Financial Statement Presentation and Disclosures: A Realistic Approach
FSPD
Financial Statement Presentation and Disclosure
A Realistic Approach
By Gary A. Hotchkiss
Note - A great deal of care has gone into the preparation of these materials, however, errors of omission
and/or commission can and occasionally do occur. As such, prior to making any significant decisions based
upon the contents of this manual, it is strongly suggested that such guidance be confirmed through
reference to the original professional statement(s) underlying the subject matter referred to in this
particular session.
Copyright © 2014 by RealisticApproach Seminars, Inc.
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CHAPTER 1 – OVERVIEW – WHY SPEND A DAY GOING OVER FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE .................................................................................................... 7
PEER REVIEW FEEDBACK .......................................................................................................................... 7
USER FEEDBACK ....................................................................................................................................... 7
WHAT IS A FINANCIAL STATEMENT? ...................................................................................................... 12
WHAT ISN’T A FINANCIAL STATEMENT? ................................................................................................. 14
COMPARATIVE OR SINGLE-PERIOD PRESENTATIONS?............................................................................ 15
GAAP OR Special Purpose Framework (OCBOA)? ................................................................................... 16
FINANCIAL STATEMENT PREPARATION CONSIDERATIONS FOR OCBOA FINANCIAL STATEMENTS ......... 19
DISCLOSURES – HOW MUCH IS ENOUGH? .............................................................................................. 19 DISCLOSURES MADE ON THE FACE OF THE FINANCIAL STATEMENT ...................................................... 20 FOOTNOTES TO FINANCIAL STATEMENTS ............................................................................................... 22
CHAPTER 2 -- FORMATTING BASICS — GENERAL PURPOSE FINANCIAL STATEMENTS
FOR COMMERCIAL ENTITIES ............................................................................................................ 23
Formatting elements – Common Elements ............................................................................................ 23
Position Statement (Balance Sheet, Statement of Financial Position) .................................................... 23 General Balance Sheet Points to Consider .............................................................................................. 24
Flow Statement Number I — Income Statement Required Presentation Elements ................................ 27 GENERAL INCOME STATEMENT POINTS TO CONSIDER ........................................................................... 27
Flow Statement Number 2 — Statement of Cash Flows ......................................................................... 34 GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER .............................................................. 34 CASH FLOW STATEMENT DISCLOSURE FOR NON-CASH TRANSACTIONS ................................................ 37
RETAINED EARNINGS/SHAREHOLDER EQUITY STATEMENT ................................................................... 39
GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER .............................................................. 39
CHAPTER 3 -- FINANCIAL STATEMENT DISCLOSURES ............................................................ 41
Generally appearing on the face of the individual financial statement .................................................. 41
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Generally appearing in the body of the footnotes to the financial statements ...................................... 42 Summary of Significant Accounting Policies ............................................................................................ 42
Examples of Footnotes Commonly Occurring in Typical Financial Statements ....................................... 46 Cash and Cash Equivalents ...................................................................................................................... 46 Use of Estimates ...................................................................................................................................... 48 Income Taxes ........................................................................................................................................... 50 New Accounting Pronouncements .......................................................................................................... 55 Reclassification of amounts ..................................................................................................................... 59 Revenue Recognition ............................................................................................................................... 60 Property, Plant and Equipment ............................................................................................................... 63 Consolidation Policies .............................................................................................................................. 67 Inventories ............................................................................................................................................... 69 Nature of Operations ............................................................................................................................... 71 Accounts Receivable ................................................................................................................................ 73 Asset Impairment .................................................................................................................................... 75 Basis of Presentation ............................................................................................................................... 78 Fair Value Measurement ......................................................................................................................... 79 Financial Instruments .............................................................................................................................. 85 Goodwill ................................................................................................................................................... 90 Warranties ............................................................................................................................................... 94 Advertising ............................................................................................................................................... 96 Commitments and Contingencies ............................................................................................................ 97 Comprehensive Income ......................................................................................................................... 100 Research and Development ................................................................................................................... 101 Selling, General and Administrative Expense ........................................................................................ 102 Cash Flow Statement ............................................................................................................................. 103 Cost of Sales ........................................................................................................................................... 104 Equity and Cost investments ................................................................................................................. 105 Intangible assets .................................................................................................................................... 107 Leases .................................................................................................................................................... 109 Long-lived Assets ................................................................................................................................... 111 Marketable Securities ............................................................................................................................ 113 Pension Cost .......................................................................................................................................... 118 Related Party Transactions .................................................................................................................... 120 Subsequent Events ................................................................................................................................ 122
CHAPTER 4 -- SPECIALIZED INDUSTRIES ................................................................................... 123
CONSTRUCTION CONTRACTORS ........................................................................................................... 123
DISCLOSURES COMMONLY APPLICABLE TO CONSTRUCTION CONTRACTORS INCLUDE ........................ 123 REVENUE AND COST RECOGNITION ...................................................................................................... 123 CONTRACT RECEIVABLES ....................................................................................................................... 125 REVENUES, JOB COSTS, AND BILLINGS (WORK-IN-PROCESS) – BALANCE SHEET PRESENTATION......... 126
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NOTES PAYABLE (NOTHING REALLY UNIQUE TO CONTRACTORS – JUST A GOOD EXAMPLE) .......... 127 EXAMPLES OF TYPICAL CONTRACTOR FINANCIAL STATEMENTS........................................................... 128
NOT-FOR-PROFIT ORGANIZATIONS ...................................................................................................... 130 Nature of the Organization .................................................................................................................... 134 ACCOUNTING TREATMENT OF REVENUES AND EXPENSES ................................................................... 134 DONATED SERVICES, GOODS, AND USE OF FACILITIES .......................................................................... 135 Conditional promises to give ................................................................................................................. 135 Functional Allocation of Expenses ......................................................................................................... 135 Policies with respect to classification of net assets ............................................................................... 135
(Footnote disclosure as to further information with respect to ....................................................... 137 Organization policies regarding investments ........................................................................................ 137 EXAMPLES OF NOT-FOR-PROFIT FINANCIAL STATEMENTS ................................................................... 137
PERSONAL FINANCIAL STATEMENTS .................................................................................................... 145
EXAMPLES OF PERSONAL FINANCIAL STATEMENTS ............................................................................. 152
PROSPECTIVE FINANCIAL INFORMATION ............................................................................................. 155
POWER POINT HANDOUTS ............................................................................................................. 165
Today’s Topics...................................................................................................................................... 167
Why Spend a Day? ............................................................................................................................... 169
Protocol for Effective Presentation and Disclosure .............................................................................. 170
Characteristics of a Financial Statement .............................................................................................. 177
Special Purpose Framework (Other Comprehensive Bases of Accounting) ........................................... 180
Financial Statement Formatics ............................................................................................................. 182
Balance Sheet Formatics ...................................................................................................................... 190
Income Statement Formatics ............................................................................................................... 198
Comprehensive Income ....................................................................................................................... 207
Statement of Cash Flows Formatics ..................................................................................................... 215
Equity Statement Formatics ................................................................................................................. 228
What is Meant by “Disclosure” ............................................................................................................ 235
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Researching Presentation and Disclosure Matters ............................................................................... 240 Access the FASB ..................................................................................................................................... 241 Use the SEC – Access EDGAR ................................................................................................................. 259
Footnotes – Summary of Significant Accounting Policies ..................................................................... 274 Cash and Cash Equivalents .................................................................................................................... 278 Use of Estimates .................................................................................................................................... 279 Income Taxes ......................................................................................................................................... 280 New Accounting Pronouncements ........................................................................................................ 283 Reclassification of Amounts ................................................................................................................... 284 Revenue Recognition ............................................................................................................................. 285 Property, Plant and Equipment ............................................................................................................. 286 Consolidation Policies ............................................................................................................................ 288 Inventories ............................................................................................................................................. 290 Nature of Operations ............................................................................................................................. 291 Accounts Receivable .............................................................................................................................. 292 Asset Impairments ................................................................................................................................. 294 Basis of Presentation ............................................................................................................................. 296 Fair Value ............................................................................................................................................... 297 Financial Instruments ............................................................................................................................ 301 Goodwill ................................................................................................................................................. 305 Warranties ............................................................................................................................................. 306 Advertising ............................................................................................................................................. 307 Commitments and Contingencies .......................................................................................................... 308 Comprehensive Income ......................................................................................................................... 310 Research and Development ................................................................................................................... 311 Selling, General and Administrative Expenses ....................................................................................... 312 Cash Flow ............................................................................................................................................... 313 Cost of Sales ........................................................................................................................................... 314 Equity and Cost Investments ................................................................................................................. 315 Intangible Assets .................................................................................................................................... 316 Leases .................................................................................................................................................... 318 Other Long-lived Assets ......................................................................................................................... 319 Marketable Securities ............................................................................................................................ 320 Pension Cost .......................................................................................................................................... 325 Related Party Transactions .................................................................................................................... 327 Subsequent Events ................................................................................................................................ 328
REALISTICAPPROACH SEMINARS, INC. EMAIL INFORMATION .......................................... 329
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CHAPTER 1 – OVERVIEW – WHY SPEND A DAY GOING OVER
FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE?
FAMILIARITY BREEDS CONTEMPT (AND ALLOWS FOR ERROR)
PEER REVIEW FEEDBACK The number-one source of findings in off-site (report and engagement) peer reviews is financial
statement presentation (formatics) and disclosure (on both the face of the financial statement
and as separate footnotes). Failure of quality control systems to check for presentation and
disclosure errors and/or omissions or other defects in either presentation or disclosure is also a
major driving factor in findings noted in on-site (system) peer reviews. This problem is chronic in
public accounting practices, and since the financial statements are (technically) the product of
the client entity, it is a logical conclusion that this topic is a formidable issue for professional
accountants in industry as well.
USER FEEDBACK All too often financial statements, and related disclosures, are designed based upon user needs
as perceived by the preparing accountant. From the perspective of the major generic user
groups (management, investors, creditors), the preparing accountant is a tangential user, at
best. A central theme that will be presented today is that financial statements should be
designed to meet the needs of the user(s) of the financial statements. Professional standards,
and general usage, allow substantial leeway in financial statement formatics. There are really
very few requirements that professional standards places on how any given financial statement
should be laid out. There are certain totals and sub-totals that are required for a given class of
financial statement, and in some cases a minimum level of detail is prescribed by the standards.
However, even in those cases, there is significant latitude insofar as specific compliance with
requirements is concerned.
The need for a preparing accountant to survey and develop a user-needs list is generally
inversely proportional to the sophistication of the client and/or intended users of the financial
statements. In very sophisticated environments, such as in the public company realm, users
such as regulatory bodies and potential investors have very clearly defined expectations with
respect to the form and content of financial statements prepared for their use. Professional
judgment must still be exercised in the preparation of such financial statements regarding
adequacy of disclosure for the intended use of the financial statements, but many of the more
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routine sufficiency decisions have been made by the user(s), and compliance become a major
issue for the preparing accountant.
The less sophisticated user of financial statements, on the other hand, may present without the
slightest idea of the potential benefits provided by presenting the same data in alternate ways.
There are at least three reasons why professional accountants (with no malice intended) can
provide substandard services to the unsophisticated user:
1. The user has no frame of reference, or
2. The user does not use the financial statements provided by the accountant because
a. They are not familiar with the financial presentation, or
b. The information is presented in a format that is other than what the user is used
to.
3. The financial statements are not critically reviewed by a professional accountant, such
as
a. Technical review within the practice unit, and/or
b. Peer review.
These users have little or no idea of options available to them as it relates to financial reporting.
This lack of knowledge could run from what basis of accounting (financial reporting framework)
is most appropriate for the circumstances to whether or not any disclosures should accompany
the financial statement package. It is in these situations that the professional accountant should
step forward and provide the necessary inputs that will result in financial statements that meet
the various needs of the intended users of those financial statements. Very often, well-
intentioned accountants overlay formatic and disclosure decisions without consultation with
any user at all. Such an approach often results in the intended user relegating those financial
statements to a file or desk drawer with little or no review, let alone study. Lack of perceived
utility of financial statements is a major reason for fee resistance by clients, or criticism of the
accounting department (ever hear the term “bean-counters” used to refer to your department)
by other areas within your company.
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To summarize the preceding matters, there are three considerations that go into the effective
presentation and disclosure of financial statements:
1. Appearance,
a. Counts – even if your unsophisticated client or user doesn’t say anything, if it is
bad enough, they will notice,
b. Feedback as to appearance is limited with the unsophisticated user, but if they
get negative feedback, you will hear about it.
2. Approach, and
a. A compliance approach to financial statement presentation and disclosure is
predicated on “what’s the least I have to do” (to get this thing billed)? A
compliance approach is looking for the minimum, and affects both the provider
and consumer
i. The provider is looking for the least amount of effort that will be
acceptable, and
ii. The consumer (user) is focused on the least that he or she will have to
pay for a given service
b. A value added approach focuses on providing the best professional service that
is possible on a practicable basis in a manner that distinguishes the provider
from the competition. Value added presumes there is more to value than cost.
3. Acceptance is a user perception that relates directly to appearance and approach, and
manifests itself in the form of a
a. Commodity product – this view holds that there is no difference in who does the
work; cost is the central factor in client retention decisions.
b. Custom product – this view holds that the user is getting something that is
tailored to their special needs, something that is unique to this accountant.
Clients who believe that their “special” needs are being met by a particular
accounting firm have a much greater chance of staying with that accountant,
and they tend to be less fee resistant than users looking for a commodity
product.
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The process of getting up to speed with respect to user needs is really quite simple, but an
orderly approach to the task is advisable. One such protocol might include the following four
steps:
1. Identify the principal users of the financial statements. Inquiries of management of
the organization, and/or review of previously distributed financial statements are
the two most common techniques for meeting this goal.
2. Determine key points with each user. A couple of approaches to the discovery of
user “hot-buttons” include:
a. Identification of documentation that delineates user needs. This is most
often the case in the case of lenders. The loan documentation may actually
prescribe the applicable financial reporting framework (basis of accounting),
and sometimes the expected frequency and level of detail expected by the
user.
b. Alternatively, posing questions such as — ‘What do you look for when you
review this company’s financial statements”, or “What would you like to get
from these financial statements” will garner insight to level of detail, basis,
and materiality expectations of various users.
3. Provide options in formatics to the user. These options might include such items as;
differing levels of line-item detail, rounding amounts, comparative vs. single-period
presentations, supporting schedules (supplementary information), or optional
approaches to presentation such as use of the direct or indirect method of
presenting cash from operations in the cash flow statement. Some options that
may be presented to the lesser sophisticated client include matters related to:
a. An effective cash flow presentation,
b. Cost-Volume-Profit analysis,
c. Variance analysis,
d. Different levels of detail,
e. Use of charts and/or graphic presentations.
4. Obtain consensus from the financial statement users. However, remain open to
changing user expectations. One of the hallmarks of good financial statements is
that users actually use the financial statements in their day-to-day decision making
process. When financial statements are actually used, users will become aware of
refinements that could improve the effectiveness of the information from their
perspective. The refinements might manifest themselves as requests for more
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timely presentation, recasting of formats (provision of a cost-volume-profit
approach to income presentation vs. traditional full-absorption income statements),
or modification of disclosure within the financial statement package.
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WHAT IS A FINANCIAL STATEMENT?
A basic issue in financial statement presentation concerns the determination of what constitutes
a financial statement in the first place. Presentations that do not meet the definition of financial
statements are supporting schedules or possibly supplementary information. This distinction
becomes important when an external accountant is involved in preparation and/or attestation
with respect to the financial presentation.
Statement on Standards for Accounting and Review Services (SSARS) No. 1, Compilation and
Review of Financial Statements, provides probably the best definition of what constitutes a
financial statement when it states that a financial statement is a:
1. Presentation of (principally) financial data, including accompanying notes. This is a
disclosure requirement that encompasses all elements of disclosure as defined in
professional standards:
a. Level-of-detail,
b. Parenthetic
c. Footnote
i. Summary of Significant Accounting Policies
ii. Standard Required,
iii. Generic (such other disclosure as may be necessary to prevent the
financial statements from being misleading)
2. Derived from accounting records (regardless of their level of formality),
3. Intended to communicate an entity’s economic resources or obligations at a point in
time, or the changes therein for a period of time, and
4. In accordance with” a financial reporting framework (basis of accounting).”
a. Generally Accepted Accounting Principles, or
b. An acceptable “other-comprehensive-basis-of-accounting” (now referred to as a
Special Purpose Framework - SPF)
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This definition, while brief, has some very interesting attributes:
Financial statements include notes as an integral part of the document. Therefore, the
default situation is that footnotes will always be an integral part of a set of financial
statements.
Development of financial statements begins with accounting records. General practice
has been very liberal in its definition of what constitutes “accounting records”. A check
register, shoe-box of receipts, and notes on the back of envelopes may be sufficient to
meet this definitional requirement. The implication in this aspect of the definition is that
(independent) support exists, at some undefined level of detail, for what appears in the
financial statement. An abstraction of this aspect of the definition provides a
justification for the summarization and rounding that transpires during the financial
statement development process.
Financial statements are produced with the intent to communicate the resources and
obligations of a given business entity either at a point in time or changes in those
resources and/or obligations over a period of time. This aspect of the definition speaks
to the issue of comprehensiveness of a given financial statement. The definition tells us
that financial statements:
o Are geared to an entity-wide perspective, and that
o The purpose is either
A snapshot (balance sheet) at a particular point in time or
A flow-summary of changes for the entity for a given period of time
(retained earnings statement, income statement and cash flow
statement).
