June 21, 2012
Group E:
Arjun Arulambalam
Emily Crawford
Rajesh Khullar
Kira Hataley
Yun Shim
Agenda
 Introduction
 Case Study: SportsGoodStop
 External Study
 CICA Handbook: Section 4250
 Future-Oriented Financial Information
 Conclusion
 Class Activity
Has anyone used forecasts in the
workplace?
SportsGoodStop Company Background
 Derek Jeffries is the owner
 Selling brand name sports jerseys, ball caps, and golf equipment
 Operated 15 retail outlets throughout Western Canada
 5 franchises have already been approved
 10 more requests for franchise stores are waiting to be approved by the
board of directors
 Goal: Expand into Toronto and then into eastern Canada with a
combination of company owned and franchise outlets
SportsGoodStop Company - Issues
 Better share price would be
obtained for the IPO if potential
investors were aware of the
forecasted earnings
 Debt to total assets ratio is already
near the limit of 80% that his
banker had set out several years
ago
 Forecasted budget may adopt
accounting practices to increase
assets
SportsGoodStop Company –
Auditor
 Steven Snipes is a senior manager at Sloan and Travis a
CA firm
 Smaller firm with only one other public company
 Derek Jeffries is a long time friend and client
 Confrontation: Whether Derek could provide audit
assurance of the forecasted earnings in four days
 Derek has threaten to switch to the Big5 if S and T
cannot complete the task
SportsGoodStop - Growth Rate
 In 2000, the
company reduced
is expenses more
than the revenue
fell therefore the
net income still
increased
 In 2001 is it
practical to have
an increase of
3246% from the
addition of a
guaranteed 5
franchises
SportsGoodStop Company
Statement of Income
Revenue
Cost of goods sold
Gross Profit
Expenses
Selling, general and adminstratives
Interest
Amortization
Income before bonus and income taxes
Management bonus
Income before income taxes
Provisions for income taxes
Net income
Growth
Rate
Projected
99/'00
2001
Growth
Rate
00/'01
1999
2000
16,500,000
10,890,000
5,610,000
15,900,000
10,310,000
5,590,000
4,045,000
168,000
149,000
4,362,000
3,790,000
160,000
145,000
4,095,000
-6.30%
-4.76%
-2.68%
-6.12%
4,368,600
180,000
151,400
4,700,000
15.27%
12.50%
4.41%
14.77%
1,248,000
1,068,000
180,000
45,000
135,000
1,495,000 19.79%
1,299,000 21.63%
196,000 8.89%
49,000 8.89%
147,000 8.89%
6,559,000
338.73%
6,559,000
1,639,750
4,919,250
3246.43%
3246.43%
3246.43%
-3.64% 25,409,000
-5.33% 14,150,000
-0.36% 11,259,000
59.81%
37.25%
101.41%
SportsGoodStop - Forecasted
Revenue
 Initial franchise fees are a one time payment
 Does it make sense to include as income?
 Franchisee must capitalized the initial franchise fee rather than
expensing it
 Royalties are included as revenue
 The income is incurred yearly and as percent of franchisee’s
sales
Revenue
Initial franchise fees
Royalties
Sales to franchisees
Retail sales
4,500,000
336,600
1,564,400
19,008,000
25,409,000
PWC Study
 PWC Study
 Increase in demand for trends and drivers of
performances

To maintain investors confidence
 KPMG Study
 Organizations need to improve quality, reliability and
insightfulness in the data they use to produce forecasts
 Look beyond internal data sources to forecast
performance
 Scenario planning is a useful tool address uncertainty
Who would be the users of
financial forecasts?
Purpose and Scope
 Establishes standards
 For the measurement,
presentation and
disclosure of futureoriented financial
information
 Does not apply to
historical pro-forma
statements issued.
Introduction to Section 4250 Objective
 Objective: The objective of presenting future-oriented
financial information is to provide external users with
information that assists them in evaluating any entity's
financial prospects.
Section 4250 - Definitions
 Future-oriented financial information is information about
prospective results of operations, financial position and/or cash flows,
based on assumptions about future economic conditions and courses
of action. Future-oriented financial information is presented as either a
forecast or a projection.
 General purpose future-oriented financial information prepared
for external users with whom the entity is not negotiating or dealing
directly.
 Special purpose future-oriented financial information prepared
for external users with whom the entity is negotiating or dealing
directly.
What is the difference between a
forecast & a projection?


Forecast: prepared using assumptions which reflect the entity's
planned courses of action for the period covered given management's
judgment as to the most probable set of economic conditions
Projection: prepared using assumptions that reflect the entity's
planned courses of action for the period covered given management's
judgment as to the most probable set of economic conditions, together
with one or more hypotheses that are assumptions which are consistent
with the purpose of the information but are not necessarily the most
probable in management's judgment.
