Intermediate accounting 17e by kieso ch24

Intermediate Accounting
Seventeenth Edition

Kieso ● Weygandt ● Warfield

Chapter 24
Full Disclosure in Financial Reporting

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Learning Objectives

After studying this chapter, you should be able to:

1.

Review the full disclosure principle and describe how it is implemented.

2.

Discuss the disclosure requirements for related-party transactions, post-balance-sheet events, major business segments,
and interim reporting.

3.

Identify the major disclosures in the auditor’s report and understand management’s responsibilities for the financial
statements.

4.

Identify reporting issues related to fraudulent financial reporting and financial forecasts.

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Preview of Chapter 24 (1 of 2)

Full Disclosure In Financial Reporting
Full Disclosure Principle

•

Increase in reporting requirements

•

Differential disclosure

•

Notes to the financial statements

Disclosure Issues

•

Related parties

•

Post-balance-sheet events

•

Diversified companies

•

Interim reports
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Preview of Chapter 24 (2 of 2)

Auditor's and Management’s Reports

•

Auditor's report

•

Management's reports

Current Reporting Issues

•

Fraudulent financial reporting

•

Internet financial reporting

•

Reporting on forecasts and projections

•

Criteria for accounting and reporting choices

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Learning Objective 1

Review the full disclosure principle and describe how it is
implemented.

LO 1

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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 Theranos highlight the difficulty of
implementing the full disclosure principle.

LO 1

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Full Disclosure Principle
Types of Financial Information

LO 1

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Full Disclosure Principle
Increase in Reporting Requirements

Reasons:

LO 1

•

Complexity of business environment.

•

Necessity for timely information.

•

Accounting as a control and monitoring device.

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Full Disclosure Principle
Differential Disclosure

•

“Big GAAP versus Little GAAP”.

•

FASB has traditionally taken the position that there should be one set of GAAP.

•

FASB is working with an advisory committee to explore ways that its standards
can be more cost-effective for all companies, regardless of size.

LO 1

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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 and followed.

•

Should present the disclosure as

o

first note or

o

separate Summary of Significant Accounting Policies section preceding the notes to the financial
statements.

LO 1

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Notes to the Financial Statements
Review Question

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.

LO 1

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Notes to the Financial Statements

Review Question - Answer

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.

LO 1

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Notes to the Financial Statements
Major Disclosures

Common Notes

•

Inventory

•

Property, Plant, and Equipment

•

Creditor Claims

•

Equityholders’ Claims

•

Contingencies and Commitments

•

Fair Values

•

Deferred Taxes, Pensions, and Leases

•

Changes in Accounting Principles

LO 1

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Learning Objective 2

Discuss the Disclosure Requirements for Related-Party Transactions, PostBalance-Sheet Events, Major Business Segments, and Interim Reporting

LO 2

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Disclosure Issues (1 of 25)

Disclosure of Special Transactions or Events

•

Related Parties

o

Nature of the relationship(s) involved.

o

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

o

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

o

LO 2

Amounts due from or to related parties.

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Disclosure Issues (2 of 25)
Review Question

If a business entity entered into certain related party transactions, it would be required to disclose all 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 statement of financial position presented.

LO 2

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Disclosure Issues (3 of 25)

Review Question - Answer

If a business entity entered into certain related party transactions, it would be required to disclose all 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 statement of financial position presented.

LO 2

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Disclosure Issues (4 of 25)
Post-Balance Sheet-Events (Subsequent Events)

1 - Events that provide additional evidence about

2 - Events that provide evidence about conditions that did

conditions that existed at the balance sheet date.

not exist at the balance sheet date.

LO 2

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Disclosure Issues (5 of 25)
Illustration: For each of the following subsequent 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.

______ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.
______ 2. Introduction of a new product line.
______ 3. Loss of assembly plant due to fire.
______ 4. Sale of a significant portion of the company’s assets.
______ 5. Retirement of the company president.
______ 6. Issuance of a significant number of ordinary shares.

LO 2

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Disclosure Issues (6 of 25)
Illustration: For each of the following subsequent 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 ordinary shares.

LO 2

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Disclosure Issues (7 of 25)
Illustration: For each of the following subsequent 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.

______ 7. Loss of a significant customer.
______ 8. Prolonged employee strike.
______ 9. Material loss on a year-end receivable because of a customer’s bankruptcy.
______ 10. Hiring of a new president.
______ 11. Settlement of prior year’s litigation.
______ 12. Merger with another company of comparable size.

LO 2

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Disclosure Issues (8 of 25)
Illustration: For each of the following subsequent 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.

LO 2

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Disclosure Issues (9 of 25)

Reporting for Diversified (Conglomerate) Companies
Investors and investment analysts want income statement, balance sheet, and cash flow information on the
individual segments that compose the total income figure.

LO 2

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Disclosure Issues (10 of 25)
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.

LO 2

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Disclosure Issues (11 of 25)
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).

LO 2

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