The last aspect of the definition addresses the idea that a financial statement is produced in
accordance with a recognized financial reporting framework (basis of accounting). Financial
statements have utility to users only if users understand the assumptions that underpin the
financial statements.
This is the whole justification for generally accepted accounting principles (GAAP). GAAP is the
default basis for general purpose financial statements. GAAP is a set of “standard” rules that a
user can access when that user has no special entrée into a company’s unique operating
characteristics. GAAP provides a standard “benchmark” for financial statement readers.
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Other Comprehensive Bases of Accounting (OCBOA) are other bases of accounting that have
wide general acceptance, and many users have a working knowledge of such bases. Professional
standards note that if a user has
1. Access to decision makers in the company, and
2. Reasonable expectation of obtaining a response to questions regarding the financial
statements,
The financial statements need not be prepared in accordance with GAAP.
Later on in the session OCBOA will be a topic of discussion.
WHAT ISN’T A FINANCIAL STATEMENT? It is highly suspect that any financial presentation that does not meet the definition of a
financial statement as presented in the preceding section is a financial statement in fact. As
stated earlier, whether or not a financial presentation is a financial statement is significant when
external accountants are involved. This significance diminishes significantly for internally
produced financial statements. However, the distinction and treatment of financial
presentations other than financial statements is significant to all professional accountants
involved in the preparation of financial statements.
Just because a financial presentation does not meet the criteria of a financial statement, that
presentation is not, by definition, inferior to a financial statement. In fact, many users focus
more on presentations that are not financial statements.
Generally, information that does not meet the definition of a financial statement is referred to
as a “schedule”. Schedules may provide additional detail of line items reflected in a financial
statement. An example of a “supporting schedule” might be a detail of the components of cost-
of-goods-sold. While this summarized amount is appropriately reflected in an income statement
as a single line item, many users have an interest in the components (beginning and ending
inventories, purchases, labor, overhead) that are reflected in the line item. Notice, that this
schedule “fails” the test of being a financial statement in that it does not describe flows (costs
accumulated over the reporting period) for the entity as a whole, but merely for one of many
types of costs incurred by the entity. This type of schedule is commonly referred to as
supplementary information. Supplementary information is used very often in the presentation
of financial information because its distribution is discretionary on the part of the financial
statement producer. Bases of accounting prescribe what constitutes “basic financial
statements”. Users of financial statements (generally) expect that they will receive a complete
set of basic financial statements (and any additional disclosures thereto), or be told that certain
elements of what constitutes a complete set of basic financial statements has not been provided
by the organization. Supplementary information is not defined as part of a basic set of financial
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statements, and as such any given user might not be provided with supplementary information
without violating any basic financial statement conventions. In actual practice some users will
get (certain) supplementary information and others will not, as the situation dictates. Recall the
discussion on user needs and expectations. There is one complicating factor regarding
supplementary information, namely, if reference is made to a supporting schedule
(supplementary information) in the body of the financial statements (“see supporting schedule
A” on a particular line, for instance) then that supporting schedule becomes an integral part of
the basic financial statements. Remember, users believe that they are getting a complete set of
the basic financial statements unless they have been told otherwise. Also, the direct reference
in the financial statements (or notes thereto) alerts the user to the existence of the additional
information.
COMPARATIVE OR SINGLE-PERIOD PRESENTATIONS?
Professional standards, contrary to a popular misconception, do not require the presentation of
comparative financial statements. Accounting Research Bulletin No. 43 states that it is
“ordinarily desirable” to present comparative basic financial statements, because such a
presentation “enhances the usefulness” of such information to users. Certain regulatory bodies
require that any submission destined for distribution to their agency be presented in a
comparative format. This is just another permutation of the user-expectation discussion noted
on page 10 of this manual.
When presenting comparative financial statements, disclosures in the financial statements and
notes thereto must be comparative as well. The chapter in this session that addresses the topic
of disclosure notes that disclosures appear on both on the face of the financial statement, as
well as in the notes thereto. Comparative financial statement presentations must reflect all
disclosures, regardless of where they appear, in comparative form. This means, for example,
that the line-item parenthetic disclosure of the balance of the allowance for doubtful accounts
(an example of a disclosure made on the face of a financial statement) must include all periods
presented for comparative purposes. This requirement also means that the five-year maturity
schedule provided for debt must encompass five year maturities for all of the years presented
for comparative purposes, not just the most recent year presented.
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GAAP OR Special Purpose Framework (OCBOA)?
General Aspects of GAAP and Special Purpose Frameworks (OCBOAs)
The basis of accounting, as stated earlier, is the “benchmark” that a user references when he or
she reads financial statements. When GAAP is the basis of accounting used, the user can make
certain assumptions based on the “rules” promulgated by that basis. Such rules or standards
enable a user to make (standards based) presumptions such as; Fixed assets are stated at cost,
or If any long-term assets were impaired there would be impairment valuation allowances
reflected/disclosed in the financial statements, or The financial statements have been updated
for any significant subsequent events that might have occurred after the financial statement
date, but prior to the financial statement issuance date. GAAP is the default basis of accounting.
GAAP is generally the appropriate basis for financial statements that are going to be distributed
to the general public. GAAP has some definite drawbacks arising principally because of its
generic-audience attribute. GAAP disclosures are quite extensive, understandably, because of
the breadth of interests of potential users comprehended in general distribution. Many of the
disclosures, and accounting treatments required in GAAP have limited significance to more
specifically targeted financial statement users.
While efficiencies in accounting issues and disclosures are not as great as some would like to
believe, there are certain circumstances where a financial reporting framework (basis of
accounting) other than GAAP, referred to as a Special Purpose Framework (SPF), offers potential
efficiencies in financial statement preparation without sacrificing (and sometimes enhancing)
utility to identified users. Professional literature (Statement on Auditing Standards No. 62,
Special Reports) recognizes that there are comprehensive bases of accounting other than GAAP
that enjoy a wide following in the financial statement user community. These other bases are
referred to as “other comprehensive bases of accounting”, and the acronym associated with the
defined bases is “OCBOA”. Currently there are only four defined OCBOAs — Three of the
defined OCBOAs are basis-specific, and the forth is a generic definition that has given rise to
only one, rarely seen, candidate. The three defined bases are:
1. Regulatory or Statutory basis,
2. Income Tax basis, and
3. Cash basis.
The generic definition suggests that price-level (inflation accounting — not to be confused with
fair-value accounting) accounting might meet the test for being an OCBOA. In practice, and
covered in this session, most non-GAAP financial statements are either income tax or cash basis
presentations.
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Cash basis financial statements are generally a viable option to an entity that does not have
inventory, receivables, or payables. This is a very limiting requirement, but many service entities
may qualify for use of this basis. A lot of professional entities use the cash basis for financial
statement purposes even though they have receivables and payables. Memo records are
maintained for receivables and payables, but the balances and changes in those balances are
not reflected in the financial statements. If these balances are not significant, and changes in
these balances are not significant, then the use of the cash basis would not be prohibited by
professional standards. Very rarely would any entity, except for some very basic not-for-profit
organizations, qualify as a true cash basis candidate. Even if an organization did qualify, the true
cash basis financial statements would have limited utility in that the position statement would
be made up solely of cash and equity (net assets in the not-for-profit scenario). The flow
statement (income statement) would summarize cash receipts for revenues (all cash receipts
presumed to be revenues or owner contributions) and cash disbursements (all cash
disbursements presumed to be either operational or distributions to owners). In practice, most
cash basis entities are actually using a basis referred to as the “modified cash basis”. The
modified cash basis allows entities to reflect transactions that might not be considered to be
cash-basis in a strict sense of the term. Cash basis financial statements that are actually
modified cash basis financial statements might include line items such as:
Fixed assets and attendant debt.
Payroll taxes accrued and payable.
Certain limited prepaid items.
Professional literature that discusses the cash basis of accounting stresses that less-is-best when
it comes to non-cash transactions. In fact, the literature notes that inclusion of too many
(undefined term) non-cash transactions results in incomplete GAAP financial statements. The
point where this line is crossed is a matter of professional judgment. While there is a theoretical
difference between cash basis and modified cash basis financial statements, professional
standards does not state that inclusion of non-cash transactions results in another OCBOA –
“modified cash basis”. The resulting financial statements are still cash basis. Financial
statement preparers may prefer to refer to such financial statements as “modified cash basis”
(nothing in professional literature proscribes this language), but professional literature does not
require the usage of such terminology.
Income tax basis financial statements are financial statements that are prepared on the same
basis as that used by the entity in the filing of its actual (Federal) income tax return. The income
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tax basis of accounting is especially attractive to entities that have relatively restricted
distribution of financial statements and no users have expressed a need for data or disclosures
that only GAAP provides. In fact, many users are more informed concerning federal income tax
conventions than they are GAAP requirements, making the use of the income tax basis an
attractive option in such cases. Adoption of the income tax basis eliminates the need in many
organizations to maintain two sets of records — one to be compliant with tax regulations and
one to comply with GAAP. Income tax basis financial statements must be developed using the
same assumptions as actually used in the preparation of the entity’s federal income tax return.
If the entity uses an approach allowed for tax return purposes, but different from what the
entity actually took on the applicable tax return, this constitutes a departure from the income
tax basis. For example, if the entity is a cash basis taxpayer for federal income tax basis, it
cannot presume that it is an accrual basis taxpayer for financial statement preparation purposes
(without disclosing this departure from the income tax basis of accounting). Generally speaking,
the level of detail in income tax basis financial statements should be no more summarized than
that required on the face of the appropriate federal form. Level of detail can always be greater
than minimum levels, but caution should be exercised when considering summarization below
that of minimum guidelines.
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FINANCIAL STATEMENT PREPARATION CONSIDERATIONS FOR OCBOA
FINANCIAL STATEMENTS
Titling of financial statements prepared using an OCBOA has been an issue with accountants for
some time. Professional standards requires that financial statements prepared in accordance
with an OCBOA must be clearly titled so that a user would not be misled into believing that the
financial statements were GAAP financial statements. The literature goes on to state that
unmodified titles such as balance sheet or income statement should be restricted to GAAP
financial statements only. However, the same interpretation goes on to state that modification
of those “protected” titles was acceptable. Therefore, financial statement titles such as; balance
sheet -- Income Tax Basis, or Income Statement — Cash Basis are perfectly acceptable in
accordance with current professional literature.
Some professional accountants are of the opinion that if financial statements are prepared on a
basis other than GAAP, then disclosure requirements are vastly reduced. This is an untrue
belief. Professional standards puts forth a concept referred to as the “contemporaneous
counterpart” concept that quite simply states that if an OCBOA financial statement shares a
disclosure concern with a financial statement prepared in accordance with GAAP, then the
OCBOA financial statement has (essentially) the same disclosure requirement.
There are some disclosure efficiencies that inure to OCBOA financial statements. For example,
only GAAP requires that a cash flow statement be presented as a basic financial statement.
Another example of disclosure efficiency relates to disclosures surrounding income taxes.
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
requires significant disclosures relative to deferred income taxes. Financial statements prepared
using the income tax or cash bases do not have a deferred counterpart, and SFAS 109 disclosure
requirements regarding deferred income taxes are not applicable. However, the SFAS contains
other disclosure requirements that include disclosures related to income tax liabilities, and
carry-forwards. These disclosure requirements are applicable to cash and income tax basis
financial statements.
DISCLOSURES – HOW MUCH IS ENOUGH?
The usual discussion of disclosure issues generally entails at least two areas:
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1. Disclosures are made on the face of each financial statement, and
2. Additional disclosures are (usually) made in the form of footnotes to the financial
statements.
As discussed earlier in this chapter, the default supposition (regardless of the financial reporting
framework (basis of accounting) employed) is that all disclosures appropriate to a particular set
of financial statements are included within those financial statements. Omission of any
disclosure in a financial statement (intended for internal and/or external distribution) should
only be considered if there is a high level of certainty that known users are already adequately
informed with respect to the omitted disclosure(s). This is a high threshold to overcome.
DISCLOSURES MADE ON THE FACE OF THE FINANCIAL STATEMENT
Many accountants do not associate the face of any given financial statement with the topic of
disclosure. Actually, two types of disclosure occur on the face of the financial statement:
1. Individual line item descriptions (Level-of-Detail) and
2. Parenthetic additional disclosures that appear on the face of the financial statement.
Actually the topic of level-of-detail in the development of the form that a financial statement
will take is actually a disclosure issue. The level of detail reflected in a financial statement should
be a function of user expectations. A common myth in financial statement development is that
“one size fits all”. The level of detail embodied within a financial statement should speak directly
to a defined user need. Financial statements provided to an operating unit within an
organization might need to be presented at the general ledger level of detail to be useful for
purposes of comparison with budgeted inputs and outputs. The results of operations of that
same unit might be presented at a highly summarized level for review by senior-level
management. The level of detail presented is a disclosure issue. Closely related to this is the
line-item description, itself. The line-item descriptions should clearly describe the particular
financial statement element in unambiguous terms. For example, the term “Fixed Assets, Net”
might be an adequate description and level of summarization at a high level within an
organization. Other users, such as a lender to who has a lien on certain of those fixed assets,
providing security for loans it has made to the company, will want to see more descriptive, less
summarized, line-item titles that allow them to identify areas of particular interest.
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Another aspect of disclosure made on the face of a financial statement entails “parenthetic”
addenda to line-item descriptions. This is an important source of information in a financial
statement, and attention should be paid to what is disclosed parenthetically such that it
efficiently conveys information to a user without unduly cluttering the face of the financial
statement. Disclosure in the notes to the financial statements is an option to parenthetic
disclosure. Parenthetic disclosures are commonly used when net amounts are extended to
amount columns in a financial statement. An example of this type of disclosure is the allowance
for un-collectible accounts provided for trade accounts receivable. Other parenthetic disclosures
are made to supplement information pertinent to a given line-item. An example of this type of
parenthetic disclosure would be the additional disclosures customarily made on the common
stock line item.
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FOOTNOTES TO FINANCIAL STATEMENTS
The issue of whether or not footnotes should accompany financial statements has been a
question that has vexed professional accountants for some time — at least as long as SSARS has
been around (1978). The answer to this particular question is an unequivocal “it depends”. Like
so many issues encountered in the profession of accounting, answers to questions surrounding
footnote disclosures (as well as other disclosures) depend on situational facts and
circumstances. Professional standards define three broad categories of circumstances and/or
events that require footnote disclosure:
1. Summary of Significant Accounting Policies,
2. Professional standards prescribe certain financial statement disclosures that are
required by specific standard(s). Because the standards specifically discuss these
required disclosures, compliance with those disclosure requirements is not particularly
difficult. Disclosures in this category include areas such as;
a. Use of Estimates, Financial dependencies, and
b. Related Party Transactions.
3. The more difficult type of footnote disclosure to identify occurs in the category of “such
other disclosures as necessary to prevent the financial statements from being
misleading.” The use of professional judgment by the preparing professional
accountant is particularly important when he or she seeks to ascertain that the financial
statements and additional disclosures thereto meet this category of user expectation.
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CHAPTER 2 -- FORMATTING BASICS — GENERAL PURPOSE
FINANCIAL STATEMENTS FOR COMMERCIAL ENTITIES Formatting elements – Common Elements
1. Financial statements must be titled, and the titles must disclose the following (order is
not prescribed by professional standards)
a. Name of Entity
b. Title of Financial Statement
c. Date of, or period of time encompassed by, the financial statement
2. Comparative financial statements are encouraged by GAAP, but are not required.
However, if the financial statement preparer chooses to present comparative financial
statements, then all disclosures must be comparative as well. This requirement applies
to disclosures made on the face of the financial statement, as well as to the footnotes.
So, for instance, parenthetic disclosure of the allowance for doubtful accounts, or status
of capital stock elements, must address all dates presented for comparative purposes. If
the balance sheet is accompanied by footnotes, general practice indicates that there
should be a reference to the footnotes in the form of a “tombstone” at the bottom of
the financial statement page.
3. If the financial statement has been compiled or reviewed by an external public
accountant, professional standards require that the tombstone include a reference to
the accountant’s report. While not specifically required by professional standards per
Se, most audited financial statements also include a reference to the auditor’s report as
a tombstone, as well.
4. Financial statements prepared in accordance with GAAP need not refer to specific
footnotes at the line-item level. Certain regulatory agencies prefer that submissions to
their agencies have specific line-item references to the footnotes, but this is a user
imposed requirement. Some financial statement preparers think that such referencing
makes the financial statement easier to work with, and increases the probability that
certain disclosures will be read by users. Do note, however, that referencing to
supplementary information makes that supplementary information an integral part of
the basic financial statements. This can have significant reporting ramifications for
external accountants.
5. Beginning amounts, terminal amounts are generally in preceded by a dollar sign.
6. Terminal amounts and balancing totals are generally indicated with a double
underscore.
7. Subtotals are usually indicated with single underscores.
Position Statement (Balance Sheet, Statement of Financial Position)
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General Balance Sheet Points to Consider:
1. Appropriate titles include Balance Sheet, and Statement of Financial Position, provided
the financial statement is presented in accordance with generally accepted accounting
principles. If the basis is other than GAAP, those two titles should not be used.
However, provided the applicable financial reporting framework (basis of accounting) is
clearly disclosed (as part of the financial statement title, such as” Balance Sheet —
(state the name of the framework, such as Cash Basis)” the terms are acceptable forms
of titling this OCBOA financial statement.
