MODULE
FAR 2
6
1
SEC Reporting
Requirements
SEC Reporting Requirements
FAR 2
Overview of SEC Reporting Requirements
The SEC requires that more than 50 forms be filed to comply with reporting requirements.
These forms are filed electronically through the electronic data gathering, analysis, and retrieval
system (EDGAR) and are available online to the public. The following is a brief overview of several
significant forms that must be filed by companies registered with the SEC.
1.1
Securities Offering Registration Statements
When a company issues new securities, it is required to submit a registration statement to the
SEC that includes:
Disclosures about the securities being offered for sale.
The relationship of the new securities to the company's other securities.
Information similar to that filed in the annual filing.
Audited financial statements.
A description of business risk factors.
1.2
Form 10-K
Form 10-K must be filed annually by U.S. registered companies (issuers). The filing deadline for
Form 10-K is 60 days after the end of the fiscal year for large accelerated filers, 75 days after
the end of the fiscal year for accelerated filers, and 90 days after the end of the fiscal year for
all other registrants. These forms contain financial disclosures, including a summary of financial
data, management's discussion and analysis (MD&A), and audited financial statements.
Pass Key
A large accelerated filer is defined by the SEC as an issuer with a worldwide market value
of outstanding common equity held by nonaffiliates of $700 million or more as of the last
business day of the issuer's most recently completed second fiscal quarter. An accelerated
filer is defined as an issuer with a worldwide market value of outstanding common equity
held by nonaffiliates of $75 million or more, but less than $700 million. Smaller reporting
companies, which are entities with annual revenues of less than $100 million, are excluded
from the definition of large accelerated filers or accelerated filers.
1.3
Form 10-Q
Form 10-Q must be filed quarterly by U.S. registered companies (issuers). The filing deadline
for Form 10-Q is 40 days after the end of the fiscal quarter for large accelerated filers and
accelerated filers, and 45 days after the end of the fiscal quarter for all other registrants. This
form contains unaudited financial statements prepared using U.S. GAAP, interim period MD&A,
and certain disclosures.
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Module 6
F2–27
FAR 3
5
PP&E: Depreciation and Disposal
Example 4
Double-Declining-Balance Method
Facts: An asset costing $10,000 with a salvage value of $2,000 has an estimated useful life
Required: Using the double-declining-balance method, calculate the depreciation expense
for each year of the useful life of the asset.
Solution: First, the regular straight-line method percentage is determined, which in this
case is 10 percent (10-year life). The amount is doubled to 20 percent and applied each year
to the remaining book value, as follows:
Year
Double
Percentage
Net Book Value
Remaining
Amount of
Depreciation
Expense
1
20
$10,000
$2,000
2
20
8,000
1,600
3
20
6,400
1,280
4
20
5,120
1,024
5
20
4,096
819
6
20
3,277
655
7
20
2,622
524
8
20
2,098
98
2,000
0
Salvage value
Note: Had the preceding illustration been 1½ times declining balance (150 percent), the
rate would have been 15 percent of the remaining book value.
If the asset had been placed in service halfway through the year, the first year's
depreciation would have been $1,000 (one-half of $2,000), and the second year's
depreciation would have been 20 percent of $9,000 (remaining value after the first year),
In Year 8, only $98 depreciation expense is taken because book value cannot drop below
salvage value. In addition, no depreciation expense is recorded in Years 9 and 10.
3.5
Partial-Year Depreciation
When an asset is placed in service during the year, the depreciation expense is typically taken
only for the portion of the year that the asset is used. For example, if an asset (of a company on
a calendar year basis) is placed in service on July 1, only six months' depreciation is taken.
Some companies may choose to use other specific variations for assets placed in service during
the year. The half-year convention means one-half year's depreciation is taken in both the year
of acquisition and the year of disposal. Other variations include taking no depreciation in the
year of acquisition and a full year's depreciation in the year of disposal, or taking a full year's
depreciation in the year of acquisition and no depreciation in the year of disposal.
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Module 5
F3–55
FAR 4
2
4
Transition to the Equity Method
Equity Method
When significant influence is acquired, it is necessary to record a change from the fair value
method to the equity method by doing the following on the date the investment qualifies for the
equity method:
1.
Add the cost of acquiring the additional interest in the investee to the carrying value of the
previously held investment.
2.
Adopt the equity method as of that date and going forward. Retroactive adjustments are
not required.
Example 4
Transition to Equity Method
Facts:
Required: Prepare the journal entry to be recorded on January 1, Year 2, to account for the
transition to the use of the equity method for the investment in Small Co.
Solution:
Journal entry to record the acquisition of the additional interest in Small Co. on January 1, Year 2:
DR
CR
Investment in Small Co.
Cash
$60,000
$60,000
For equity securities without readily determinable fair values, if transitioning to the equity
method due to an observable transaction, the investment must be remeasured immediately
before the transition. If transitioning from the equity method, the investment must be
remeasured immediately after the transition.
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Module 2
F4–29
3
FAR 6
Derivatives and Hedge Accounting
Illustration 3
Swap Contract
On January 1, Year 1, East Company and West Company entered into an interest rate swap
in which East Company agreed to make to West Company a series of future payments
equal to a fixed interest rate of 8% on a principal amount of $1,000,000. In exchange, West
Company agreed to make to East Company a series of future payments equal to a floating
interest rate of SOFR* + 1% on the principal amount of $1,000,000.
Underlying:
East Company—8%, and West Company—SOFR + 1%
Notional amount:
$1,000,000
Initial net investment:
$0 (no cost to enter into the swap contract)
Settlement amount:
East Company—8% × $1,000,000 = $80,000, and
On the first settlement date, SOFR was 8.5% and the following amounts were exchanged:
$80,000
East Company
West Company
$95,000 = $1,000,000 × 9.5%
Derivatives generally have multiple settlement options. This derivative could be settled in
the following ways:
1.