Measurement - Assumptions
 Management is responsible for the process of
developing assumptions and for ensuring that the
assumptions developed are appropriate in the
circumstances
 One assumption may affect many parts of a business
and lead to the formulation of other assumptions
 Must be internally consistent
Measurement - Assumptions
 A forecast is based on reasonable and supportable
assumptions that management believes reflect the
most probable set of economic conditions and
planned courses of action (.11 & .12)
 Can vary according to circumstances
 Consider time period (.12)
Measurement - Assumptions
 Hypotheses: assumptions that assume a set of
economic conditions or courses of action that are not
necessarily the most probable in management's
judgment, but are consistent with the purpose of the
projection.
 To be reasonable, hypotheses must be:
 Consistent with the purpose of the projection
 Represent plausible circumstances
 Need not be supportable
Time Period
 The period covered by future-oriented financial
information should not extend beyond the point in
time for which such information can be reasonably
estimated
 Depends on:
 Needs of users
 Ability to make appropriate assumptions
 Nature of the industry
 Operating cycle of the entity
Time Period
 Forecasts would not normally be prepared for periods
beyond the following fiscal year except when there is
reasonable assurance as to the operations in the
forecast period
 Projections may be presented for periods extending
beyond the following fiscal year when there is a
reasonable basis for making estimates, although the
degree of uncertainty normally increases with the
length of the future period covered
Accounting Policies
 Future-oriented financial information should be
prepared in accordance with the accounting policies
expected to be used in presenting historical financial
statements for the future period
 Facilitates comparisons with the actual results
Presentation
 General purpose future-oriented financial information should be
presented in the format of historical financial statements and
include at least an income statement
 May want to present a balance sheet, a statement of retained
earnings, and/or a cash flow statement
 Special purpose future-oriented financial information should be
presented in the level of detail and the format of presentation
agreed between the parties
Presentation
 When future-oriented financial information is
presented together with historical financial
statements:
 Notes to the future-oriented financial information need
not include disclosures that would be repetitive of those
in the historical financial statements, provided
appropriate cross-reference is made
 Presented in single monetary unit or range of amounts
 Most useful presentation
 Care should be used to ensure that the range is not so
broad it is rendered meaningless
General Disclosure
 Future-oriented financial information should:
 Include a cautionary note to the effect that actual results
achieved for the period covered will vary from the
information presented and that the variations may be
material
 Be clearly labelled as either a forecast or a projection
General Disclosure
 An entity presenting future-oriented financial
information should disclose:
 the effective date of the underlying assumptions
 the extent to which actual financial results are
incorporated and the period covered by those results
 whether or not the entity intends to update the futureoriented financial information subsequent to issue
General Disclosure
 Users of the handbook are instructed numerous
times to remind users of the limitations and
uncertainties inherent in predicting future
conditions and actions
General Disclosure
 Disclosure of the effective date
 Events occurring subsequent to that date may affect the
usefulness of the information presented
 Disclosure of the extent to which actual results are
incorporated and the period covered by those results
 Provides an indication of the degree of reliability
 Disclosure of intentions to revise future-oriented
financial information and/or compare it to subsequent
actual financial results
Disclosure of Assumptions
 Significant assumptions underlying future-oriented
financial information should be disclosed
 Hypotheses should be separately disclosed and identified
 When a forecast is presented, the entity should:
 disclose that the projection has been prepared using
assumptions
 disclose how assumptions are supported
Assumptions
 Assumptions vary in both their nature and significance. They are
considered significant when:
 Reflects an expectation of economic conditions significantly
different from those currently prevailing,
 Relatively high probability of a sizeable variation
 A small change in the assumption would have a significant
impact on the future-oriented financial information
 Hypotheses are considered significant and would be disclosed
Common Assumptions
 All future-oriented financial information is premised on
certain common assumptions about future conditions,
including:
 government's courses of action
 absence of natural disasters
 continuation of peace
 Assumptions of this type are so general to the whole
economy that they need not be disclosed unless an
assumption has been made that is in conflict with
conditions that are generally understood to exist
Disclosure of Accounting Policies
 When the future-oriented financial information
incorporates a change in accounting policy the change
should be described and its effect disclosed
 When the entity intends to change an accounting
policy, a description of the change and disclosure of its
effect enables the user to understand the nature of the
change and its impact and to compare future-oriented
financial information with historical financial
statements
Other Disclosures
 When there is a change in accounting policy in future
orientated financial statements that is different from
previously released financial statements, these
changes should be disclosed.
 The discloser should enable users to understand the
impact and nature of these changes, and also enable
comparisons between future-orientated and previous
financial statements.
Other Disclosures
 For special Purpose future-orientated financial
information, the following should be disclosed:
 Identity of the intended users
 Purpose of the statements
 A cautionary note on the appropriateness of statements
(should only be used for purpose intended)
 Cannot be presented in a format that allows direct
comparison with actual results
Other Disclosures
 Projections should likewise state the purpose and a
cautionary note.
 For example, an introduction to a projection might
read, "This projection is designed to demonstrate the
earnings expected if the operating capacity were
increased fifty percent, and it may not be appropriate
for other purposes".
Conclusion
 It is critical to ensure all forecasts follow the handbook
as it provides reliability and transparency in the
financial statements
 Questions?