2. There is no requirement in GAAP that a classified balance sheet be presented.
a. If an unclassified balance sheet is presented, then assets must be listed in order
of liquidity, and liabilities must be presented in order of their maturities. This is
not an easier approach to presenting a statement of financial position — just
one for-instance -- if long term debt exists in an organization, it may have to
appear several times within a given statement if there are other liabilities that
have maturities that occur within the amortization period of the debt.
b. When a classified balance sheet is presented, it must include two subtotals:
Total Current
i. Assets, and
ii. Liabilities
3. Format can be over-and-under, also known as “portrait” (assets over liabilities and
equity), or side-by-side, “landscape” (assets on the left-hand side of the sheet, liabilities
and equity on the right-hand side of the sheet). If the financial statement takes up more
than one page, the pages should be assembled so that they are facing each other in the
presentation. When this is the case, one financial statement title can be “shared” by
each page, as well as one tombstone. However, if the pages do not face each other,
then there should be some continuity reference that alerts a reader that the financial
statement consists of multiple pages. This might be accomplished with a reference at
the bottom of the first page such as “continued on page XX”, and the title of the second
page including a disclosure such as “Balance Sheet — Continued). If the financial
statements do not face each other (and comprise a complete presentation), generally
speaking there should be separate tombstones on each page.
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BALANCE SHEET
As of December 31,
2008 2007
ASSETS
5,096$ -$
2,429,185 2,750,801
1,439,218 1,226,258
170,478 167,500
4,043,977 4,144,559
1,435,506 1,048,717
(470,204) (330,804)
965,302 717,913
56,622 45,677
56,622 45,677
5,065,901$ 4,908,149$
-$ 253,070$
832,518 1,000,005
110,332 189,443
484,826 6,836
21,873 832,944
1,574,075 282,086
3,023,624 2,564,384
714,546 713,873
3,738,170 3,278,257
490,000 490,000
837,731 1,139,892
1,327,731 1,629,892
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 5,065,901$ 4,908,149$
See Accompanying Notes and Accountants' Compilation Report
shares outstanding
Retained Earnings
LONG TERM DEBT, LESS CURRENT PORTION
TOTAL LIABILITIES
STOCKHOLDERS EQUITY
Common Stock, no par value, 100,000,000 shares
authorized and 500,000 shares issued and 500,000
TOTAL ASSETS
Current Liabilities
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft
Trade Accounts Payable
Sales Tax Payable
Accrued Expenses
Other Liabilities
Current Portion of Long Term Debt
Fixed Assets
Accumulated Depreciation
Cash
Trade Accounts Receivable
Inventories
Prepaid Expenses
Current Assets:
Deposits
OTHER ASSETS
CURRENT ASSETS
FIXED ASSETS
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Flow Statement Number I — Income Statement Required Presentation
Elements
GENERAL INCOME STATEMENT POINTS TO CONSIDER:
1. Income statement preparers should not present revenue net any significant amounts,
such as discounts, on the face of the income statement without disclosure. It is not
correct to net sales with sales returns and not disclose the amount by which (gross)
sales has been reduced. Normally this is a parenthetic disclosure.
2. The income statement should reflect expenses at a level of detail appropriate for the
intended user. Line items, such as, cost of sales, or selling, general and administrative
expenses many times appear as line items without any further detail. This is not an
incorrect presentation provided that the intended user is not be misled by omission the
detail of the significant components of these elements. Supplementary information may
be used to provide necessary details (remember that if an external accountant is going
to report on the financial statements the report must address any accompanying
supplementary information), but if the information is referred in the body of the
financial statements or notes thereto, the information then becomes an integral part of
the basic financial statements.
3. Unusual or Infrequently Occurring items must be given line item status on the face of
the financial statement. The FASB has purposefully tried to make extraordinary items a
thing of the past. However, they do recognize that quite often one, but not both, of the
criteria for determining an item to be extraordinary are situationally met. In such
situations, subject to materiality considerations, professional standards clearly requires
line-item status for disclosure of such items. Some examples of events that might qualify
include floods, fire damage, theft losses, and business interruptions.
4. Gains and/or Losses are different from revenues and expenses. Gains and/or losses are
ancillary to the operations of the organization. Another potential plus to something
being deemed a gain or loss is that GAAP allows such transactions to be netted, as
opposed to the general rule of never netting elements of revenue and expense.
Circumstances vary, and financial statement preparers should thoroughly research each
situation, according to its unique facts and circumstances, before netting elements that
go into the reported gain or loss.
5. Income from Continuing Operations before Income Taxes — this is one of the “required”
subtotals that should be present on the face of an income statement. This subtotal is
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the difference between revenues, cost-of-sales, selling general and administrative
expenses, as well as any gains and or losses.
6. Income Tax Expense appears directly below income from continuing operations before
income taxes, and reflects all components of income tax applicable to the entity in light
of the financial reporting framework (basis of accounting) used for preparing the
financial statements. It is not correct to presume that there is no requirement to reflect
income taxes and disclosures thereto if the framework (basis of accounting) is other
than GAAP. GAAP does require the use of deferred tax accounting, and the other bases
do not, but there are other elements of income taxes that are common to all of the
bases (carry forwards, payable/receivable amounts) that must be reflected in each.
7. Income from Continuing Operations is the difference between income from continuing
operations before income taxes and income tax expense. This amount should not be
confused with net income. Net income and income from continuing operations may be
the same when there are no below-the-line items included in the financial statements.
8. Currently, professional standards allows for three types of “below-the-line” items
a. Discontinued operations/Disposal of a Segment
b. Extraordinary items
c. Changes in Accounting Principle
9. Net Income appears once in the body of an income statement. It (used to be) is the
“bottom line” at the end of the day. However, there is now a line below the bottom line
that is entitled “Comprehensive Income” that is discussed in more detail later in the
session.
10. Six elements (to the extent they exist) must be disclosed regarding income statement
matters:
a. Revenues or,
b. Cost of Sales, and
c. Gross margin, and
d. Income from Continuing Operations, and
e. Income tax Expense, and
f. Net Income (if there are no below-the-line items)
g. Below-the-line-items
i. Discontinued Operations/Disposal of a Segment
ii. Extraordinary Items, and
iii. Changes in Accounting Principle
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Typical Company, Inc.
STATEMENTS OF INCOME AND CHANGES IN RETAINED EARNINGS
For the Years Ended December 31,
2008 2007
16,333,643$ 12,916,911$
(87,139) (47,774)
16,246,504 12,869,137
(9,460,815) (6,373,896)
6,785,689 6,495,241
(6,493,219) (5,332,033)
292,470 1,163,208
23,680 733
(151,809) (113,307)
- 513,307
- (304,168)
164,341 1,259,773
(21,118) (250,437)
143,223 1,009,336
1,139,893 530,102
- (117,830)
(445,385) (281,715)
837,731$ 1,139,893$
See Accompanying Notes and Accountants' Compilation Report
Beginning Retained Earnings
Net Income
Sales
Returns & Allowances
Net Sales:
Cost of Goods Sold
Gross Income:
Abandonment of assets
Proceeds from lawsuit
Income taxes
Selling and G&A Expenses
Income From Continuing Operations
Interest Income
Interest Expense
Income From Continuing Operations
Loss on Sale of Treasury Stock
Dividends Paid
Ending Retained Earnings
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Flow Statement Number 1A — Comprehensive Income
GENERAL COMPREHENSIVE INCOME STATEMENT INFORMATION
When an entity enters into certain types of transactions, current GAAP now requires the
application of a new concept called “comprehensive income”. Basically, comprehensive income
(as of today) folds in certain transactions that have previously not been considered to be
income-statement-type transactions, which are now to be reflected as separate elements in this
particular financial statement.
At this point in time, the FASB has defined four elements of comprehensive income. Currently
comprehensive income occurs when any of the following transactions occur:
1. Unrealized gains/losses on available-for-sale securities
2. Certain hedging gains/losses
3. Foreign exchange translation adjustments
4. Gains and losses associated with pension or other postretirement benefit costs to
include:
a. Adjustment of the “additional minimum liability” balance in accounting for
defined benefit pension costs by an employer,
b. Transition assets and/or liabilities, and,
c. Prior service costs.
A very significant point to note is that certain of the elements of comprehensive income “turn
around” and are actually recognized in net income in periods after being recognized as an
element of Other Comprehensive Income (available-for-sale securities may actually be sold).
When this occurs, reclassification out of accumulated comprehensive income into retained
earnings is required.
Currently, the FASB allows three formatic options (Financial Statement Format) — examples of
each are included in the materials:
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1. “One Statement Approach” (Combined Statement)
2. Separate (stand-alone) Statement
3. Statement-of-Changes-in-Equity Approach
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Revenues 470,000$
Expenses (135,000)
Other gains and losses 10,500
Gain on sale of securities 2,000
Income from operations before tax 347,500
Income tax expense (83,400)
Income before extraordinary item and cumulative effect of accounting change 264,100
Extraordinary item, net of tax (198,350)
Cumulative effect of accounting change, net of tax (1,250)
Net income 64,500
Other comprehensive income, net of tax:
Foreign currency translation adjustments 8,000
Unrealized gains on securities
Unrealized holding gains arising during period 13,000$
Less: reclassification adjustment for gains included in net income (1,500) 11,500
Minimum pension liability adjustment (2,500)
Other comprehensive income 17,000
Comprehensive income 81,500$
See Accompanying Accountants' Compilation (Review) Report (And Notes to Financial Statements)
Net income 64,500$
Other comprehensive income, net of tax:
Foreign currency translation adjustments 8,000
Unrealized gains on securities
Unrealized holding gains arising during period 13,000$
Less: reclassification adjustment for gains included in net income (1,500) 11,500
Minimum pension liability adjustment (2,500)
Other comprehensive income 17,000
Comprehensive income 81,500$
See Accompanying Accountants' Compilation (Review) Report (And Notes to Financial Statements)
Statement of Comprehensive Income (Separate Statement Approach)
Year Ended December 31, 2008
Enterprise
Statement of Income and Comprehensive Income (Combined Approach)
Year Ended December 31, 2008
Enterprise
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Enterprise
Statement of Changes in Equity
Year Ended December 31, 2008
Accumulated
Other
Comprehensive Retained Comprehensive Common Paid-in
Total Income Earnings Income Stock Capital
Beginning balance 438,500$ 88,500$ 25,000$ 100,000$ 225,000$
Comprehensive income
Net income 64,500 64,500 64,500
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment 11,500 11,500
Foreign currency translation adjustments 8,000 8,000
Minimum pension liability adjustment (2,500) (2,500)
Other comprehensive income - 17,000 17,000 17,000
Comprehensive income 81,500
Common stock issued 150,000 50,000 100,000
Dividends declared on common stock (10,000) - (10,000) - - -
Ending balance 660,000$ 81,500$ 143,000$ 42,000$ 150,000$ 325,000$
See Accompanying Accountants' Compilation (Review) Report (And Notes to Financial Statements)
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Flow Statement Number 2 — Statement of Cash Flows
GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER The Statement of Cash Flows is a required basic financial statement when the financial
statements purport to present in accordance with GAAP. It is not a required basic financial
statement for OCBOAS. However, if an entity elects to present a statement of cash flows when
using an OCBOA, then (because of the contemporaneous counterpart requirement) the cash
flow statement must comply with (GAAP) professional standards.
The cash-provided/used-in-operations category is the default area for cash flow statement
decisions. That is to say, if a transaction or item does not clearly classify into either investing or
financing, then it defaults to operating cash transactions.
There are three types of reconciling items that are necessary to go from net income to cash
provided or used in operations:
1. Non-cash (depreciation),
2. Discretionary (current assets and/or liabilities, and
3. Reclassifications (gains/losses on sale of fixed assets.
A cash flow statement is required for each income statement presented when the presentation
is in accordance with GAAP.
The direct method of presenting cash-provided/used-in-operations is generally more
informative to financial statement users than the indirect method. The first step to presenting
the direct method is the construction of the indirect method of presenting cash-provided/used-
in-operations. Then the body of the income statement replaces the first line of the indirect
method (net income). Revenues and/or gains on the income statement are sources of cash, and
expenses and/or losses are uses of cash. These elements are combined with their balance sheet
counterparts to generate the line items as seen in the direct method. For example, to arrive at
cash received from customers’ sales is combined with the change (already computed in getting
the indirect method out of the way) in accounts receivable. In computing the amount disbursed
to suppliers and employees, cost-of-sales is combined with the changes in accounts payable and
inventory. The bulk of the work is done when the indirect method is done. This is an ideal
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electronic spreadsheet application — develop the spreadsheet once and it will thereafter
“automatically” convert from the indirect to the direct method.
If you use the direct method of reflecting operating cash, you must also include a reconciliation
of net income to cash provided/used in operations.
The cash flow statement has certain “articulation” requirements, which means that the
following presentation matters are required by definition and variance from the approach is not
permitted:
1. The cash flow statement must be prepared by activities (order is not required)
a. Operating,
b. Investing, and
c. Financing.
2. The indirect method of presenting cash from operations must begin with net income.
3. There is a required subtotal for cash provided or used from all sources.
4. Cash from all sources must be follow by a line item that states – Cash and cash
equivalents, beginning of the year (or equivalent language),
5. The combination of cash provided/used from all sources and beginning cash must foot
to – Cash and cash equivalents, end of year (or equivalent language). And,
6. The balances and line item titles for the cash balances must agree exactly with the
corresponding cash line of the balance sheet (having to combine amounts on the
balance sheet to equal the balance reflected on the cash flow statement is not
acceptable).
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Typical Company, Inc. Typical Company, Inc.
STATEMENTS OF CASH FLOW Operating Cash - Direct Method
For the Years Ended December 31, For the Years Ended December 31,
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES
143,223$ 1,009,336$
139,401 86,801
304,168
321,616 (1,556,384)
(212,960) (230,113)
(170,478) 33,139
(145,614) 13,872
(79,111) 128,864
477,990 (83,296)
474,067 (293,613)
(10,945) (45,677)
15,000 (15,000) (386,789) (428,572)
(382,734) (489,249)
(832,944) 275,639
- (240,221)
1,292,662 800,000
- 82,500
(445,385) (281,716)
(253,070) 118,554
152,500 28,106
(86,237) 782,862
5,096 -
- -
5,096$ -$
131,809$ 78,307$
366,229$ 591,573$
See Accompanying Notes and Accountants' Compilation Report
Taxes Paid
SUPPLEMENTAL DISCLOSURES
Interest Paid
CASH AND CASH EQUIVALENTS AT END OF YEAR
NET CHANGE IN CASH
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
Loss on Abandonment of Assets
NET CASH USED BY INVESTING ACTIVITIES
Accrued Expenses
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
CASH FLOWS (USED BY) INVESTING ACTIVITIES
Deposits
BondsAcquisition of Equipment
Trade Accounts Receivable
Inventory
Prepaid Expenses
Trade Accounts Payable
Dividends Paid
Decrease in Bank Overdraft
Due From Shareholder
NET CASH PROVIDED BY FINANCING ACTIVITIES
Net Income
Depreciation
Adjustments to Reconcile Net Income to Net Cash Provided
(Increase) Decrease In:
CASH FLOWS FROM & (USED BY) FINANCING ACTIVITIES
Increase (Decrease) In:
Sales Tax Payable
Decrease in Lines of Credit
Payment of Notes Payable
New Proceeds of Notes Payable
Sale of Treasury Stock
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CASH FLOW STATEMENT DISCLOSURE FOR NON-CASH TRANSACTIONS Professional standards clearly state that transactions that do not involve, literally, either a debit
or credit to an account that meets the definition of cash and cash equivalents should not be
included in amounts appearing in the cash flow statement. However, those standards do
require that any and all significant non-cash transactions be disclosed in the presentation.
There appears to be several acceptable approaches to compliance with this requirement;
1. Parenthetic disclosure such as; Capital Expenditures (net of $49, $5 and $16 of non-cash
capital expenditures in fiscal 2007, 2006 and 2005, respectively,)
2. Preparation of a schedule that appears on the face of the cash flow statement beneath
the statement, or
3. Footnote disclosure.
Most of the significant non-cash expenditures disclosed to meet this requirement involve
financed purchases of assets.
DIRECT METHOD OF PRESENTATION OF CASH PROVIDED OR USED IN OPERATIONS.
Many financial statement users prefer this method looking at cash provided and used in
operations. If the financial statements are presented in accordance with GAAP, the
presentation must ALSO include a reconciliation of net income and cash provided from
operations (i.e. the indirect method). Following is a presentation of cash from operations using
the same data as was used in the presentation of cash from operations under the direct
method:
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Typical Company, Inc.
Operating Cash - Direct Method
For the Years Ended December 31,
2008 2007
Cash Received From Customers 16,568,120$ 11,312,753$
Cash Proceeds from Lawsuit - 513,307
Cash Received From Interest 23,680 733
Cash Paid Out to Suppliers and Employees (15,619,695) (11,450,526)
Cash Paid Out for Interest (131,809) (78,307)
Cash Paid Out for Taxes (366,229) (591,573)
Net Cash Provided (Used) by Operating Activities 474,067$ (293,613)$
Generally speaking, the direct method of presenting cash from operations is more easily
understood by financial statement users than is the indirect method of presentation of the same
information. The indirect method is useful for analysis of cash management activities of an
organization.
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RETAINED EARNINGS/SHAREHOLDER EQUITY STATEMENT
GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER
1. A retained earnings statement, when presented, represents another “basic” financial
statement for purposes of GAAP.
2. Generally speaking, if the only change in equity is net income/loss the statement is
combined with the income statement and the combined statements are titled
something like “Statement of Income and Retained Earnings”.
