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					             Full Disclosure in
       24    Financial Reporting



   Intermediate Accounting
        14th Edition




                  Kieso, Weygandt, and Warfield
24-1
                           Learning Objectives
                           Learning Objectives
       1.   Review the full disclosure principle and describe implementation
            problems.

       2.   Explain the use of notes in financial statement preparation.

       3.   Discuss the disclosure requirements for major business segments.

       4.   Describe the accounting problems associated with interim reporting.




24-2
                      Full Disclosure Principle
                      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.




24-3      LO 1 Review the full disclosure principle and describe implementation problems.
                   Full Disclosure Principle
                   Full Disclosure Principle


                                                                       Illustration 24-1
                                                                       Types of Financial
                                                                       Information




24-4   LO 1 Review the full disclosure principle and describe implementation problems.
            Notes to the Financial Statements
            Notes to the Financial Statements

       Common Notes
        u   Inventory
        u   Property, Plant, and Equipment
        u   Creditor Claims
        u   Equityholders’ Claims
        u   Contingencies and Commitments
        u   Fair Values
        u   Deferred Taxes, Pensions, and Leases
        u   Changes in Accounting Principles

24-5                    LO 2 Explain the use of notes in financial statement preparation.
                        Disclosure Issues
                        Disclosure Issues

       Disclosure of Special Transactions or Events
        u   Related-party transactions

            ►   Nature of relationship.

            ►   A description of the transactions for each of the
                periods for which income statements are presented.

            ►   Dollar amounts of transactions for each of the
                periods for which income statements are presented.

            ►   Amounts due from or to related parties.

        u   Errors and fraud.

24-6                  LO 2 Explain the use of notes in financial statement preparation.
                           Disclosure Issues
                           Disclosure Issues

       Post-Balance Sheet-Events (Subsequent
       Events)                           Illustration 24-3
                                         Time Periods for
                                                                      Subsequent Events




        1 - Events that provide additional        2 - Events that provide
        evidence about conditions that            evidence about conditions that
        existed at the balance sheet date.        did not exist at the balance
                                                  sheet date.

24-7                    LO 2 Explain the use of notes in financial statement preparation.
                          Disclosure Issues
                          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.

       Meeting this objective will help users:

        a) Better understand the enterprise’s performance.

        b) Better assess its prospects for future net cash flows.

        c) Make more informed judgments about the enterprise as a
           whole.

24-8            LO 3 Discuss the disclosure requirements for major business segments.
                          Disclosure Issues
                          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).




24-9            LO 3 Discuss the disclosure requirements for major business segments.
                          Disclosure Issues
                          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.




24-10           LO 3 Discuss the disclosure requirements for major business segments.
                           Disclosure Issues
                           Disclosure Issues

        Identifying Operating Segments
        Quantitative Materiality Test: Must satisfy one to determine
        whether the segment is significant enough to warrant actual
        disclosure.
         •   Its revenue is 10 percent or more of the combined revenue of all the
             company’s operating segments.

         •   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.

         •   Its identifiable assets are 10 percent or more of the combined assets
             of all operating segments.
24-11
                                                                                    LO 3
                            Disclosure Issues
                            Disclosure Issues

        Identifying Operating Segments
        Quantitative Materiality Test: In applying these tests, the
        company must consider two additional factors.

          •   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.

          •   The FASB decided that 10 is a reasonable upper limit for the
              number of segments that a company must disclose.




24-12             LO 3 Discuss the disclosure requirements for major business segments.
                                                                                  LO 3
                             Disclosure Issues
                             Disclosure Issues
                                                                 Illustration 24-6
        Materiality Test Illustration                            Data for Different Possible
                                                                 Reporting Segments




          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.
24-13
                                                                                               LO 3
                             Disclosure Issues
                             Disclosure Issues
                                                              Illustration 24-6
        Materiality Test Illustration                         Data for Different Possible
                                                              Reporting Segments




        The 75 percent test is computed as follows.
          75% of combined sales test: 75% x $2,150 = $1,612.50. The sales of A,
          C, D, and E total $2,000 ($100 + $700 + $300 + $900); therefore, the 75
          percent test is met.


24-14              LO 3 Discuss the disclosure requirements for major business segments.
                                                                                   LO 3
                          Disclosure Issues
                          Disclosure Issues

        Segmented Information Reported
         •   General information about operating segments.
         •   Segment profit and loss and related information.
         •   Segment assets.
         •   Reconciliations.
         •   Information about products and services and geographic
             areas.
         •   Major customers.


24-15           LO 3 Discuss the disclosure requirements for major business segments.
                          Disclosure Issues
                          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.


24-16           LO 3 Discuss the disclosure requirements for major business segments.
                          Disclosure Issues
                          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.




24-17           LO 3 Discuss the disclosure requirements for major business segments.
                          Disclosure Issues
                          Disclosure Issues

        Interim Reports
        Cover periods of less than one year.

        Two viewpoints exist:

          •   Discrete approach

          •   Integral approach

        Companies should use the same accounting principles for
        interim reports that they use for annual reports.



24-18          LO 4 Describe the accounting problems associated with interim reporting.
                         Disclosure Issues
                         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


24-19         LO 4 Describe the accounting problems associated with interim reporting.
                           Disclosure Issues
                           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.


24-20           LO 4 Describe the accounting problems associated with interim reporting.

				
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