Chapter
24-1
CHAPTER
24
FULL DISCLOSURE IN
FINANCIAL REPORTING
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
24-2
Learning Objectives
Chapter
24-3
Full Disclosure in Financial Reporting
Full
Disclosure
Principle
Increase in
reporting
requirements
Differential
disclosure
Notes to
Financial
Statements
Accounting
policies
Common
notes
Disclosure
Issues
Special
transactions
or events
Post-balancesheet events
Diversified
companies
Interim
reports
Chapter
24-4
Auditor’s and
Management’s
Report
Auditor’s
report
Management’s
reports
Current
Reporting
Issues
Reporting on
forecasts and
projections
Internet financial
reporting
Fraudulent
financial
reporting
Criteria for
accounting and
reporting
choices
Full Disclosure Principle
Full disclosure principle calls for financial
reporting of any financial facts significant
enough to influence the judgment of an informed
reader.
Financial disasters at Microstrategy, PharMor,
WorldCom, and AIG highlight the difficulty of
implementing the full disclosure principle.
Chapter
24-5
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure Principle
The full disclosure principle, as adopted by the accounting profession, is
best described by which of the following?
a.
All information related to an entity's business and operating
objectives is required to be disclosed in the financial statements.
b.
Information about each account balance appearing in the financial
statements is to be included in the notes to the financial
statements.
c.
Enough information should be disclosed in the financial statements
so a person wishing to invest in the stock of the company can make
a profitable decision.
d.
Disclosure of any financial facts significant enough to influence the
judgment of an informed reader.
Chapter
24-6
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure Principle
All Information Useful for Investment, Credit, and Similar Decisions
Financial Reporting
Affected by Existing FASB Standards
Illustration 24-1
Basic Financial Statements
Financial
Statements
Balance sheet
Statement of
Income
Statement of
Cash Flows
Statement of
Changes in
Stockholders’
Equity
Chapter
24-7
Notes to
Financial
Statements
Examples
Accounting
Policies
Contingencies
Inventory
Methods
Shares
Outstanding
Alternative
Measures
Supplementary
Information
Examples:
Changing
Prices
Disclosures
Oil and Gas
Reserves
Information
Other Means of
Financial
Reporting
Examples:
 Management
Discussion
and Analysis

Letters to
Stockholders
Other
Information
Examples:
 Competition
and Order
Backlog in SEC
Forms