3. If there are other elements of the capital section that have changed over the reporting
period, then presentation of a separate statement is generally appropriate. (See
example of statements incorporated elsewhere in the session.
4. An aggressive school of thought believes that if the only reconciling element in equity is
net income/loss, then no statement is necessary because the change can be computed
using existing information — this is risky, and leaves the preparer open to criticism.
An example of a comprehensive shareholder equity statement appears on page 33.
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CHAPTER 3 -- FINANCIAL STATEMENT DISCLOSURES
SPECIFIC FINANCIAL STATEMENT DISCLOSURES -- REQUIRED FOR ALL GAAP FINANCIAL
STATEMENTS THAT ARE “FULL DISCLOSURE” FINANCIAL STATEMENTS (AND MOST OCBOA
FULL DISCLOSURE PRESENTATIONS)
Generally appearing on the face of the individual financial statement:
1. Appropriate line-item descriptions,
2. Financial statement totals and sub-totals,
3. Valuation allowances (Allowance for doubtful accounts, asset impairment, etc.), and
4. Capital stock (par value, authorized, issued, outstanding, other rights & or preferences)
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Generally appearing in the body of the footnotes to the financial statements
Summary of Significant Accounting Policies (AREA – Presentation, TOPIC – 235, Notes to
Financial Statements, SUB-TOPIC – 10, Overall, SECTION – 50, Disclosure)
Footnote Disclosures
1. Summary of Significant
Accounting Policies
A. Alternative approaches allowed by
applicable reporting framework.
B. Policies and/or approaches that are
unique to a specialized industry.
C. Unusual and/or innovative applications
of the applicable reporting framework.
D. Other maters – usage.
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(Elements 1 through 3) This is the one footnote that is absolutely required whenever annual
financial statements include footnote disclosure (This disclosure is required for interim financial
statements when, and if, accounting policies change with respect to the previous annual
financial statement disclosure.) -- -- Criteria for what goes into this footnote:
1. Basis of presentation allows for alternative approaches — this is probably the most
frequent source of information appearing in the summary of significant accounting
policy footnote. This situation is applicable when, for instance, GAAP allows for different
methods of depreciating fixed assets. Each method is acceptable to the financial
reporting framework (basis of accounting), but the reader must be filled in as to which
option is being made use of in the financial statements.
2. Unique to a specialized industry — this is a requirement to inform the financial
statement user of approaches that are unique applications to an industry, even if every
reporting entity in that industry uses that convention. Most commonly an example of
this type of disclosure is found in the disclosure regarding the method of revenue
recognition by construction contractors. As we know, most every contractor uses the
percentage of completion method, but failure to disclose this would result in a reporting
deficiency. Caution must be exercised whenever financial statements are developed for
entities in specialized industries.
3. Innovative applications of financial reporting framework (basis of accounting) — this is
a catch-all category for those bits of information that do not classify in other areas. This
is also an area where organizations tend to disclose “aggressive” approaches to a
particular type (class) of transaction. However, merely disclosing that an organization is
using an approach that is contrary to the correct method prescribed by the financial
reporting framework (basis of accounting) does not mitigate the departure from the
basis.
4. Other Matters – Recently, although not required by existing professional standards,
reporting entities have added other matters to the summary of significant accounting
policies that are not (explicitly) required to be presented in this footnote. Review of
published financial statements of public entities reveals that other matters, beyond
those explicitly identified by existing standards (items 1 through 3 of this listing), appear
routinely in this note. These items are generally a recitation of matters for which GAAP
does not provide options in presentation and/or disclosure, but the presentation and/or
disclosure is regarded by the provider as significant. Examples of such matters include
subsequent events and use of estimates.
Generally speaking, this footnote should minimize the use of numbers. The Summary of
Significant Accounting Policies footnote should be used to orient users to the financial
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statements, and not to fill in specifics regarding the application of accounting policies. However,
there are times when organizations (knowingly) violate this convention. Generally, numbers
(and other application specific information) would be included in this footnote when efficiency
dictates. (We are told in professional standards that repetition is, generally, not a good thing in
financial statements.) So, for example, if an organization discloses its policy regarding
advertising, and the amounts incurred for advertising do not appear elsewhere (as broken-out
line items) in the financial statements, the amounts incurred for advertising might be disclosed
in this note to complete the disclosure requirement in lieu of creating another footnote that
merely states the amount of advertising incurred. Such a treatment would, in most cases, not be
an appropriate course of action with respect to disclosure of fixed asset/depreciation matters
because of the amount of additional disclosure required by professional standards.
(-5) The standard expressly notes that this set of disclosures should not duplicate disclosure(s)
made elsewhere in the financial statements. The standard also notes that a cross-reference to
another footnote is an acceptable method of fulfilling the disclosure requirement.
(-6) Unlike previous professional guidance, while it is still the preferred method of presentation,
the summary of significant accounting policies no longer must be the first footnote, and these
disclosures no longer (absolutely) must appear within one footnote.
This footnote is also used to disclose how the organization would approach a situation in one of
the three categories above if such a circumstance presented itself. This is a relatively subjective
aspect of this disclosure requirement. There are times when it is appropriate to disclose how an
organization would address a situation even though as of the financial statement date the
company has not encountered the subject area of the disclosure requirement. A classic example
of this is the entity’s disclosure of the definition of cash and cash equivalents. SFAS 95 (Area –
Presentation, 230-10-50-1) requires that an organization disclose its policy regarding
classification of certain short-term investments (the choice is between investment or cash
equivalent) because it is an option. Professional standards and general application seem to
require that an organization make this decision prior to presenting a statement of cash flows,
whether or not the organization has investments that might qualify as cash equivalents.
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Footnote Disclosures
1.Summary of
Significant Accounting
Policies
2.Standard Required
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Examples of Footnotes Commonly Occurring in Typical Financial Statements
Cash and Cash Equivalents
Professional Standards Regarding Cash and Cash Equivalents (ASC 230-10-50-1)
When a reporting entity presents a cash flow statement, it is required to state its policy
regarding cash equivalents
A. This is required, whether or not the entity currently has cash equivalents, because it is an
election,
B. A change in policy regarding cash equivalents is defined/disclosed
1. As a change in accounting policy, that is to be reflected
2. Through restatement of all periods presented for comparative purposes.
Examples
1 The Company considers all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
2 The Company considers all highly liquid instruments with a maturity of three months or
less at the time of issuance to be cash equivalents.
3 The Company considers as cash equivalents all highly liquid investments with an original
maturity of three months or less.
4 Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with
banks, and investments with banks and financial institutions that have original maturities of
three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash
equivalents totaled $195,449 and $190,007 as of January 28, 2012 and January 29, 2011,
respectively, primarily consisting of money market funds, demand deposits, and time deposits.
Income earned on cash equivalents was $1,252, $551, and $36 for 2011, 2010, and 2009,
respectively, and was reflected in other income on the accompanying Consolidated Statements
of Income. There were no compensating balance arrangements as of January 28, 2012. The
Company had a compensating balance of $10,000 as of January 29, 2011, related to the
Company's purchasing card program.
5 Cash and cash equivalents include investments in money market funds and all highly
liquid debt instruments with an original maturity of three months or less when acquired.
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6 For the purpose of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time of purchase to be cash
equivalents.
7 The Company considers all highly liquid investments, which include money market funds
and short-term bank deposits (up to three months from date of deposit or with maturity of
three months from date of purchase) that are not restricted as to withdrawal or use, to be cash
equivalents.
8 Cash and cash equivalents generally consist of cash and money market accounts. The
fair value approximates the carrying value due to the short duration of the securities. These
securities have original maturity dates not exceeding three months. The Corporation has short-
term investments with maturities of less than one year and also has investments with maturities
greater than one year included in Other Assets on the Consolidated Balance
Sheets. Management classifies investments in marketable securities at the time of purchase
and reevaluates such classification at each balance sheet date. Debt securities including
government and corporate bonds are classified as available-for-sale and stated at current
market value with unrealized gains and losses included as a separate component of equity, net
of any related tax effect. The specific identification method is used to determine realized gains
and losses on the trade date. The Corporation has invested in an investment fund which is
valued at fair market value with changes recorded through the income statement.
9 We consider all highly liquid instruments with a maturity of three months or less when
purchased to be cash equivalents.
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Use of Estimates
Professional Standards Regarding Use of Estimates (ASC 275-10-50-4, 275-10-55-6 (example
language))
When a reporting entity presents financial statements that include footnotes is should
include a footnote disclosure that notes that the preparation of financial statements requires
that management make estimates.
The example language, provided in the Codification, suggests that the footnote should conclude
by stating that certain estimates may not be achieved.
Examples
1 The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
The Company regularly evaluates estimates and assumptions related to the deferred income tax
asset valuation allowances. The Company bases its estimates and assumptions on current facts,
historical experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and expenses that are not readily
apparent from other sources. The actual results experienced by the Company may differ
materially and adversely from the Company’s estimates. To the extent there are material
differences between the estimates and the actual results, future results of operations will be
affected.
2 The preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
3 The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these estimates.
4 In preparing financial statements in conformity with U.S. generally accepted accounting
principles, management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. The real estate industry has
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historically been cyclical and sensitive to changes in economic conditions such as interest rates,
credit availability, and unemployment levels. Changes in these economic conditions could affect
the assumptions used by management in preparing the accompanying financial statements.
5 Use of estimates - In preparing financial statements, management is required to make
estimates and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses during the periods presented. Actual results may differ
from these estimates.
6 The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. Actual results could differ from the estimates and assumptions used.
7 The preparation of financial statements requires us to make estimates and assumptions
that affect our results during the periods reported. Estimates are used to account for certain
items such as marketing accruals, warranty costs, employee benefit programs, etc. Estimates
are based on assumptions that we believe are reasonable under the circumstances. Due to the
inherent uncertainty involved with estimates, actual results may differ.
8 The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying
notes. The more significant areas requiring use of management estimates relate to allowance
for doubtful accounts, inventory reserves, marketing program accruals, warranty accruals,
accruals for self-insured medical claims, workers’ compensation, legal contingencies, general
liability and auto insurance claims, valuation of long-lived assets, and useful lives for
depreciation and amortization. Actual results could differ from those estimates.
9 The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period.
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Income Taxes
Professional Standards Regarding Income Taxes (ASC740-10-50-2 - 21)
1. 50-2 -- Balance sheet disclosures
A. Total deferred tax
1) Liabilities, and/or
2) Assets
B. Total valuation allowance recognized, re. deferred tax assets, as well as change in valuation
allowance during reporting period.
2. 50-3 Amounts and expiration dates of
A. Loss carryforwards, and/or
B. Tax credit carryforwards
C. Valuation allowance amounts that will be credited directly to contributed capital.
3. 50-4 When a reporting entity's tax status changes with respect to the following reporting
period, but prior to the issuance of financial statements, this matter should be disclosed in the
notes.
4. 50-8 For nonpublic reporting entities, disclosure of the types of significant temporary
differences is required -- numeric reconciliation is permitted, but not required.
5. 50-9 Significant components of income tax need to be disclosed, either on the face of the
financial statement or within the footnotes, elements that commonly comprise such items
include
A. Current expense,
B. Deferred expense,
C. Benefit of loss carryforwards, and/or
D. Adjustments to deferred tax liability and/or asset resulting from changes in tax laws and/or
rates.
6. 50-10 When applicable, amount of income tax expense allocated to continuing operations
and other separately reported elements (intraperiod tax allocation).
7. 50-13 Nonpublic reporting entities are required to disclose the nature of significant matters
that cause a difference between expected and reflected income tax expense (effect of the
surtax exemption).
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8. 50-14 Any matters that may affect comparability of financial statements included in a
particular presentation.
9. 50-15 Non Public entities are required to disclose the following matters regarding
unrecognized income tax benefits
A. Total interest and/or penalties recognized in the balance sheet and/or income statement,
B. For positions for which it is reasonable possible there will be a significant change within the
following 12 months
1) Nature of the uncertainty,
2) The type of event that could give rise to the change,
3) An estimate of the range of the effect of the change, or a statement that such a range
cannot be reasonable estimated
C. Tax years open -- subject to examination, by jurisdiction.
10. 50-18 Choice(s) between alternative acceptable tax options.
11. 50-19 Interest and/or penalty recognition policy(ies).
12. 50-20 Policy regarding recognition of investment tax credits, and
13. 50-21 Generic disclosure requirement -- to prevent the financial statements from being
misleading (for their intended usage).
Examples
1 The Company uses the asset and liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse.
2 The Company is organized as a limited liability Company and is taxed as a partnership
for income tax purposes. Accordingly, the Company is not subject to federal and state income
taxes and makes no provision for income taxes in its financial statements. the Company's
taxable income or loss is reportable by its members. the Company has determined that there
are no material uncertain tax positions that require recognition or disclosure in its financial
statements. Taxable years ended December 31, 2009 through 2012 are subject to IRS and other
jurisdictions tax examinations. At December 31, 2012, the reported amounts of the Company’
aggregate tax bases exceeded their net assets by approximately $XXXXXX. At December 31,
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2011, the reported amounts of the Company’ aggregate tax bases exceeded their net assets by
approximately $XXXXXX.
3 The Company accounts for income taxes under ASC 740, Accounting for Income Taxes.
Under ASC 740, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period, which
includes the enactment date.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an entity's
financial statements This Interpretation prescribed a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In addition, ASC 740 provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company adopted the provisions of FIN-48 and they had no impact on its financial position,
results of operations, and cash flows.
Based on its evaluation, the Company has concluded that there are no significant uncertain tax
positions requiring recognition in its consolidated financial statements. The Company's
evaluation was performed for the tax years ended December 31, 2004 through December 31,
2011 for U.S. Federal Income Tax, for the tax years ended December 31, 2004 through
December 31, 2011 for the State of Florida Corporate Income Tax, the years which remain
subject to examination by major tax jurisdictions as of December 31, 2011.
4 Deferred income taxes reflects the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, as well as operating loss, capital loss and tax credit
carryforwards. Deferred tax assets and liabilities are classified as current or non-current based
on the classification of the related assets or liabilities for financial reporting, or according to the
expected reversal dates of the specific temporary differences, if not related to an asset or
liability for financial reporting. Valuation allowances are established against deferred tax assets
if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates or laws is recognized in operations in the period
that includes the enactment date.
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the
application of complex tax regulations. The Company recognizes liabilities for uncertain tax
positions based on the two-step process prescribed by applicable accounting principles. The first
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step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step requires
the Company to estimate and measure the tax benefit as the largest amount that is more likely
than not being realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as this requires the Company to determine the probability of various
possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis.
This evaluation is based on factors including, but not limited to, changes in facts or
circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.
Such a change in recognition or measurement would result in the recognition of a tax benefit or
an additional charge to the tax provision in the period. The Company recognizes interest and
penalties as incurred in finance income (expense), net in the Consolidated Statements of
Operations.
Our effective tax rate is based on income, statutory tax rates and tax planning
opportunities available to us in the various jurisdictions in which we operate. Significant
judgment is required in evaluating our tax positions, which has an impact on our effective tax
rate. We establish reserves when, despite our belief that our tax return positions are fully
supportable, we believe that certain positions are likely to be challenged based on technical
merits. A tax benefit from an uncertain tax position is recognized when it is more likely than not
that the position will be sustained upon examination, including the resolution of any related
appeals or litigation, based on the technical merits. The amount recognized is measured as the
largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement.
5 The Corporation uses an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have
been recognized in the Corporation’s financial statements or tax returns. Deferred income taxes
are provided to reflect differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements. The Corporation provides for taxes that may be
payable if undistributed earnings of overseas subsidiaries were to be remitted to the United
States, except for those earnings it considers to be permanently reinvested. There were
approximately $XXXXX million of accumulated earnings considered permanently reinvested in
China, Hong Kong and India as of December 29, 2012. See the Income Tax footnote for further
information.
6 The Company accounts for income taxes under Section 740-10-30 of the FASB
Accounting Standards Codification, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and liabilities are
based on the differences between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the fiscal year in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance to the extent management
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concludes it is more likely than not that the assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal
years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of
Income and Comprehensive Income in the period that includes the enactment date.
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New Accounting Pronouncements -- While the Codification does not provide any
specific guidance/requirement regarding disclosure of a reporting entity's treatment of new
accounting pronouncements, 70 percent of the financial statements reviewed in compiling data
for this session included this category of disclosure within the Summary of Significant
Accounting Policies.
Examples
1 During May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP. This ASU provides guidance setting forth additional requirements relating to disclosures
about fair value. The guidance was effective for Associates beginning with the first interim
period in 2012. In accordance with the guidance, Associates was required to disclose the level in
the fair value hierarchy in which each fair value lies that is disclosed but not used to measure an
asset or liability on the balance sheet. The guidance also clarifies that the fair value of a non-
financial asset is based on its highest and best use and requires disclosure if a non-financial asset
is being used in a manner that is not its highest and best use. The adoption of ASU 2011-04 on
January 1, 2012 did not have a material impact on Associates financial condition or results of
operations.
2 Other accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are not expected to
have a material impact on the consolidated financial statements upon adoption.
3 There have been no recent accounting pronouncements or changes in accounting
pronouncements during the year ended December 31, 2012, that are of material significance, or
have potential material significance, to the Company.
