


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Management Discussion and Analysis

Provides a biased but

informed perspective ofa companys operations,

liquidity, and capital

resources.


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Managements Responsibilities

Preparing the financial statements and otherinformation in the annual report.

Included in annual reports to assert theresponsibility of management and directors


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3-32


Explain the purpose of

an audit and describethe content of theaudit report.


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AuditorsReport

Expresses the auditorsopinionas to the fairness of

presentation of the financial

statements in conformity withaccounting standards.

Must comply with the auditingstandards of the specificjurisdictions over which the

company operates.


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AuditorsOpinions

Unqualified

Issued when the financial statements

present fairly the financial posi tion,

results of operations, and cash flowsare in conformity with accounting

standards.

Qualified

Issued when there is an exception

to the standard unqualified opinion

but is not of sufficient seriousnessto invalidate the financial

statements as a whole.

AdverseIssued when the exceptions are so

serious that a qualified opinion is

not justi fied.

DisclaimerIssued when there is insufficient

information on which to express an

opinion.

Slide 35


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Compensation of Directors & Top Executives

Disclosure Directors remuneration

Remuneration policies and

practicesAuditors report on remuneration

policies

In the U.S., a proxy statementissent each year to all shareholders,

usually in the same mailing with the

annual report.


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Homework

Discussion Questions (no need to hand in)

E3-10

E3-11


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End of Chapter 3

ch 3 - the statement of financial position and financial disclosures

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