Analysts'
reports
Economic
Statistics
Articles
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure Principle
Increase in Reporting Requirements
Reasons:
Complexity of Business Environment.
Necessity for Timely Information.
Accounting as a Control and Monitoring Device.
Chapter
24-8
LO 1 Review the full disclosure principle and describe implementation problems.
Full Disclosure Principle
Differential Disclosure
“Big GAAP versus Little GAAP”.
FASB takes the position that there should be
one set of GAAP.
Chapter
24-9
LO 1 Review the full disclosure principle and describe implementation problems.
Notes to the Financial Statements
Notes are the means of amplifying or explaining
the items presented in the main body of the
statements.
Accounting Policies
Companies should present a statement
identifying the accounting policies adopted
(Summary of Significant Accounting Policies).
Chapter
24-10
LO 2 Explain the use of notes in financial statement preparation.
Notes to the Financial Statements
Which of the following should be disclosed in a Summary
of Significant Accounting Policies?
a. Types of executory contracts
b. Amount for cumulative effect of change in
accounting principle
c. Claims of equity holders
d. Depreciation method followed
Chapter
24-11
LO 2 Explain the use of notes in financial statement preparation.
Notes to the Financial Statements
Common Notes
Inventory
Property, Plant, and Equipment
Creditor Claims
Equity Holders’ Claims
Contingencies and Commitments
Fair Values
Deferred Taxes, Pensions, and Leases
Changes in Accounting Principles
Chapter
24-12
LO 2 Explain the use of notes in financial statement preparation.
Disclosure Issues
Disclosure of Special Transactions or Events
Related-party transactions
 Nature of relationship
 Description of the transaction
 Dollar amounts
 Amounts due from or to related parties
Illegal acts
Chapter
24-13
LO 2 Explain the use of notes in financial statement preparation.
Disclosure Issues
If a business entity entered into certain related party transactions,
it would be required to disclose all of the following information
except the
a.
nature of the relationship between the parties to the
transactions.
b. nature of any future transactions planned between the parties
and the terms involved.
c.
dollar amount of the transactions for each of the periods for
which an income statement is presented.
d. amounts due from or to related parties as of the date of each
balance sheet presented.
Chapter
24-14
LO 2 Explain the use of notes in financial statement preparation.
Disclosure Issues
Post-Balance-Sheet Events (Subsequent Events)
Illustration 24-4
1 - Events that provide additional
evidence about conditions that
existed at the balance sheet
date.
Chapter
24-15
2 - Events that provide
evidence about conditions
that did not exist at the
balance sheet date.
LO 2 Explain the use of notes in financial statement preparation.
Disclosure Issues
E24-2 (Post-Balance-Sheet Events): For each of the following
subsequent (post-balance-sheet) events, indicate whether a
company should (a) adjust the financial statements, (b) disclose in
notes to the financial statements, or (c) neither adjust nor disclose.
a
______
1. Settlement of federal tax case at a cost considerably in
excess of the amount expected at year-end.
c
______
2. Introduction of a new product line.
b
______
3. Loss of assembly plant due to fire.
b
______
4. Sale of a significant portion of the company’s assets.
c
______
5. Retirement of the company president.
b
______
6. Issuance of a significant number of shares of common
stock.
Chapter
24-16
LO 2 Explain the use of notes in financial statement preparation.
Disclosure Issues
E24-2 (Post-Balance-Sheet Events): For each of the following
subsequent (post-balance-sheet) events, indicate whether a
company should (a) adjust the financial statements, (b) disclose in
notes to the financial statements, or (c) neither adjust nor disclose.
c
______
7. Loss of a significant customer.
c
______
8. Prolonged employee strike.
a
______
9. Material loss on a year-end receivable because of a
customer’s bankruptcy.
c
______
10. Hiring of a new president.
a
______
11. Settlement of prior year’s litigation.
b
______
12. Merger with another company of comparable size.
Chapter
24-17
LO 2 Explain the use of notes in financial statement preparation.
Disclosure Issues
Reporting for Diversified Companies
Investors and investment analysts income
statement, balance sheet, and cash flow
information on the individual segments that
compose the total income figure.
Chapter
24-18
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Objective of Reporting Segmented Information
To provide information about the different types of
business activities in which an enterprise engages and
the different economic environments in which it
operates.
A company can meet objective by providing financial
statements segmented based on how the company’s
operations are managed (Operating Segment).
Chapter
24-19
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Basic Principles
GAAP requires that general-purpose financial
statements include selected information on a single basis
of segmentation.
A company can meet the segmented reporting objective
by providing financial statements segmented based on
how the company’s operations are managed (management
approach).
Chapter
24-20
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Identifying Operating Segments
An operating segment is a component of an enterprise:
a. That engages in business activities from which it earns
revenues and incurs expenses.
b. Whose operating results are regularly reviewed by the
company’s chief operating decision maker.
c. For which discrete financial information is available.
Chapter
24-21
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Identifying Operating Segments
Quantitative Materiality Test: Must satisfy one to determines
whether the segment is significant enough to warrant actual
disclosure.
1.
Its revenue is 10 percent or more of the combined revenue of all the
company’s operating segments.
2.
The absolute amount of its profit or loss is 10 percent or more of
the greater, in absolute amount, of (a) the combined operating profit
of all operating segments that did not incur a loss, or (b) the
combined loss of all operating segments that did report a loss.
3.
Chapter
24-22
Its identifiable assets are 10 percent or more of the combined
assets of all operating segments.
LO 3
Disclosure Issues
Identifying Operating Segments
Quantitative Materiality Test:
In applying these tests, the company must consider two additional
factors.
1.
Segment data must explain a significant portion of the
company’s business. Specifically, the segmented results
must equal or exceed 75 percent of the combined sales to
unaffiliated customers for the entire company.
2. The FASB decided that 10 is a reasonable upper limit for
the number of segments that a company must disclose.
Chapter
24-23
LO 3 Discuss the disclosure requirements for major business segments.
LO 3
Disclosure Issues
Materiality Test Illustration
Illustration 24-7
Chapter
24-24
Solution on
note page
Reporting segments are therefore A, C, D, and E,