4 In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic
820) - Fair Value Measurement (ASU 2011-04). The amendments in this update changed the
wording used in the existing guidance to better align U.S. generally accepted accounting
principles with International Financial Reporting Standards and to clarify the FASB's intent on
various aspects of the fair value guidance. The update also required increased disclosure of
quantitative information about unobservable inputs used in a fair value measurement that is
categorized within Level 3 of the fair value hierarchy. This update was effective for our fourth
quarter of fiscal 2012. Since We did not have any investments with unobservable market inputs,
thus this update did not impact our consolidated financial statements. The effect of this
guidance on future periods will depends on the nature and significance of any fair value
measurements we subsequently make that are subject to this guidance.
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In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350), Testing Goodwill
for Impairment, (ASU 2011-08), which permits an entity to make a qualitative assessment of
whether it is more likely than not that a reporting unit's fair value is less than its carrying value
before applying the two-step goodwill impairment model that is currently in place. If it is
determined through the qualitative assessment that a reporting unit's fair value is more likely
than not greater than its carrying value, the remaining impairment steps would be unnecessary.
The qualitative assessment is optional, allowing companies to go directly to the quantitative
assessment. This update was effective for our fourth quarter of fiscal 2012. We elected to
perform the Our qualitative assessment which indicated that our goodwill of $1,567 was not
impaired.
In June 2011, the FASB issued accounting guidance updating the presentation format of
comprehensive income. The guidance provided two options for presenting net income and
other comprehensive income. The total of comprehensive income, the components of net
income and the components of other comprehensive income may be presented in either a
single continuous statement of comprehensive income or in two separate but consecutive
statements. The Corporation adopted the new guidance beginning January 1, 2012. The
guidance did not have a material impact on the Corporation's financial statements.
In July 2012, the FASB issued accounting guidance intended to reduce the cost and complexity of
the annual impairment test for indefinite-lived intangible assets other than goodwill by
providing the option of performing a qualitative assessment to for indefinite-lived intangible
assets other than goodwill by providing the option of performing a qualitative assessment to
determine whether future impairment testing is necessary. This guidance became effective
December 30, 2012, the beginning of the Corporation's 2013 fiscal year. The Corporation does
not anticipate this guidance to have any impact on the Corporation's financial statements.
In June 2011, the FASB issued the FASB Accounting Standards Update No. 2011-05
Comprehensive Income (ASU 2011-05), which was the result of a joint project with the IASB and
amends the guidance in ASC 220, Comprehensive Income, by eliminating the option to present
components of other comprehensive income (OCI) in the statement of stockholders’ equity.
Instead, the new guidance now gives entities the option to present all non-owner changes in
stockholders’ equity either as a single continuous statement of comprehensive income or as two
separate but consecutive statements. Regardless of whether an entity chooses to present
comprehensive income in a single continuous statement or in two separate but consecutive
statements, the amendments require entities to present all reclassification adjustments from
OCI to net income on the face of the statement of comprehensive income. The amendments in
this Update should be applied retrospectively and are effective for public entity for fiscal years,
and interim periods within those years, beginning after December 15, 2011.
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In September 2011, the FASB issued the FASB Accounting Standards Update No. 2011-08
Intangibles—Goodwill and Other: Testing Goodwill for Impairment (ASU 2011-08). This Update
is to simplify how public and nonpublic entities test goodwill for impairment. The amendments
permit an entity to first assess qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two-step goodwill impairment test described in Topic
350. Under the amendments in this Update, an entity is not required to calculate the fair value
of a reporting unit unless the entity determines that it is more likely than not that its fair value is
less than its carrying amount. The guidance is effective for interim and annual periods
beginning on or after December 15, 2011. Early adoption is permitted.
In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-10
Property, Plant and Equipment: De-recognition of in Substance Real Estate-a Scope Clarification
(ASU 2011-09). This Update is to resolve the diversity in practice as to how financial statements
have been reflecting circumstances when parent company reporting entities cease to have
controlling financial interests in subsidiaries that are in substance real estate, where the
situation arises as a result of default on nonrecourse debt of the subsidiaries. The amended
guidance is effective for annual reporting periods ending after June 15, 2012 for public entities.
Early adoption is permitted.
In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-11 Balance
Sheet: Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). This Update requires an
entity to disclose information about offsetting and related arrangements to enable users of its
financial statements to understand the effect of those arrangements on its financial position.
The objective of this disclosure is to facilitate comparison between those entities that prepare
their financial statements on the basis of U.S. GAAP and those entities that prepare their
financial statements on the basis of IFRS. The amended guidance is effective for annual
reporting periods beginning on or after January 1, 2013, and interim periods within those annual
periods.
In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-12
Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting
Standards Update No. 2011-05 (ASU 2011-12). This Update is a deferral of the effective date
pertaining to reclassification adjustments out of accumulated other comprehensive income in
ASU 2011-05. FASB is to going to reassess the costs and benefits of those provisions in ASU
2011-05 related to reclassifications out of accumulated other comprehensive income. Due to
the time required to properly make such a reassessment and to evaluate alternative
presentation formats, the FASB decided that it is necessary to reinstate the requirements for the
presentation of reclassifications out of accumulated other comprehensive income that were in
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place before the issuance of Update 2011-05. All other requirements in Update 2011-05 are not
affected by this Update, including the requirement to report comprehensive income either in a
single continuous financial statement or in two separate but consecutive financial statements.
Public entities should apply these requirements for fiscal years, and interim periods within those
years, beginning after December 15, 2011.
Management does not believe that any other recently issued, but not yet effective accounting
pronouncements, if adopted, would have a material effect on the accompanying financial
statements.
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Reclassification of amounts
Professional Standards Reclassification of amounts appearing in financial statements (ASC 250-
10-50 -1) -- When significant reclassifications have been made within financial statements,
presented for comparative purposes, with the current period, information should be included
that will explain the reason for and nature of the change.
Examples
1 Certain prior year numbers have been reclassified to conform with current year
reporting presentation.
2 For purposes of comparison, certain items shown in the 2011 consolidated financial
statements have been reclassified to conform with the presentation used for 2012.
3 Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
4 Certain reclassifications have been made to the Company’s prior year's consolidated
financial statements to conform to the current year’s consolidated financial statement
presentation of line items in revenues and cost of sales.
5 Certain prior-year amounts have been reclassified to conform to the fiscal 2012
classification. Such reclassifications had no impact on reported net income.
6 Certain reclassifications have been made within the footnotes to conform to the current
year presentation.
7 Certain amounts in the prior period financial statements have been reclassified to
conform to the current period presentation. These reclassifications had no effect on reported
losses.
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Revenue Recognition
Professional Standards Regarding Revenue Recognition -- Currently, there is no specific
requirement for an entity to disclose revenue recognition policies, unless that reporting entity is
a member of an industry where the revenue recognition approach is unique to that industry
(construction contractor, or franchise operations). However, because of a stated preference by
the SEC (for its registrants) for such disclosure, non-registrants are including disclosure regarding
revenue recognition policies, even when such approaches are not unique to the industry.
Examples
1 Basic rental income, as defined in a long-term lease, is a fixed amount that the Company
records ratably over the year. Commencing January 1, 2013, basic rent paid by Sub-lessee is
$XXXXX per annum plus debt service. Additional rent is based on 50% of the net operating
profit of the Sub-lessee, as defined, in excess of $XXXXX for each lease year ending
December 31st and is recorded by the Company when such amount becomes realizable and
earned, at the end of each calendar year.
2 The Company intends to recognize revenues in accordance with ASC 605-10. Revenue
will be recognized when persuasive evidence of an arrangement exists, as services are provided
or when product is delivered, and when collection of the fixed or determinable selling price is
reasonably assured.
3 The Company's revenue recognition policy is consistent with applicable revenue
recognition guidance and interpretations. The Company recognizes revenue when persuasive
evidence of an arrangement exists, services have been rendered, the price is fixed or
determinable, and collectability is reasonably assured. The Company assesses whether payment
terms are customary or extended in accordance with normal practice relative to the market in
which the sale is occurring. The Company's sales arrangements generally include standard
payment terms. These terms effectively relate to all customers, products, and arrangements
regardless of customer type, product mix or arrangement size. If revenue recognition criteria are
not satisfied, amounts received from customers are classified as deferred revenue on the
balance sheet until such time as the revenue recognition criteria are met. Revenues from fixed-
price contracts which require significant production, modification and/or customization to
customer specifications are recognized using the percentage-of-completion method.
Percentage-of-completion estimates are in man-months of labor and are reviewed periodically,
and any adjustments required are reflected in the period when such estimates are
revised. Losses on contracts, if any, are recognized in the period in which the loss is determined.
Such revenues are recorded by the Company in the Consolidated Statement of Operations in
revenues from Projects. Revenue from sales of sensor products is recognized at the time title to
the products and significant risks of ownership pass to the customer, which is generally upon
shipment, when all significant contractual obligations have been satisfied and collection is
reasonably assured. Milestone payments are recognized as revenue when milestones are
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deemed to be substantive and are achieved. A substantive milestone is one that is based on
successful performance by the Company and not solely contingent upon the passage of time or
performance by another party. Such revenues are recorded by SS in the Consolidated Statement
of Operations in revenues from Projects. Revenue from sales of monitoring equipment is
recognized at the time title to the equipment and significant risks of ownership pass to the
customer (which is generally upon shipment), when all significant contractual obligations have
been satisfied and collection is reasonably assured. Equipment and customer support services
revenue is recognized upon delivery of the systems when persuasive evidence of an
arrangement exists that includes obtaining a written agreement in the form of a sales order with
the customer, collection is probable, and the fee is fixed and determinable. Such revenues are
recorded by GS in the Consolidated Statement of Operations in revenues from Products.
4 Sales of OM monitoring systems may have multiple elements, including equipment,
installation and monitoring services. OM equipment and related installations do not qualify as a
separate unit of accounting. As a result, revenues (and related costs) associated with sale of
equipment and related installations are recorded to deferred revenue (and deferred charges)
once delivery, installation and customer acceptance is completed. Revenue and related costs
with respect to the sale of equipment and related installations are recognized over the
estimated life of the customer relationship. Such revenues are recorded by OM in the
Consolidated Statement of Operations as Product revenues. Revenues from the prepayment of
monitoring fees (generally paid 12 months in advance) are initially recorded as deferred revenue
upon receipt of payment from the customer and then amortized to revenue over the monitoring
service period. Such revenues are recorded by OM in the Consolidated Statement of Operations
as Service revenues. Revenues from management and consulting, time-and-materials service
contracts, maintenance agreements and other services are recognized as services are provided.
Such revenues are recorded by the Company in the Consolidated Statement of Operations as
Service revenues.
5 Revenue is recognized for Restaurants at the point of sale, other than revenue from the
sale of gift cards, which is deferred and recognized upon redemption. Revenue in the Foods
segment is generally recognized when products are received by our customers. All revenue is
presented net of sales tax collections. We issue gift cards which contain no expiration dates or
inactivity fees. We recognize revenue from gift cards when they are redeemed by the customer.
In addition, we recognize income on unredeemed gift cards (gift card breakage) based on
historical redemption patterns. Gift card breakage is included in net sales in the Consolidated
Statements of Income, and the liability for unredeemed gift cards is included in deferred
revenue on the Consolidated Balance Sheets.
6 Automotive revenue is generated primarily by sales of vehicles, parts and
accessories. Revenue is recorded when all risks and rewards of ownership are transferred to our
customers (generally dealers and distributors). For the majority of our sales, this occurs when
products are shipped from our manufacturing facilities. When vehicles are shipped to customers
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or vehicle modifiers on consignment, revenue is recognized when the vehicle is sold to the
ultimate customer. When we give our dealers the right to return eligible parts for credit, we
reduce the related revenue for expected returns.
We sell vehicles to daily rental car companies subject to guaranteed repurchase options. These
vehicles are accounted for as operating leases. At the time of sale, the proceeds are recorded as
deferred revenue in Accrued liabilities and deferred revenue. The difference between the
proceeds and the guaranteed repurchase amount is recognized in Automotive revenues over an
average term of eight months, using a straight-line method. The cost of the vehicles is recorded
in Net investment in operating leases and the difference between the cost of the vehicle and the
estimated auction value is depreciated in Automotive cost of sales over the term of the
lease. Proceeds from the sale of the vehicle at auction are recognized in Automotive revenues
at the time of sale. At December 31, 2012 and 2011, we recorded $1.5 billion and $1.5 billion as
deferred revenue, respectively.
7 Sales of office furniture and hearth products are generally recognized when title
transfers and the risks and rewards of ownership have passed to customers. Typically title and
risk of ownership transfer when the product is shipped. In certain circumstances, title and risk
of ownership do not transfer until the goods are received by the customer or upon installation
and customer acceptance. Revenue includes freight charged to customers; related costs are
recorded in selling and administrative expense. Rebates, discounts and other marketing
program expenses directly related to the sale are recorded as a reduction to net
sales. Marketing program accruals require the use of management estimates and the
consideration of contractual arrangements subject to interpretation. Customer sales that
achieve or do not achieve certain award levels can affect the amount of such estimates and
actual results could differ from these estimates.
8 The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards
Codification for revenue recognition. The Company will recognize revenue when it is realized or
realizable and earned. The Company considers revenue realized or realizable and earned when
all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the
product has been shipped or the services have been rendered to the customer, (iii) the sales
price is fixed or determinable, and (iv) collectability is reasonably assured.
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Property, Plant and Equipment
Professional Standards Regarding Property, Plant and Equipment (ASC 360-10-50-1 through 3)
1. 50-1 Each of the following matters should be disclosed either on the face of the financial
statement or notes thereto:
A. Depreciation expense for each period presented,
B. Disaggregated balance information for PP&E by the following categories (for each balance
sheet presented)
1) Major class,
2) Nature and/or function
C. Accumulated depreciation -- by either -- major class or total -- for each balance sheet
presented.
D. General description of method(s) used to depreciate -- by major class of assets subject to
depreciation
2. 50-2 Impairment of long-lived assets (to include those assets that are currently held and used
within the reporting entity)
A. A description of the impaired long-lived asset(s)
B. Reason(s) for impaired status,
C. If given other than line-item status -- the amount of the impairment loss, and where the
amount appears within the income statement,
D. When applicable, disclosure of which segment of the reporting entity in which the
impairment appears.
Examples
1 The Company continuously evaluates its real estate portfolio and closes
underproductive stores in the normal course of business as leases expire or as other
circumstances dictate. During 2011, the Company closed one SFA store and two OFF 5TH stores.
The Company incurred $5,065 of store closing costs primarily related to a lease termination fee
and employee severance. Also included in impairment and disposition costs for 2011 is $5,041
of asset impairment charges related to held and used assets. During 2010, the Company
incurred costs associated with the closing of seven SFA stores and one OFF 5TH store. The
Company incurred $12,045 of store closing-related costs associated with these locations. Also
included in impairment and disposition costs for 2010 are $785 of asset impairment charges
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related to held and used assets and $255 of losses on the disposal of assets during the normal
course of business.
2 Property and equipment are stated at historical cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives of the
assets. Buildings and building improvements are depreciated over 20 to 40 years while fixtures
and equipment are depreciated over 3 to 10 years. Leasehold improvements are amortized over
the shorter of their estimated useful lives or their related lease terms, generally ranging from 10
to 20 years. Lease terms may include renewal periods at the Company's option if exercise of the
option is determined to be reasonably assured at the inception of the lease. Costs incurred for
the development of internal-use computer software are capitalized and amortized using the
straight-line method over 3 to 10 years. Costs incurred during the discovery and post-
implementation stages of internally-developed computer software are expensed as incurred.
Costs incurred when constructing stores, including interest expense, are capitalized. The
Company may receive allowances from landlords related to the construction. If the landlord is
determined to be the primary beneficiary of the property, then the portion of those allowances
attributable to the property owned by the landlord is considered to be a deferred rent liability,
whereas the corresponding capital expenditures related to that store are considered to be
prepaid rent. Allowances in excess of the amounts attributable to the property owned by the
landlord are considered leasehold improvement allowances and are recorded as deferred rent
liabilities that are amortized over the life of the lease. Capital expenditures are reduced when
the Company receives cash and allowances from merchandise vendors to fund the construction
of vendor shops.
Long-lived assets are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. If the estimated future
undiscounted cash flows resulting from the use and eventual disposition of the store assets are
less than the carrying value of such assets, an impairment loss is recognized for the difference
between the estimated fair value and the carrying value. The evaluation is performed at the
lowest level of identifiable cash flows, which is primarily at the individual store level. Long-lived
asset impairment charges are included in impairments and dispositions on the Consolidated
Statements of Income. Impairment and disposition costs include costs associated with store
closures, including employee severance and lease termination fees, asset impairment and
disposal charges, and other store closure activities. Additionally, impairment and disposition
costs include long-lived asset impairment charges related to assets held and used and losses
related to asset dispositions made during the normal course of business. During 2009, the
Company incurred $28,176 of asset impairment charges related to held and used assets and
$1,172 of losses on the disposal of assets during the normal course of business.
3 Property and equipment are stated at historical cost, which consists of the net book
value of the assets carried on the prior company's books. Depreciation is computed over the
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estimated useful lives of the assets using the straight-line method generally over a 3 to 5-year
period. Leasehold improvements will be amortized on the straight-line method over the life of
the related lease. Expenditures for ordinary maintenance and repairs are charged to expense as
incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are
eliminated from the account and any gain or loss is reflected in the statement of operations.
Depreciation expense for property and equipment is recorded as either cost of goods sold or
general and administrative expense, depending on the use of the assets.