East Company could pay $80,000 to West Company, and West Company could pay
$95,000 to East Company.
2.
West Company could pay $15,000 ($95,000 – $80,000) to East Company. This is a net
settlement and is the most likely form of settlement in this example.
*SOFR (Secured Overnight Financing Rate) measures the cost of overnight borrowings
through repurchase (repo) transactions collateralized with U.S. Treasury securities.
3
Derivative Risks
Market risk and credit risk are the inherent risks of all derivative instruments.
3.1
Market Risk
Market risk is the risk that the entity will incur a loss on the derivative contract. As demonstrated
in the examples above, derivatives are a "zero sum game." Every derivative has a "winner" and
3.2
Credit Risk
Credit risk is the risk that the other party to the derivative contract will not perform according to
the terms of the contract. For example, in the interest rate swap example above, East Company
faces the risk that West Company will refuse to pay the net settlement of $15,000.
F6–34
Module 3
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Corporation.and
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Hedge
reserved.
Accounting
6
FAR 6
Income Taxes: Part 2
5
Operating Losses
A net operating loss (NOL) arising in 2018, 2019, or 2020 tax years can be carried back five years
(to the oldest year first) and carried forward indefinitely to offset taxable income in other years.
NOLs utilized in the five-year carryback period or in 2018, 2019, or 2020 tax years are not subject
to a taxable income limitation. NOLs carried forward to taxable years beginning in 2021 or later
are limited to 80 percent of taxable income before the NOL deduction. Taxpayers can elect not
to carry back and just carry forward. NOLs arising in 2021 and beyond cannot be carried back
but can be carried forward indefinitely. Taxable income and financial accounting income will
differ for the years in which the loss is incurred and carried back or forward.
5.1
Net Operating Loss Carrybacks
If operating losses are carried back to a year before 2018 when the federal corporate tax rate
was 35 percent, tax receivables should be measured at the 35 percent rate applicable to the
carryback year.
In those cases where a carryback of the NOL is permitted, the tax effects of any realizable loss
carryback should be recognized in the determination of the loss period net income. A claim for
refund of past taxes is shown on the balance sheet as a separate item from deferred taxes. This
income tax refund receivable is usually classified as current.
Tax carrybacks that can be used to reduce taxes due or to receive a refund for a prior period
are a tax benefit (asset) and should be recognized (to the extent they can be used) in the period
Journal entry to record a current net operating loss that can be used to obtain a refund of $30,000
taxes previously paid:
DR Tax refund receivable
CR
5.2
$30,000
Tax benefit
$30,000
Operating Loss Carryforwards
If an operating loss is carried forward, the tax effects are recognized to the extent that the
tax benefit is more likely than not to be realized. Tax carryforwards should be recognized as
deferred tax assets (because they represent future tax savings) in the period in which they occur.
Net operating loss (NOL) carryforwards should be "valued" using the enacted (future) tax
rate for the period(s) they are expected to be used.
Tax credit carryforwards should be "valued" at the amount of tax payable to be offset in the
future. A current net operating loss of $100,000 is carried forward to be used in a period for
which the current enacted tax rate is 21 percent.
Journal entry to record the deferred tax benefit:
DR
Deferred tax asset
$21,000
CR
$21,000
*This is a reduction of the book loss (not a contra-expense).
The deferred tax asset (DR) will reduce tax payable in a future period.
The tax benefit (CR) would reduce the net operating loss of the current period.
F6–70
Module 6
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Income
rights reserved.
Taxes: Part 2
FAR 6
6
Income Taxes: Part 2
Example 3
Net Operating Losses
Facts: The pretax financial accounting income and taxable income of ABC Company were the
same for each of the following years. No temporary or permanent differences exist.
2017
2018
2019 (current year)
2020 (expected)
2021 and forward
Income
$10,000
$15,000
(60,000)
10,000
-0-
Enacted Rates
35%
21%
21%
21%
21%
Required: Assume that it is more likely than not that there will be no taxable earnings after
2020. Assume also that ABC elects to use the five-year
year carryback. Prepare the journal entry to
record the 2019 income taxes and determine how income taxes should be presented in the
income statement and the balance sheet.
Solution:
NOL
2019 net operating loss (NOL)
Carryback to 2017
Carryback to 2018
NOL carryforward to 2020 and future years
Carryback
Income tax receivable:
2017 ($10,000 × 35%)
2018 ($15,000 × 21%)
Income tax refund receivable
Carryforward
$60,000
(10,000)
(15,000)
$35,000
$ 3,500
3,150
$ 6,650
Deferred tax asset (NOL carryforward benefit):
2020 and future years ($35,000 × 21%)
Deferred tax asset valuation allowance:
NOL carryforward
Less: 2020 income
Carryforward that will not be used
Tax rate (enacted)
Deferred tax asset valuation allowance
$35,000
(10,000)
$25,000
×
21%
$ 5,250
Net realizable deferred tax asset
$ 2,100
$ 7,350
Journal entry to record income taxes for 2019:
DR
Income tax refund receivable
DR
Deferred tax asset
$6,650
7,350
CR
Deferred tax asset valuation allowance
CR
Income tax benefit (residual)
Income Statement—2019
Income tax benefit:
Current
$6,650
Deferred (net)
2,100
$8,750
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$5,250
8,750
Balance Sheet—2019
Current assets:
Income tax ref. rec.
$6,650
Non-current assets:
Deferred tax asset
$7,350
Less: valuation allow.
(5,250)
$2,100
Module 6
F6–71
7
II