assuming that these four segments have enough sales to
meet the 75 percent of combined sales test.
LO 3
Disclosure Issues
Materiality Test Illustration
Illustration 24-7
Chapter
24-25
LO 3 Discuss the disclosure requirements for major business segments.
LO 3
Disclosure Issues
Segmented Information Reported
1.
General information about operating segments.
2. Segment profit and loss and related information.
3. Segment assets.
4. Reconciliations.
5. Information about products and services and
geographic areas.
6. Major customers.
Chapter
24-26
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Revenue of a segment includes
a. only sales to unaffiliated customers.
b. sales to unaffiliated customers and intersegment
sales.
c. sales to unaffiliated customers and interest
revenue.
d. sales to unaffiliated customers and other revenue
and gains.
Chapter
24-27
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
The profession requires disaggregated information
in the following ways:
a. products or services.
b. geographic areas.
c. major customers.
d. all of these.
Chapter
24-28
LO 3 Discuss the disclosure requirements for major business segments.
Disclosure Issues
Interim Reports
Cover periods of less than one year.
Two viewpoints exist:
1. The discrete approach
2. The integral approach
Companies should use the same accounting principles
for interim reports that they use for annual reports.
Chapter
24-29
LO 4 Describe the accounting problems associated with interim reporting.
Disclosure Issues
Unique Problems of Interim Reporting
(1)
Advertising and similar costs
(2) Expenses subject to year-end adjustment
(3) Income taxes
(4) Extraordinary items
(5) Earnings per share
(6) Seasonality
Chapter
24-30
LO 4 Describe the accounting problems associated with interim reporting.
Disclosure Issues
In considering interim financial reporting, how does the
profession conclude that such reporting should be viewed?
a. As a "special" type of reporting that need not follow
generally accepted accounting principles.
b. As useful only if activity is evenly spread throughout
the year so that estimates are unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.
Chapter
24-31
LO 4 Describe the accounting problems associated with interim reporting.
Auditor’s and Management’s Reports
Auditor’s Report
Standard Unqualified Opinion – auditor expresses
the opinion that the financial statements are
presented fairly, in all material respects, in
conformity with GAAP.
Other opinions:
Qualified
Adverse
Disclaim
Illustration 24-14
Chapter
24-32
LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s Reports
Auditor’s Report
Certain circumstances, although they do not affect
the auditor’s unqualified opinion, may require the
auditor to add an explanatory paragraph to the audit
report.
Going Concert
Lack of Consistency
Emphasis of a Matter
Illustration 24-14
Chapter
24-33
LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s Reports
Auditor’s Report
A qualified opinion contains an exception to the
standard opinion. Usual circumstances may include:
1. Scope limitation.
2. Statements do not fairly present financial
position or results of operations because of:
a. Lack of conformity with GAAP.
b. Inadequate disclosure.
Chapter
24-34
LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s Reports
Management’s Report
The SEC mandates inclusion of management’s
discussion and analysis (MD&A).
Management highlights favorable or unfavorable
trends related to liquidity, capital resources,
and results of operations.
Chapter
24-35
LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s Reports
The MD&A section of a company's annual report is to cover
the following three items:
a. income statement, balance sheet, and statement of
owners' equity.
b. income statement, balance sheet, and statement of
cash flows.
c. liquidity, capital resources, and results of operations.
d. changes in the stock price, mergers, and acquisitions.
Chapter
24-36
LO 5 Identify the major disclosures in the auditor’s report.
Auditor’s and Management’s Reports
Management’s Responsibilities for Financial
Statements
The Sarbanes-Oxley Act requires the SEC to
develop guidelines for all publicly traded
companies to report on management’s
responsibilities for, and assessment of, the
internal control system.
Chapter
24-37
LO 6 Understand management’s responsibilities for financials.
Current Reporting Issues
Reporting on Financial Forecasts and Projections
Financial forecast is a set of prospective financial
statements that present, a company’s expected
financial position, results of operations, and cash
flows.
Financial projections are prospective financial
statements that present, given one or more
hypothetical assumptions, an entity’s expected
financial position, results of operations, and cash
flows. SEC Safe Harbor Rule
Chapter
24-38
LO 7 Identify issues related to financial forecasts and projections.
Current Reporting Issues
Which of the following best characterizes the difference between a
financial forecast and a financial projection?
a.
Forecasts include a complete set of financial statements, while
projections include only summary financial data.
b. A forecast is normally for a full year or more and a projection
presents data for less than a year.
c.
A forecast attempts to provide information on what is
expected to happen, whereas a projection may provide
information on what is not necessarily expected to happen.
d. A forecast includes data which can be verified about future
expectations, while the data in a projection is not susceptible
to verification.
Chapter
24-39
LO 7 Identify issues related to financial forecasts and projections.
Current Reporting Issues
Internet Financial Reporting
All large companies have Internet sites, and a large
proportion of companies’ websites contain links to
their financial statements and other disclosures.
Chapter
24-40
LO 7 Identify issues related to financial forecasts and projections.
Current Reporting Issues
Fraudulent Financial Reporting
Intentional or reckless conduct, whether through
act or omission, that results in materially misleading
financial statements.
The Sarbanes-Oxley Act has numerous provisions
intended to help prevent fraudulent financial
reporting.
Chapter
24-41
LO 8 Describe the profession’s response to fraudulent financial reporting.
Current Reporting Issues
Fraudulent Financial Reporting
Causes of Fraudulent Financial Reporting
Common causes are the desire
 to obtain a higher stock price,
 to avoid default on a loan covenant, or
 to make a personal gain of some type (additional
compensation, promotion).
Chapter
24-42
LO 8 Describe the profession’s response to fraudulent financial reporting.
Current Reporting Issues
Fraudulent Financial Reporting
Causes of Fraudulent Financial Reporting
Common opportunities for fraudulent financial reporting
 Absence of a board of directors or audit committee
 Weak or nonexistent internal accounting controls.
 Unusual or complex transactions
 Accounting estimates requiring significant judgment
 Ineffective internal audit staffs resulting
Chapter
24-43
LO 8 Describe the profession’s response to fraudulent financial reporting.