The Company evaluates its long-lived assets for impairment, in accordance with FASB ASC 360-
10, when events or changes in circumstances indicate that the related carrying amount may not
be recoverable. Impairment is considered to exist if the total estimated future cash flow on an
undiscounted basis is less than the carrying amount of the related assets. An impairment loss is
measured and recorded based on the discounted estimated future cash flows. Changes in
significant assumptions underlying future cash flow estimates or fair values of assets may have a
material effect on the Company's financial position and results of operations. No such
impairment to the carrying amount of long-lived assets was indicated at December 31, 2011.
4 Property and equipment are presented at cost at the date of acquisition. Depreciation
and amortization is calculated based on the straight-line method over the estimated useful lives
of the depreciable assets, or in the case of leasehold improvements, the shorter of the lease
term or the estimated useful life of the asset, a portion of which is allocated to cost of
sales. Improvements are capitalized while repairs and maintenance are charged to operations
as incurred.
5 Property, plant and equipment are recorded at cost less accumulated depreciation. The
straight-line depreciation method is used for nearly all capitalized assets, although some assets
purchased prior to fiscal 1995 continue to be depreciated using accelerated methods.
Depreciation is calculated at rates adequate to amortize costs over the estimated useful lives of
buildings and improvements (15 to 25 years) and machinery and equipment (3 to 10 years).
Improvements to leased properties are depreciated over the shorter of their useful lives or the
lease terms. Total depreciation expense was $ 81,301; $ 82,323; and $ 83,095 in fiscal 2012,
fiscal 2011 and fiscal 2010, respectively. We sell real property via like-kind exchanges under
Internal Revenue Code Section 1031 whereby gains are not recognized for federal income tax
purposes. We recognize all such gains for financial reporting purposes in the period the property
is sold. Consolidated results for fiscal 2012, fiscal 2011 and fiscal 2010 include net pretax gains
of $ 365; $ 128 and $ 1,362, respectively, on sale of assets. The gains are classified as a
reduction of selling, general and administrative (S,G&A) expenses in the Consolidated
Statements of Income. We evaluate property, plant and equipment held and used in the
business for impairment whenever events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable. Impairment is determined by comparing
the estimated undiscounted future operating cash flows for the asset group to the carrying
amount of its assets. If impairment exists, the amount of impairment is measured as the excess
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of the carrying amount over the estimated discounted future operating cash flows of the asset
and the expected proceeds upon sale of the asset. During fiscal 2012, fiscal 2011 and fiscal
2010, we identified certain operating and closed locations with negative cash flows, declining
net sales performance or other potential indicators of impairment. In fiscal 2012, pretax fixed
asset impairment charges were recorded in the Restaurants $3,199 and $2,327, respectively,
for three underperforming operating locations and five other properties and eight
underperforming operating locations. The impairments in fiscal year 2012 were predominately
locations that had been previously partially impaired. In fiscal 2011, pretax fixed asset
impairment charges were recorded in Restaurants of $1,896 and $13,070 respectively, for three
underperforming Restaurants and eight underperforming locations. In fiscal 2012, a pretax fixed
asset impairment of $87 was recorded in the Foods segment. Also in fiscal 2011, a $1,239 pretax
fixed asset impairment charge was recorded in the Foods segment for the closure of a fresh
sausage operation and a food production facility. In fiscal 2010, a $6,195 pretax fixed asset
impairment charge was recorded for four underperforming Restaurant operating locations and
22 other properties. We did not record any fixed asset impairment charges for other than
Restaurants in fiscal 2010. The fixed asset impairment charges are reflected in S,G&A expenses
in the Consolidated Statements of Income. In accordance with the Property, Plant and
Equipment Topic of the FASB ASC, we wrote down the carrying value of the underlying assets to
their estimated fair value, which resulted in the above impairment charges. The estimated fair
value was determined based on independent appraisals, which we deemed to be Level 3 inputs
under the Fair Value Measurements and Disclosures Topic of the FASB ASC.
6 Property, plant and equipment are carried at cost. Depreciation has been computed
using the straight-line method over estimated useful lives: land improvements, 10 – 20 years;
buildings, 10 – 40 years; and machinery and equipment, 3 – 12 years.
Long-lived assets are reviewed for impairment as events or changes in circumstances occur
indicating the amount of the asset reflected in the Corporation’s balance sheet may not be
recoverable. An estimate of undiscounted cash flows produced by the asset, or the appropriate
group of assets, is compared to the carrying value to determine whether impairment exists. The
estimates of future cash flows involve considerable management judgment and are based upon
assumptions about expected future operating performance. The actual cash flows could differ
from management’s estimates due to changes in business conditions, operating performance
and economic conditions. Asset impairment charges recorded in connection with the
Corporation’s restructuring activities are discussed in Restructuring Related Charges. These
assets included real estate, manufacturing equipment and certain other fixed assets. The
Corporation’s continuous focus on improving the manufacturing process tends to increase the
likelihood of assets being replaced; therefore, the Corporation is regularly evaluating the
expected lives of its equipment and accelerating depreciation where appropriate.
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Consolidation Policies
Professional Standards Regarding Consolidation Policies (ASC 810-10-50-1 through 2)
1. 50-1 Consolidation policies should be disclosed -- either communicated on the face of the
financial statement or a note to the financial statements
2. 50-1A When the consolidated financial statements reflect consolidation of less-than-wholly-
owned subsidiaries, the following additional information should be disclosed for such
subsidiaries
A. Consolidated net income, and when applicable, comprehensive income (appears on the face
of the financial statement -- not to be a footnote disclosure)
B. Net income and comprehensive income attributable to the parent and non-controlling
interest (minority) -- (appears on the face of the financial statement -- not to be a footnote
disclosure)
C. The following subtotals, with respect to the Parent organization, should be disclosed either
on the face of the financial statement or as a footnote disclosure
1) Income from continuing operations,
2) Discontinued operations, and/or
3) Extraordinary items.
D. Reporting entities are to report, either within the equity statement or notes to the financial
statements
1) Reconciliation of the equity accounts of the following, from the beginning to the end of the
reporting period,
a. Total equity -- at the consolidated level,
b. Parent,
c. Non-controlling (minority) interests
2) The level of detail of the reconciliations should disclose the following elements
a. Net income,
b. Transactions with owners -- acting as owners, and
c. Each component, as applicable, of other comprehensive income.
E. Any changes in parent ownership of a consolidated subsidiary should be disclosed in a
footnote.
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Examples
1 These consolidated financial statements include the accounts of the Company and its
global subsidiaries; all significant intercompany accounts and transactions have been eliminated.
Our Mexican subsidiary closes one month early to facilitate consolidated reporting.
2 The consolidated financial statements include the accounts of the Parent Company as of
the date the Share Exchange Agreement closed, October 3, 2011, and its wholly-owned
subsidiary, Subsidiary 1. All material intercompany balances and transactions have been
eliminated in consolidation. All financial and related data has been retroactively adjusted in the
accompanying consolidated financial statements and footnotes to reflect the effect of the
recapitalization of Young Aviation and the presentation of consolidated historical financial data.
3 The consolidated financial statements include the accounts of the Company and its
subsidiaries. In these consolidated financial statements, subsidiaries are companies that are
over 50% controlled, the accounts of which are consolidated with those of the Company.
Significant intercompany transactions and balances are eliminated in consolidation; profits from
intercompany sales, are also eliminated; non-controlling interests are included in equity.
4 The consolidated financial statements include the accounts of the Parent Company and
its subsidiaries. Intercompany accounts and transactions have been eliminated. Dollars are in
thousands, except per share amounts.
5 The consolidated financial statements include the accounts and transactions of the
Corporation and its subsidiaries. Intercompany accounts and transactions have been eliminated
in consolidation.
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Inventories
Professional Standards Regarding Inventories (ASC 330-10-50-1 through 6)
1. 50-1 Requires
A. Consistency in application (statement if not followed), and
B. Disclosure of the basis of stating inventories
C. If there has been a change that affects consistency, the nature of the change and effect
(subject to materiality considerations) on income should be provided
2. 50-2 Significant losses arising from the application of lower-of-cost-or-market should be
disclosed -- potentially as a separate line item.
3. 50-3 Inventory stated above cost should be disclosed.
4. Inventory stated as sales price should be disclosed.
5. 50-5 Any losses resulting from firm purchase (inventory) commitments should be disclosed,
and separately presented in the income statement.
6. 50-6 Significant estimates made in development of amounts for inventory should be
disclosed.
Examples
1 Inventories are valued at the lower of cost or market. Cost of approximately 44% of
inventories at March 31, 2012 (46% at March 31, 2011) has been determined using the LIFO
(last-in, first-out) method. Costs of other inventories have been determined using the FIFO (first-
in, first-out) or average cost method. FIFO cost approximates replacement cost. Costs in
inventory include components for direct labor and overhead costs.
2 Merchandise inventories are stated at the lower of cost or market. Cost is determined
using the retail first-in, first-out (FIFO) method and includes freight, buying and distribution
costs. The Company takes markdowns related to slow moving inventory, ensuring the
appropriate inventory valuation.
The Company regularly records a provision for estimated shrinkage, thereby reducing the
carrying value of merchandise inventory. A complete physical inventory of all of the Company's
stores and distribution facilities is performed annually, with the recorded amount of
merchandise inventory being adjusted to coincide with this physical count. The differences
between the estimated amount of shrinkage and the actual amount realized have been
insignificant.
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The Company receives vendor-provided support in different forms. When the vendor provides
support for inventory markdowns, the Company records the support as a reduction to cost of
sales. Such support is recorded in the period that the corresponding markdowns are taken.
When the Company receives inventory-related support that is not designated for markdowns,
the Company includes this support as a reduction of the cost of purchases.
Consignment merchandise on hand of $93,897 and $109,877 as of January 28, 2012 and January
29, 2011, respectively, is not reflected on the Consolidated Balance Sheets.
3 Inventories are comprised of components (raw materials), work-in-process and finished
goods, which are measured at the lower of cost or market.
Raw materials inventory is generally comprised of: electrical components, circuit boards,
mechanical fasteners, and housings. Work-in-process inventory is primarily comprised of units
that have commenced with assembly as well as capitalized labor and overhead. Finished Goods
inventory consists of fully assembled units ready for final shipment to the customer. Costs are
determined at cost of acquisition on a weighted average basis and include all outside production
and shipping costs.
All inventories are periodically reviewed for impairment due for slow-moving and obsolete
inventory. No impairment was recorded in 2010 or 2011. In 2012 we recorded an inventory
impairment charge of $357 of which $349 was in our GS segment and is included in Cost of Sales
- Products. There was no reserve for inventory recorded as of December 31, 2011. At December
31, 2012, the Company's inventory reserve was $316.
4 We value inventories at the lower of first-in, first-out cost or market. Inventory includes
raw materials and supplies ($15,159 in fiscal 2012 and $ 16,545 in fiscal 2011) and finished
goods ($8,229 in fiscal 2012 and $ 6,981 in fiscal 2011).
5 The Corporation valued 70%, 67% and 77% of its inventory by the LIFO method at
December 29, 2012, December 31, 2011 and January 1, 2011, respectively. During 2012 and
2010, inventory quantities were reduced at certain reporting units. This reduction resulted in a
liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as
compared with the cost of current year purchases, the effect of which decreased cost of goods
sold by approximately $0.8 million and $1.5 million in 2012 and 2010, respectively. If the FIFO
method had been in use, inventories would have been $25.5 million, $25.9 million and $23.8
million higher than reported at December 29, 2012, December 31, 2011 and January 1, 2011,
respectively.
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Nature of Operations
Professional Standards Regarding Nature of Operations (ASC 275-10-50-2)
50-2 All reporting entities should disclose the following matters, as applicable, regarding the
nature of their operations;
1. Major products and/or services,
2. Principal markets,
3. Location(s) of markets,
4. Relative significance of operations/services in reporting entities that provide multiple
products/services,
5. Not-for-Profit reporting entities should disclose the services performed, and significant
revenue sources
6. Disclosures need not be quantified.
Examples
1 The Company was incorporated under the laws of the State of Nevada, U.S. on
September 25, 2008. The Company is in the development stage as defined under Financial
Accounting Standards Board Accounting Standards Codification (FASB ASC 915-205)
Development-Stage Entities and it was formerly set up to design and construct eco-friendly
self- assembly housing and storage structures. The Company intended to build
a product that will be well suited to a more environmentally conscious market looking for
affordable quality housing and storage that can be put together easily and quickly. Initially the
target market will be the resort and cabin markets of Europe and North America. On October 7,
2011, the Company acquired certain patents and intellectual property relating to dental health
and care, and changed its operating name to another name.
2 Through April 16, 2002, the Associates owned the tenant’s interest in a master
operating leasehold (the Master Lease) on the Building, located at XXXX Fifth Avenue, New York,
New York. On April 17, 2002 Associates acquired, through a wholly-owned limited liability
company, the fee title to the Building and to the land thereunder (the Land), (together, the Real
Estate). Associates subleases the property to the Building Company L.L.C. (Sub lessee).
3 The Company, founded in 2004, is currently a diversified broker and supplier of parts,
components and products to the general aviation and aerospace markets of the U.S., Europe
and Asia. General aviation is defined as all aviation other than military and scheduled
commercial airlines. Over 20% of our sales revenue has been derived from international sales
for the period from January 1, 2009 to date.
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The Company services a broad range of clients such as aircraft leasing companies, major airlines,
repair stations, fixed-base operators, leasing companies and after -market suppliers.
4 As of April 27, 2012, the Company and its subsidiaries owned and operated 710 full-
service restaurants in 24 states. The Company's Restaurants are primarily located in the
Midwest, mid-Atlantic and Southeast regions of the United States. Our subsidiary's properties
are primarily in California and other western states. We also produce and distribute pork
sausage products and a variety of complementary home-style convenience food items under the
Company's brand names. These food products are distributed primarily to warehouses that
distribute to grocery stores throughout the United States.
5 The Corporation is a provider of office furniture and hearth products. Both industries
are reportable segments; however, the Corporation’s office furniture business is its principal line
of business. Refer to Operating Segment Information for further information. Office furniture
products are sold through a national system of dealers, wholesalers and national office product
distributors and directly to end-user customers and federal and state governments. Dealers and
wholesalers are the major channels based on sales. Hearth products include a full array of gas,
electric, and wood burning fireplaces, inserts, stoves, facings and accessories. These products
are sold through a national system of dealers and distributors, as well as Corporation-owned
distribution and retail outlets. The Corporation’s products are marketed predominantly in the
United States and Canada. The Corporation exports select products to a limited number of
markets outside North America, principally Latin America and the Caribbean, through its export
subsidiary and manufactures and markets office furniture in Asia and India; however, based on
sales, these activities are not significant.
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Accounts Receivable
Professional Standards Regarding Accounts Receivable (ASC 310-10-50-1 through 14) Note:
Guidance provided is restricted, primarily, to trade and financing receivables -- this section is
much broader in coverage.
1. 50-3 The following matters, as applicable, must appear in the Summary of Significant
Accounting Policies;
A. Basis for accounting for loans, as well as, trade receivables,
B. How lower-of-cost-or-market considerations apply to non-mortgage loans that are held for
sale,
C. Classification and method of accounting for accounts receivable that can be settled in a
manner whereby the maker (reporting entity) would not recover substantially all of its recorded
investment in such receivable(s),
D. The method used to recognize interest income on receivables for which interest accrues.
2. 50-3 If there is more than one significant category of receivables, accounts receivable by
category -- either on the face of the balance sheet or notes thereto.
3. 50-4 The allowance for doubtful accounts should appear on the face of the financial
statements, and 50-14, the valuation allowance should be netted on the face of the balance
sheet
4. 50-4A -- For all trade receivables (other than credit card), reporting entities should disclose
their policy for writing off short-term receivables that arose from the sale of goods and/or
services (trade)
5. 50-5 The amount of any receivables that have been pledged as collateral, as well as the
amount of related debt
6. 50-6 (Partial) The entity's policy for determining that accounts receivable are past
due/delinquent
Examples
1 The Company's accounts receivable are unsecured and the Company is at risk to the
extent such amounts become uncollectible. Management continually monitors accounts
receivable balances and provides for an allowance for doubtful accounts at the time collection
becomes questionable based on payment history or age of the receivable. The Company sells
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products and services and generally factors the receivable amount on terms of immediately
receiving 80% of the invoice amount from the factor upon shipment and the remaining 20%
upon collection by the factor from the customer. The Company is charged financing fees on late
payments and a nominal factoring fee by the factor. Accounts receivable are charged to the
allowance for bad debts when the Company has exhausted all reasonable means of collection.
At December 31, 2011, management deemed that certain accounts receivable may not be fully
collectible and that a bad debt reserve in the amount of $2,050 was required.
2 Accounts receivable consists of trade receivables. Trade receivables are recorded at the
invoiced amount.
3 Trade receivables, recorded on our consolidated balance sheet in Other receivables, net,
consist primarily of Automotive sector receivables for vehicles, parts, and accessories. Trade
receivables initially are recorded at the transaction amount. We record an allowance for
doubtful accounts representing our estimate of the probable losses inherent in trade
receivables. At every reporting period, we assess the adequacy of our allowance for doubtful
accounts taking into consideration recoveries received during that period. Additions to the
allowance for doubtful accounts are made by recording charges to bad debt expense reported in
Automotive cost of sales. Receivables are charged to the allowance for doubtful accounts when
an account is deemed to be uncollectible.
4 Accounts receivable are presented net of allowance for doubtful accounts of $5.2
million, $4.8 million and $5.5 million, for 2012, 2011 and 2010, respectively. The allowance is
developed based on several factors including overall customer credit quality, historical write-off
experience, and specific account analyses projecting the ultimate collectability of the
account. As such, these factors may change over time causing the reserve level to adjust
accordingly.
