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Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 10
Corporate Governance, Notes to the
Financial Statements, and Other
Disclosures
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
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Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
After studying this chapter you should understand and be able to:
1. Discuss the significance of corporate governance.
2. Identify the types of financial reporting misstatements that have occurred in recent
years.
3. Explain why the notes are an integral part of the financial statements.
4. Discuss the kinds of significant accounting policies that are explained in the notes.
5. Describe the nature and content of various note disclosures.
6. Explain the role of the Securities and Exchange Commission and some of its reporting
requirements.
7. Explain why a statement of management’s responsibility is included with the notes.
8. Describe the significance of management’s discussion and analysis of the firm’s
financial condition and results of operations.
9. Identify what is included in the five-year (or longer) summary of financial information.
10.Discuss the meaning and content of the independent auditors’ report.
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Corporate Governance
LO1





Business ethics
Social responsibility
Equitable treatment of shareholders
Disclosures and transparency
Board of directors’ responsibility
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LO1
Corporate Governance
The most powerful legislation to date has been the Sarbanes–Oxley Act
(SOX) of 2002, which created the Public Company Accounting Oversight
Board (PCAOB) as the authoritative watchdog over the accounting and
auditing profession.
The SOX legislation was aimed
primarily to curtail the misbehavior
of senior management of corporate
entities: Chief executive officers
(CEOs) and chief financial officers
(CFOs) are required under SOX to
attest (in front of a notary) to the
correctness of their company’s
financial statements.
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The registrant must also report in a
separate section of its annual
10-K report any “Changes in and
Disagreements with Accountants on
Accounting and Financial Disclosure”
as an added measure of transparency
and management accountability.
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LO1
Corporate Governance
In response to the financial crisis of 2007–2008, Congress passed the
Wall Street Reform and Consumer Protection Act of 2010 (referred to as
the Dodd-Frank Act ). Although most of the act deals with financial
regulation, several Dodd-Frank provisions impose new corporate
governance rules not just on Wall Street banks but also on Main
Street public corporations.
Dodd-Frank Act contains the “say
on pay” mandate requiring periodic
shareholder advisory votes on
executive compensation and golden
parachute provisions.
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Dodd-Frank provision requires
companies to disclose the reasons
that they have chosen to have either
the same person or separate people
serve as the CEO and chairman of the
board.
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LO2
Recent Financial Misstatements
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LO2
Recent Financial Misstatements
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Notes to the Financial
Statements
LO3
Because of the complexities related to
financial reporting and because of the
number of alternative generally accepted
accounting principles that can be used,
explanatory notes are included as an
integral part of the financial statements.
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Notes to the Financial
Statements
LO4
Summary of Significant Accounting Policies
Typical accounting policies that are disclosed in the
notes to the financial statements include:
1.
2.
3.
4.
5.
6.
7.
8.
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Depreciation method used.
Inventory valuation method used.
Basis of consolidation of subsidiaries.
Reconciliation of taxes paid to tax expense.
The cost of employee benefit plans.
Treatment of goodwill and intangible assets.
Earnings per share information.
Stock option and stock purchase plans.
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LO4
Other Disclosures
1.
2.
3.
4.
5.
6.
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Accounting changes.
Business combinations.
Contingencies and commitments.
Events subsequent to the balance sheet date.
Impact of inflation.
Segment information.
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Depreciation Method
LO4
Sum-of-the-Years’Digits Method
Straight-Line
Method
Impact
of
Income
Declining Balance
Method
Units-of-Production
Method
Disclosure of the depreciation method permits
informed readers to make comparisons of
companies in the same industry.
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LO4
Inventory Valuation
FIFO
LIFO
WeightedAverage
Impact on Income Statement
and Balance Sheet
The selection of an inventory valuation method
influences the reported income and the inventory
amount shown on the balance sheet.
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LO4
Basis of Consolidation
The basis of consolidation disclosure requires that
consolidated financial statements include data
from substantially all subsidiary companies.
Parent
Company
$
$
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Subsidiary
Company 1
$
$
Subsidiary
Company 2
$
$
Subsidiary
Company 3
$
$
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LO4
Income Taxes
A reconciliation of the statutory income
tax rate with the effective tax rate.
GAAP is the set of
rules for preparing
financial statements.
The Internal
Revenue Code is
the set of rules for
preparing tax returns.
Results in . . .
Usually. . .
Results in . . .
financial statement
IRS income taxes
income tax expense.
payable.
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Employee Benefits
LO4
The cost of employee pension plans included as
an expense in the income statement is disclosed.
Present value of
additional benefits
related to projected
pay increases.
Present value of
nonvested benefits
at present pay
levels.
Present value of
benefits at present
pay levels.
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Projected Benefit
Obligation
Accumulated
Benefit Obligation
Vested Benefit
Obligation
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LO4
Intangibles Including Goodwill
When the balance sheet contains intangible assets,
including goodwill arising from business
acquisitions, the method of recognizing initial cost
will be described. Any amortization or impairment
in value of the intangibles must be shown.
Copyright
Trademark
™
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©
Patent
®
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LO4
Earnings Per Share
An explanation of the calculation of EPS
may include the details of the computation
of weighted-average number of common
shares outstanding and the adjustments
made to net income for preferred stock,
stock options, and convertible securities.
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LO5
Segment Information
Most large corporations operate in several
lines of business and operate in many
geographical areas.
Segment information should include:
1. Sales to unaffiliated customers,
2. Operating profit,
3. Capital expenditures,
4. Depreciation expense,
5. Identifiable assets.
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LO6
Reporting to the SEC
Instead of an annual report, companies that
are registered with the SEC file an annual
Form 10-K. The Form 10-K includes most of
the information in the company’s annual
report and must also comply with additional
SEC reporting requirements.
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LO7
Management’s Statement of
Responsibility
The company’s management bears ultimate
responsibility for the financial statements and notes,
not the auditors who express an opinion on the
fairness of the presentation of the financial
statements.
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End of Chapter 10
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