Due to the broader range of judgments allowed in more principlebased iGAAP, note disclosures generally are more expansive under
iGAAP compared to U.S. GAAP.

Like U.S. GAAP, iGAAP requires similar disclosure for transactions
with related parties.

iGAAP and U.S. GAAP have similar standards on post-balance-sheet
events. That is, under both sets of GAAP, events that occurred
after the balance sheet date that provide additional evidence of
conditions that existed at the balance sheet date are recognized in
the financial statements.
Chapter
24-44

Following the recent issuance of IFRS 8, “Operating =Segments,”
the requirements under iGAAP and U.S. GAAP are very similar.
That is, both GAAPs use the management approach to identify
reportable segments, and similar segment disclosures are required.

Neither U.S. GAAP nor iGAAP requires interim reports. Rather the
SEC and stock exchanges outside the U.S. establish the rules. In
the U.S., interim reports generally are provided on a quarterly
basis; outside the U.S., 6-month interim reports are common.
Chapter
24-45
Perspective on Financial Statement Analysis
A logical approach to financial statement analysis is necessary,
consisting of the following steps.
1.
Know the questions for which you want to find answers.
2. Know the questions that particular ratios and comparisons
are able to help answer.
3. Match 1 and 2 above. By such a matching, the statement
analysis will have a logical direction and purpose.
Chapter
24-46
LO 9 Understand the approach to financial statement analysis.
Perspective on Financial Statement Analysis
Analysis includes an understanding that
1.
Financial statements report on the past.
2. Single ratio by itself is not likely to be very useful.
3. Awareness of the limitations of accounting numbers used
in an analysis.
Chapter
24-47
LO 9 Understand the approach to financial statement analysis.
Ratio Analysis
Analysis includes an understanding that
1.
Financial statements report on the past.
2. Single ratio by itself is not likely to be very useful.
3. Awareness of the limitations of accounting numbers used
in an analysis.
Chapter
24-48
LO 10 Identify major analytic ratios and describe their calculation.
Ratio Analysis
Chapter
24-49
LO 10 Identify major analytic ratios and describe their calculation.
Ratio Analysis
Chapter
24-50
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.
Ratio Analysis
Chapter
24-51
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.
Ratio Analysis
Chapter
24-52
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.
Ratio Analysis
Chapter
24-53
Illustration 24A-1
LO 10 Identify major analytic ratios and describe their calculation.
Limitations of Ratio Analysis
 Based on historical cost.
 Use of estimates.
 Achieving comparability among firms in a given
industry.
 Substantial amount of important information is not
included in a company’s financial statements.
Chapter
24-54
LO 11 Explain the limitations of ratio analysis.
Comparative Analysis
Chapter
24-55
Illustration 24A-2
LO 12 Describe techniques of comparative analysis.
Percentage (Common Size) Analysis
Illustration 24A-3
Chapter
24-56
LO 13 Describe techniques of percentage analysis.
Percentage (Common Size) Analysis
Chapter
24-57
Illustration 24A-4
LO 13 Describe techniques of percentage analysis.
The Present Environment
 Multinational corporations.
 Mergers and acquisitions.
 Information technology.
 Financial markets.
Chapter
24-58
LO 14 Describe the current international accounting environment.
Reasons to Understand International Standards
 Convergence.
 Investors’ expectations
 Competitive factors
Chapter
24-59
LO 14 Describe the current international accounting environment.
The Challenge of International Accounting
High quality standards must
1.
Permit few alternative practices.
2. Be clearly stated, to allow for easy interpretation and
consistent application.
3. Be comprehensive, covering the major transactions
facing companies, and must provide an effective system
for responding to new transactions.
4. Provide transparency of information to make that
information relevant for making effective decisions.
Chapter
24-60
LO 14 Describe the current international accounting environment.
Who Are the Key Players
IASB – International Accounting Standards Board

develops the standards, which are referred to as
International Financial Reporting Standards (IFRS) or
iGAAP.
Other Organizations

National Standard-Setters

IOSCO – International Organization of Securities
Commissions
Chapter
24-61
LO 14 Describe the current international accounting environment.
Who Are the Key Players
Illustration 24B-1
Chapter
24-62
LO 14 Describe the current international accounting environment.
Accounting Standard-Setting and Convergence
The FASB and the IASB are working together toward
the goal of a single set of high quality accounting
standards that will be used both domestically and
internationally.
Illustration 24B-2
Chapter
24-63
LO 14 Describe the current international accounting environment.
Copyright
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Chapter
24-64