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Asset Impairment
Professional Standards Regarding Asset Impairment -- As indicated, below
1. Long-lived assets -- ASC 360-10-50-1 through 3 -- The following items are the minimum
disclosure matters when an impairment of a long-lived asset that is currently held and used by a
reporting entity occurs
A. A description of the impaired asset,
B. Circumstances that led to the presumed impairment,
C. If the impairment loss is not a line item in the income statement, the amount of the loss and
the line item in which it appears,
D. How fair value was determined, and
E. When applicable, the segment in which the impaired asset appears.
2. Goodwill Impairment -- 350-20-50-2 -- Following are the minimum disclosures required when
it has been determined that there is an impairment related to goodwill
A. Facts and/or circumstances that indicate that an impairment has occurred,
B. Amount of the impairment loss,
C. The manner by which fair value was determined, and
D. When an estimate of the impairment loss has yet to be finalized, a statement that the
impairment loss has not been finalized, and the reasons for the delay
3. Intangible assets other than goodwill -- 320-30-50-3 -- When an impairment of an intangible
asset, other than goodwill, is identified the following disclosures are to be made by the
reporting entity
A. Description of the impaired asset,
B. Facts and/or circumstances resulting in the impairment,
C. Amount of the impairment loss,
D. Method of estimating fair value,
E. If the impairment loss does not appear as a line item in the income statement, the amount
and line where such loss appears in the income statement,
F. When applicable, the segment in which the impaired asset appears.
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Examples
1 Long-lived assets including certain intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to the undiscounted future net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. No such events occurred in any
of the years ending December 31, 2010, 2011 or 2012.
2 The Company evaluates its long-lived assets for impairment, in accordance with FASB
ASC 360-10, when events or changes in circumstances indicate that the related carrying amount
may not be recoverable. Impairment is considered to exist if the total estimated future cash
flow on an undiscounted basis is less than the carrying amount of the related assets. An
impairment loss is measured and recorded based on the discounted estimated future cash
flows. Changes in significant assumptions underlying future cash flow estimates or fair values of
assets may have a material effect on the Company's financial position and results of operations.
No such impairment to
3 Impairment and disposition costs include costs associated with store closures, including
employee severance and lease termination fees, asset impairment and disposal charges, and
other store closure activities. Additionally, impairment and disposition costs include long-lived
asset impairment charges related to assets held and used and losses related to asset
dispositions made during the normal course of business.
The Company continuously evaluates its real estate portfolio and closes underproductive stores
in the normal course of business as leases expire or as other circumstances dictate. During 2011,
the Company closed one ON store and two OFF stores. The Company incurred $5,065 of store
closing costs primarily related to a lease termination fee and employee severance. Also included
in impairment and disposition costs for 2011 is $5,041 of asset impairment charges related to
held and used assets.
During 2010, the Company incurred costs associated with the closing of seven ON stores and
one OFF store. The Company incurred $12,045 of store closing-related costs associated with
these locations. Also included in impairment and disposition costs for 2010 are $785 of asset
impairment charges related to held and used assets and $255 of losses on the disposal of assets
during the normal course of business.
During 2009, the Company incurred $28,176 of asset impairment charges related to held and
used assets and $1,172 of losses on the disposal of assets during the normal course of business.
4 The Company assesses impairment of its long-lived assets in accordance with the
provisions of ASC Topic 360 Property, Plant, and Equipment. This statement requires long-lived
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assets, such as property and equipment and purchased intangibles subject to amortization to be
reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset group to estimated
undiscounted future cash flows expected to be generated by the asset group. If the carrying
amount of an asset group exceeds its estimated future cash flows, an impairment charge is
recognized equal to the amount by which the carrying amount of the asset group exceeds the
fair value of the asset group.
In assessing long-lived assets for an impairment loss, assets are grouped with other assets and
liabilities at the lowest level for which identifiable cash flows are largely independent of the cash
flows of other assets and liabilities. Asset grouping requires a significant amount of judgment.
Accordingly, facts and circumstances will influence how asset groups are determined for
impairment testing. In assessing long-lived assets for impairment, management considered the
Company's product line portfolio, customers and related commercial agreements, labor
agreements and other factors in grouping assets and liabilities at the lowest level for which
identifiable cash flows are independent. The Company considers projected future undiscounted
cash flows, trends and other factors in its assessment of whether impairment conditions exist.
While the Company believes that its estimates of future cash flows are reasonable, different
assumptions regarding such factors as future production volumes, customer pricing, economics
and productivity and cost initiatives, could significantly affect its estimates. In determining fair
value of long-lived assets, management uses management estimates, discounted cash flow
calculations, and appraisals where necessary.
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Basis of Presentation
Professional Standards Regarding Basis of Presentation -- There does not appear to be any
specific professional standard requiring the disclosure of the basis of presentation. However,
this disclosure appears in approximately 40 to 50 percent of the reporting entities reviewed for
this session.
Examples
1 The financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States (US GAAP) and are expressed in
U.S. dollars. The Company’s fiscal year end is August 31.
2 The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation.
3 The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for complete financial
statements.
4 The Company’s financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP).
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Fair Value Measurement
Professional Standards Regarding Fair Value Measurement -- 820-10-50-1 through 10, 825-10-
50-2 through 19 (optional for non-public entities -- details of disclosures not included in this
discussion) -- Note: Examples do not include tabular required disclosure
1. 820-10-50 Fair Value Measurement -- General
A. 50-1 Reporting entities should disclose information regarding fair value in each of the
following two circumstances:
1) Assets and/or liabilities measured at fair value on a recurring basis -- Both the techniques
and inputs used in development of the estimate, and
2) For fair value estimates dealing with level 3 (unobservable) inputs -- the effect of the
measurement on earnings for the reporting period.
B. In meeting the above disclosure requirement, the disclosure should be sufficient to address
the following areas of user concern:
1) An appropriate level of detail for the intended use of the financial statements,
2) Appropriate emphasis on disclosure elements,
3) Appropriate level of summarization, and
4) Generic need to prevent the financial statement disclosure(s) from being misleading
C. 50-2 Disclosure of fair value information should include reconciliations, by class/category of
asset or liability, at the following level of detail:
1) Fair value a the reporting date,
2) The level of the fair value hierarchy (see examples, below) that the asset/liability attaches
to,
3) Significant transfers between levels one and two,
4) For assets/liabilities whose fair value was determined through the use of unobservable
inputs, a reconciliation of the beginning and ending balance, to include the following as
applicable
a. Gains and losses for the period -- split between those appearing in the calculation of net
income and comprehensive income
b. Purchases, sales, issuances, and/or settlements,
c. Transfers in and out of the level three category,
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e. Gains and/or losses included in income resulting from changes in unrealized gains and/or
losses during the reporting period (and where such amounts appear within the income
statement.
f. For all significant assets/liabilities whose inputs are derived from either level two or level
three -- a description of the valuation technique used (market approach, income approach, cost
approach)
D. 50-3 There is additional disclosure guidance for derivative assets and/or liabilities, which
includes:
1) Fair value disclosure related to levels 1 through 3 are to be made on a gross basis, while
2) Reconciliations that involve transfers to/from level three may be prepared either on a gross
or net basis.
E. 50-5 For those assets and/or liabilities measured at fair value on a non-recurring basis, the
following disclosures should be made:
1) Fair value measurement amount,
2) Reason for the (re) measurement,
3) The level of the fair value hierarchy (see examples, below) that the asset/liability attaches
to, and
4) Other disclosure requirements attendant to the level of the inputs used in determining the
fair value
F. 50-7 A change in valuation technique and/or method of application is not a change in
accounting estimate, as used in ASC Section 250
G. 50-8 Quantitative disclosures regarding fair value should by made in tabular (table) form.
2. 825-10-50-1 through 19 -- this is guidance on fair value relating to financial instruments that
is mandatory for public reporting entities, but is optional for non-public reporting entities -- No
further specific guidance will be presented in this seminar.
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Examples
1 Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (i.e., exit price)
in the principal and most advantageous market for the asset or liability. Assets and liabilities are
classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by
market data
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions
As of January 28, 2012 and January 29, 2011, the Company had no financial assets or liabilities
measured at fair value on a recurring basis.
Assets and liabilities that are measured at fair value on a non-recurring basis include the
Company's long-lived assets. During 2011, long-lived assets held and used with a carrying value
of $7,533 were written down to their estimated fair value of $2,492, resulting in an impairment
loss of $5,041. During 2010, long-lived assets held and used with a carrying value of $785 were
written down to their estimated fair value of $0, resulting in an impairment loss of $785. The fair
values of long-lived assets held and used were determined using an income-based approach and
are classified as Level 3 within the fair value hierarchy. Significant inputs include projections of
future cash flows and discount rates. These inputs are based on assumptions from the
perspective of market participants.
The fair value of cash and cash equivalents, accounts payable and accrued liabilities
approximates carrying value due to the short-term maturities of these assets and liabilities. See
Note X for disclosure of the fair value of long-term debt.
2 ASC 825-10, formerly Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosures of information about the fair
value of certain financial instruments for which it is practicable to estimate the value. For
purpose of this disclosure, the fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation.
At December 31, 2011 the fair value of current liabilities approximated book value.
3 The Company follows the provisions of the accounting standard which defines fair value,
establishes a framework for measuring fair value and enhances fair value measurement
disclosure. Under these provisions, fair value is defined as the price that would be received to
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sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between
market participants at the measurement date.
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use on unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability developed based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that reflect the
Company’s assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the circumstances. The
hierarchy is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
4 Cash equivalents, marketable securities, and derivative financial instruments are
presented in our financial statements on a recurring basis at fair value, while other assets and
liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset
impairment. In measuring fair value, we use various valuation methodologies and prioritize the
use of observable inputs. The use of observable and unobservable inputs and their significance
in measuring fair value are reflected in our fair value hierarchy assessment.
Level 1 - inputs include quoted prices for identical instruments and are the most observable
Level 2 - inputs include quoted prices for similar instruments and observable inputs such as
interest rates, currency exchange rates, and yield curves
Level 3 - inputs include data not observable in the market and reflect management judgment
about the assumptions market participants would use in pricing the instruments
We review the inputs to the fair value measurements to ensure they are appropriately
categorized within the fair value hierarchy. Transfers into and transfers out of the hierarchy
levels are recognized as if they had taken place at the end of the reporting period.
Cash and Cash Equivalents. Included in Cash and cash equivalents are highly liquid investments
that are readily convertible to known amounts of cash, and which are subject to an insignificant
risk of change in value due to interest rate, quoted price, or penalty on withdrawal. A debt
security is classified as a cash equivalent if it meets these criteria and if it has a remaining time
to maturity of 90 days or less from the date of acquisition. Amounts on deposit and available
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upon demand, or negotiated to provide for daily liquidity without penalty, are classified as Cash
and cash equivalents. Time deposits, certificates of deposit, and money market accounts that
meet the above criteria are reported at par value on our balance sheet and are excluded from
the tables below.
Marketable Securities. Investments in securities with a maturity date greater than 90 days at the
date of purchase and other securities for which there is more than an insignificant risk of change
in value due to interest rate, quoted price, or penalty on withdrawal are classified as Marketable
securities. We generally measure fair value using prices obtained from pricing services. Pricing
methodologies and inputs to valuation models used by the pricing services depend on the
security type (i.e., asset class). Where possible, fair values are generated using market inputs
including quoted prices (the closing price in an exchange market), bid prices (the price at which
a buyer stands ready to purchase), and other market information. For fixed income securities
that are not actively traded, the pricing services use alternative methods to determine fair value
for the securities, including: quotes for similar fixed-income securities, matrix pricing,
discounted cash flow using benchmark curves, or other factors to determine fair value. In
certain cases, when market data are not available, we may use broker quotes to determine fair
value.
A review is performed on the security prices received from our pricing services, which includes
discussion and analysis of the inputs used by the pricing services to value our securities. We also
compare the price of certain securities sold close to the quarter-end to the price of the same
security at the balance sheet date to ensure the reported fair value is reasonable.
Derivative Financial Instruments. Our derivatives are over-the-counter customized derivative
transactions and are not exchange traded. We estimate the fair value of these instruments using
industry-standard valuation models such as a discounted cash flow. These models project future
cash flows and discount the future amounts to a present value using market-based expectations
for interest rates, foreign exchange rates, commodity prices, and the contractual terms of the
derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g.,
LIBOR) plus an adjustment for non-performance risk. The adjustment reflects the full credit
default swap (CDS) spread applied to a net exposure, by counterparty, considering the master
netting agreements and posted collateral. We use our counterparty's CDS spread when we are
in a net asset position and our own CDS spread when we are in a net liability position. In certain
cases, market data are not available and we use broker quotes and models (e.g., Black Scholes)
to determine fair value. This includes situations where there is illiquidity for a particular
currency or commodity or for longer-dated instruments.
Finance Receivables. We measure finance receivables at fair value for purposes of disclosure
(see Note 7) using internal valuation models. These models project future cash flows of
financing contracts based on scheduled contract payments (including principal and interest). The
projected cash flows are discounted to present value based on assumptions regarding credit
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losses, pre-payment speed, and applicable spreads to approximate current rates. Our
assumptions regarding pre-payment speed and credit losses are based on historical
performance. The fair value of finance receivables is categorized within Level 3 of the hierarchy.
On a nonrecurring basis, when retail contracts are greater than 120 days past due or deemed to
be uncollectible, or if individual dealer loans are probable of foreclosure, we use the fair value of
collateral, adjusted for estimated costs to sell, to determine the fair value adjustment to our
receivables. The collateral for retail receivables is the vehicle financed, and for dealer loans is
real estate or other property.
The fair value measurements for retail receivables are based on the number of contracts
multiplied by the loss severity and the probability of default (POD) percentage, or the
outstanding receivable balances multiplied by the average recovery value (ARV) percentage to
determine the fair value adjustment.
The fair value measurements for dealer loans are based on an assessment of the estimated fair
value of collateral. The assessment is performed by reviewing various appraisals, which include
total adjusted appraised value of land and improvements, alternate use appraised value,
broker's opinion of value, and purchase offers. The fair value adjustment is determined by
comparing the net carrying value of the dealer loan and the estimated fair value of collateral.
Debt. We measure debt at fair value for purposes of disclosure (see Note 17) using quoted
prices for our own debt with approximately the same remaining maturities, where possible.
Where quoted prices are not available, we estimate fair value using discounted cash flows and
market-based expectations for interest rates, credit risk, and the contractual terms of the debt
instruments. For certain short-term debt with an original maturity date of one year or less, we
assume that book value is a reasonable approximation of the debt's fair value. The fair value of
debt is categorized within Level 2 of the hierarchy.
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Financial Instruments
Professional Standards Regarding Financial Instruments -- 825-10-50-2 through 10, 825-10-50-1
through 19 (optional for non-public entities -- details of disclosures not included in this
discussion), 825-10-50-20 through 22 -- Concentrations of credit risk, 825-10-50-23 -- Market
risk of all financial instruments, and 825-10-50-28 through 32 -- Fair value option
825-10-50-20 et seq -- Concentrations of credit risk should include the following disclosures for
each type of concentration:
1. Information about the nature of the concentration (activity, geography, economic
characteristic, customer type)
2. Maximum amount of loss as if counterparty failed to perform,
3. Matters related to any collateral attendant to the affected financial instrument, and
4. Policies regarding master netting arrangements, if any.
825-10-50-23 Disclosures regarding the existence of Market risk (encouraged, but not required)
should address the following matters:
1. Details regarding instruments subject to market risk,
2. Hypothetical effects on income (net and comprehensive),
3. Gap analysis regarding relevant interest rates,
4. Life of the affected financial instruments, and
5. The reporting entity's value at risk at the end of the reporting period, as well as the average
value at risk during the reporting period.
825-10-50-28 through 30 -- Regarding assets and/or liabilities for which the reporting entity has
opted for the fair value option, the following disclosures should be made:
1. Managements reason(s) for opting for fair value,
2. If the option is used for some items, but not all, in a similar grouping -- the reason for the
selectivity,
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3. For each line item on the position statement that includes items resulting from the fair value
option:
A. Information that relates the line item to the class of asset and/or liability presented at fair
value, and
B. Aggregate carrying amount of items in a particular line that are not eligible for fair value
presentation.
4. The difference between fair value and contractual principal amounts of loans receivable,
long-term receivables, and long-term debt instruments,
5. Regarding loans held a assets, disclosure is required regarding past due (90 days)
instruments, and
6. Disclosures are required for investments that would have been presented using the equity
method, if the fair value option had not been used.
825-10-50-30 Fair value option income statement-related disclosures
1. For each affected line item within an income statement, the amounts of gains and/or losses
included in the line item related to fair value,
2. Disclosure of how interest and/or dividends are measured, and where they appear within
the income statement
3. For loans and other receivables (assets)
A. Amount of gains or losses included attributable to changes in credit risk, and
B. How the amount of gains and/or losses was determined
4. For those liabilities that have been significantly affected by credit risk
A. Estimated gains/losses as a result of the change in credit risk,
B. Qualitative inputs considered in determining change in credit risk, and
C. The method of determination of credit risk gains and/or losses.
825-10-50-31 -- Other Fair Value option disclosures -- In annual financial statements -- methods
and/or assumptions that underpin fair value estimate.
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Examples - Fair value of financial instruments (required for Public reporting entities only)
1 Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to
maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of
independent, objective evidence surrounding the inputs used to measure fair value. A financial
instrument’s categorization within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three
levels that may be used to measure fair value:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for
identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are
observable for the asset or liability such as quoted prices for similar assets or liabilities in active
markets; quoted prices for identical assets or liabilities in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in which significant
inputs are observable or can be derived principally from, or corroborated by, observable market
data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation
methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist principally of cash, and accounts payable, and
amounts due to related parties. Pursuant to ASC 820, the fair value of our cash is determined
based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. We
believe that the recorded values of all of our other financial instruments approximate their
current fair values because of their nature and respective maturity dates or durations.
2 The carrying value of the Company's current assets and current liabilities approximate
their fair values based upon the relatively short maturity of those instruments.
3 The fair values of our financial instruments (other than long-term debt) approximate
their carrying values at April 27, 2012, and April 29, 2011. At April 27, 2012, the estimated fair
value of our long-term debt approximated 142,025 compared to a carrying amount of 135,716.
At April 29, 2011, the estimated fair value of our long-term debt approximated 160,466
compared to a carrying amount of 149,287. We estimate the fair value of our long-term debt
based on the current interest rates offered for debt of the same maturities. We do not use
derivative financial instruments for speculative purposes.
4 The Company follows paragraph 820-10-35-37 of the FASB Accounting Standards
Codification (Paragraph 820-10-35-37) to measure the fair value of its financial instruments and
paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about
fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for
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measuring fair value in accounting principles generally accepted in the United States of America
(U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency
and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to
measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined
by Paragraph 820-10-35-37 are described below:
Level 1 -- Quoted market prices available in active markets for identical assets or liabilities as of
the reporting date.
Level 2 -- Pricing inputs other than quoted prices in active markets included in Level 1, which are
either directly or indirectly observable as of the reporting date.
Level 3 -- Pricing inputs that are generally observable inputs and not corroborated by market
data. Financial assets are considered Level 3 when their fair values are determined using pricing
models, discounted cash flow methodologies or similar techniques and at least one significant
model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active
markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the
inputs used to measure the financial assets and liabilities fall within more than one level
described above, the categorization is based on the lowest level input that is significant to the
fair value measurement of the instrument. The carrying amounts of the Company’s financial
assets and liabilities, such as accrued expenses approximate their fair values because of the
short maturity of these instruments.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length
basis, as the requisite conditions of competitive, free-market dealings may not exist.
Representations about transactions with related parties, if made, shall not imply that the related
party transactions were consummated on terms equivalent to those that prevail in arm's-length
transactions unless such representations can be substantiated. It is not, however, practical to
determine the fair value of advances from stockholders due to their related party nature.
Examples -- Concentrations of Credit Risk
5 Credit risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted. Concentrations of credit risk
(whether on or off balance sheet) that arise from financial instruments exist for groups of
customers or counterparties when they have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by changes in economic or
other conditions.
The Company has a diverse customer base, but is currently dependent on four customers. Over
the past three years, one of the four customers has accounted for approximately 66% of the
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Company's sales revenue and the additional three customers have accounted for approximately
23% of the sales revenue during the same timeframe. A loss of the largest major customer could
result in a material adverse effect on our business, results of operations and financial condition.
6 Financial instruments, which potentially subject the Company to concentrations of
credit risk, consist principally of cash and cash equivalents, restricted deposits and accounts
receivable. The Company’s cash, cash equivalents and restricted cash deposits were deposited
with U.S., Israeli and Australian banks and other financial institutions and amounted to $26,961
at December 31, 2012. The Company uses major banks and brokerage firms to invest its excess
cash, primarily in money market funds. The counterparty to the Company's restricted deposits
are two major Israeli banks. The Company does not believe there is significant risk of non-
performance by these counterparties. Related credit risk would result from a default by the
financial institutions or issuers of investments to the extent of the recorded carrying value of
these assets. Approximately 37% of the accounts receivable at December 31, 2012, was due
from one customer who pays their receivables over usual credit periods (as to revenues from
significant customers – see Note 20(d)). Credit risk with respect to the balance of trade
receivables is generally diversified due to the number of entities comprising the Company’s
customer base. Approximately 70% of the balance in unbilled revenue at December 31, 2012
was due from two customers that when billed, pay their trade receivables over usual credit
periods. Credit risk with respect to the balance of unbilled revenue is generally diversified due
to the number of entities comprising our customer base.
7 We maintain cash depository accounts with major banks and invest in high-quality
short-term liquid instruments. Such investments are made only in instruments issued or
enhanced by high-quality institutions. These investments mature within three months and we
have not incurred any related losses.
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Goodwill
Professional Standards Regarding Goodwill -- 350-20-50-1 through 2
350-20-50-1 -- When goodwill is presented in a statement of financial position, the following
disclosures, as applicable, should be made:
1. Gross amount of goodwill and, if applicable, accumulated impairment loss,
2. Additional goodwill recognized during the period,
3. Adjustments resulting from subsequent recognition of deferred tax assets,
4. Goodwill included in a group of assets designated for disposal,
5. Impairment losses recognized during the reporting period,
6. Exchange differences,
7. Other changes in carrying amounts, and
8. Gross and accumulated impairment losses at the end of the reporting period.
350-20-50-2 -- In each period in which a goodwill impairment arises, the following matters
should be disclosed:
1. Facts and/or circumstances leading to recognition of an impairment,
2. Amount of the impairment loss,
3. Method(s) employed in determining fair value,
4. When the estimated impairment loss has not been finalized, this fact should be disclosed as
well as disclosure of the reason for the incomplete estimate.
Examples
1 Goodwill is not amortized but is tested for impairment at least annually, in accordance
with the provisions of ASC Topic 350-20-35-1. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. The fair value of a reporting unit
is determined using a discounted cash flow methodology. The Company's reporting units are
determined based upon whether discrete financial information is available and reviewed
regularly, whether those units constitute a business, and the extent of economic similarities
between those reporting units for purposes of aggregation. The Company's reporting units
identified under ASC Topic 350-20-35-33 are at the component level, or one level below the
reporting segment level as defined under ASC Topic 280-10-50-10 Segment Reporting –
Disclosure. The Company's one segment is subdivided into four reporting units.
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When the Company evaluates the potential for goodwill impairment, it assesses a range of
qualitative factors including, but not limited to, macroeconomic conditions, industry conditions,
the competitive environment, changes in the market for its products and services, regulatory
and political developments, entity specific factors such as strategy and changes in key personnel
and overall financial performance. If, after completing this assessment, it is determined that it is
more likely than not that the fair value of a reporting unit is less than its carrying value, the
Company proceeds to a two-step impairment test.
The Company performed its qualitative assessment during the fourth quarter and determined
that it was not more likely than not that the fair value of each of its reporting units was less than
that its applicable carrying value. Accordingly, the Company did not perform the two-step
goodwill impairment test for any of its reporting units. See Note 9 for further discussion of
goodwill and intangible assets.
2 Goodwill and intangible assets determined to have an indefinite useful life are not
amortized, but instead are tested for impairment at least annually. Intangible assets that have
finite useful lives (e.g. purchased technology), are recorded at fair value at the time of the
acquisition, and are carried at such value less accumulated amortization. The Company
amortizes these intangible assets on a straight-line basis over their estimated useful lives, a
portion of which is allocated to cost of sales. Intangible assets are reviewed for impairment in
accordance applicable accounting principles.
Application of the goodwill impairment test requires judgment, including the identification of
reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to
reporting units, and determination of the fair value of each reporting unit. The Company has
identified its operating segments as its reporting units for purposes of the impairment test. The
Company’s existing goodwill and intangible assets are associated with its Energy & Security
Sonar Solutions, GridSense, Power Generation, USSI and Other segments.
In September 2011, the Financial Accounting Standards Board (FASB) issued guidance that
simplified how entities test for goodwill impairment. This guidance permits entities to first
assess qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount as a basis for determining whether it is necessary
to perform a two-step goodwill impairment test. This guidance is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after December 15,
2011, and early adoption is permitted. As discussed more fully in Note 11(a) to the Consolidated
Financial Statements, the Company early adopted this guidance for its annual goodwill
impairment test that was conducted in the fourth quarter of 2011.
If the Company determined that is was necessary to perform a two-step goodwill impairment
test, it would determine the fair value of each reporting unit and compare it to the carrying
amount of the reporting unit. Calculating the fair value of the reporting units requires
significant estimates and assumptions by management. To the extent the carrying amount of a
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reporting unit exceeds the fair value of the reporting unit, there is an indication that the
reporting unit goodwill may be impaired and a second step of the impairment test is performed
to determine the amount of the impairment to be recognized, if any.
3 Goodwill, which represents the cost in excess of fair market value of net assets acquired,
was $1,567 for both fiscal 2012 and fiscal 2011. Goodwill is not amortized; rather it is tested for
impairment at the beginning of the fourth quarter each year or on a more frequent basis when
events occur or circumstances change between the annual tests that would more likely than not
reduce the fair value of the reporting unit below its carrying value. In fiscal 2012, 2011, and
2010, no indicators existed for impairment, thus no goodwill impairment charges were
recorded.
4 The Corporation evaluates its goodwill for impairment on an annual basis during the
fourth quarter or whenever indicators of impairment exist. In September 2011, the FASB issued
guidance that simplified how entities test for goodwill impairment. This guidance permits
entities to first assess qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform a two-step goodwill impairment test. The Corporation utilized this
guidance for certain reporting units for the annual impairment evaluation during the fourth
quarter of 2012 where the fair value was well in excess of carrying value in prior year analysis.
The qualitative factors considered included, but were not limited to, general economic
conditions, outlook for the office furniture and hearth products industries and recent and
forecasted financial performance. The Corporation performed the two-step goodwill
impairment test for all other reporting units and used various valuation techniques with the
primary technique being a discounted cash flow method. Determining the fair value of a
reporting unit involves the use of significant estimates and assumptions. Management bases its
fair value estimates on assumptions it believes to be reasonable at the time, but such
assumptions are subject to inherent uncertainty. Actual results may differ from those
estimates.
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Professional Standards Regarding Fiscal Year -- There is no specific requirement, in the
Accounting Standards Codification, that requires disclosure of the fiscal year. However, if the
year-end is other than a calendar year end (December 31) especially if it is a 52/53 week period,
organizations tend to disclose this in the summary of significant accounting policies footnote.
Examples
1 The Company's fiscal year ends on the Saturday closest to January 31st. Fiscal years
2011, 2010, and 2009 ended on January 28, 2012 (2011), January 29, 2011 (2010), and January
30, 2010 (2009), respectively.
2 Fiscal Year: Our fiscal year ends on the last Friday in April. References herein to fiscal
2012, fiscal 2011 and fiscal 2010 refer to fiscal years ended April 27, 2012; April 29, 2011; and
April 30, 2010, respectively. All years presented were comprised of 52 weeks, except for fiscal
2010, which contained 53 weeks.
Prior to fiscal 2012, the consolidated operating results of the parent entity and its segments
were reported based upon a two-day early cutoff. During fiscal 2012, we eliminated this two-
day early cutoff, as it was no longer required to achieve a timely consolidation. The effect of this
change was to reflect 367 days of operating results for the parent entity and its segments within
our fiscal 2012 consolidated income statements. This resulted in $1,803 and $207 of additional
operating income for the parent entity and its segments, respectively.
3 The Corporation follows a 52/53 week fiscal year which ends on the Saturday nearest
December 31. Fiscal year 2012 ended on December 29, 2012; 2011 ended on December 31,
2011; and 2010 ended on January 1, 2011. The financial statements for fiscal years 2012, 2011
and 2010 are on a 52-week basis. A 53-week year occurs approximately every sixth year.
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Warranties
Professional Standards Regarding Warranties -- There is no specific requirement, in the
Accounting Standards Codification, that requires disclosure of warranty expense. However,
warranty expense is a form of contingency, and as such, is subject to those provisions. The
following guidance is specific to contingencies:
450-20-50- 3 and 4 --
1. Disclosure is to be made when it is at least possible, or probable that a loss may exist in
excess of any amount accrued, and should include
2. The nature of the contingency, and
3. An estimate of a possible range of loss in excess of the amount accrued (subject to
materiality considerations).
Examples -- Note: Most of the examples provide a table that discloses warranty activity during
the reporting period -- examples are not included in this resource.
1 The Company offers warranties for certain products it sells. The specific terms and
conditions of those warranties vary depending upon the product sold and the country in which
the Company sold the product. The Company generally provides a basic limited warranty,
including parts and labor for any product deemed to be defective for a period of one year. The
Company estimates the costs that may be incurred under its basic limited warranty, based
largely upon actual warranty repair costs history, and records a liability in the amount of such
costs in the month that the product revenue is recognized. The resulting accrual balance is
reviewed during the year. Factors that affect the Company's warranty liability include the
number of units sold, historical and anticipated rate of warranty claims, and cost per claim.
2 The Company’s subsidiary generally grants its customers a one to two year warranty on
its projects. The Company’s subsidiaries generally grant its customers a one year warranty on
their respective products.
Estimated warranty obligations are provided for as a cost of sales in the period in which the
related revenues are recognized, based on management’s estimate of future potential warranty
obligations and limited historical experience. Adjustments are made to accruals as warranty
claim data and historical experience warrant.
The Company’s warranty obligations may be materially affected by product or service failure
rates and other costs incurred in correcting a product or service failure. Should actual product
or service failure rates or other related costs differ from the Company’s estimates, revisions to
the accrued warranty liability would be required.
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3 The Corporation issues certain warranty policies on its furniture and hearth products
that provide for repair or replacement of any covered product or component failing during
normal use because of a defect in design, materials or workmanship. Reserves have been
established for the various costs associated with the Corporation's warranty programs and are
included in Accounts payable and accrued expenses in the Consolidated Balance Sheets.
A warranty reserve is determined by recording a specific reserve for known warranty issues and
an additional reserve for unknown claims expected to be incurred based on historical claims
experience. Actual claims incurred could differ from the original estimates, requiring
adjustments to the reserve.
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Advertising
Professional Standards Regarding Advertising --
720-35-50-1
1. Disclose the approach taken with respect to the options available (720-35-25-1)
A. As incurred, or
B. The first time that the advertising (project) takes place
2. The total amount charged to advertising for each period for which an income statement is
presented.
Examples
1 We expense advertising costs as incurred. Advertising expense was $ 51,266; $ 49,311;
and $ 45,648 in fiscal 2012, fiscal 2011 and fiscal 2010, respectively.
2 Freight, engineering, and research and development costs are included in automotive
cost of sales; advertising costs are included in Selling, administrative, and other expenses.
3 Advertising and sales promotion costs are expensed in the period in which the
advertising event takes place.
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Commitments and Contingencies
Professional Standards Regarding Commitments and Contingencies --
1. The following guidance is specific to contingencies: 450-20-50- 3 and 4 --
A. Disclosure is to be made when it is at least possible, or probable that a loss may exist in
excess of any amount accrued, and should include
B. The nature of the contingency, and
C. An estimate of a possible range of loss in excess of the amount accrued (subject to
materiality considerations).
2. Professional standards discusses disclosure of commitments at 440-10-50-1 through 7
A. If any of the following commitments exist, they should be disclosed within the financial
statements (each of the following items have item-specific disclosure requirements)
1) Unused letters of credit,
2) Long-term leases,
3) Assets pledged as collateral for loans,
4) Pension plans,
5) Dividend arrearage for cumulative preferred stock,
6) Firm commitments (examples included in ASC)
B. Regarding unconditional purchase orders (UPO) that have not been recognized within the
current financial statements (by virtue of another issue-specific standard) should have the
following matters disclosed (subject to materiality)
1) Nature and term of the commitment,
2) Amount of the fixed and determinable portion of the commitment -- for the current period
and each of the succeeding five years (subject to practicability)
3) The nature of variable attributes attendant to the commitment,
4) Amounts, if any, purchased under the UPO for each reporting period for which an income
statement is presented.
C. With respect to UPOs that have been recognized in the financial statements, the amount of
payments required by the instrument for each of the succeeding five years (5 year schedule)
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Examples
1 We rent certain restaurant facilities under operating leases having initial terms that
primarily expire approximately 20 years from inception. The leases typically contain renewal
clauses of 5 to 30 years exercisable at our option. Certain of these leases require the payment of
contingent rentals based on a percentage of gross revenues, as defined by the terms of the
applicable lease agreement. Most of the leases also contain either fixed or inflation-adjusted
escalation clauses.
We are self-insured for most casualty losses and employee health-care claims up to certain
stop-loss limits per claim. We have accounted for liabilities for casualty losses, including both
reported claims and incurred but not reported claims, based on information provided by
independent actuaries. We have accounted for our employee health-care claims liability through
a review of incurred and paid claims history. We do not believe that our calculation of casualty
losses and employee health-care claims liabilities would change materially under different
conditions and/or different methods. However, due to the inherent volatility of actuarially
determined casualty losses and employee health-care claims, it is reasonably possible that we
could experience changes in estimated losses, which could be material to both quarterly and
annual net income.
We are from time-to-time involved in ordinary and routine litigation, typically involving claims
from customers, employees and others related to operational issues common to the restaurant
and food manufacturing industries. In addition to the class action lawsuits described above, we
are involved with a number of pending legal proceedings incidental to our business.
Management presently believes that the ultimate outcome of these proceedings, individually or
in the aggregate, will not have a material adverse effect on our financial position, cash flows or
results of operations.
2 The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to
report accounting for contingencies. Certain conditions may exist as of the date the
consolidated financial statements are issued, which may result in a loss to the Company but
which will only be resolved when one or more future events occur or fail to occur. The Company
assesses such contingent liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal proceedings that are pending against
the Company or un-asserted claims that may result in such proceedings, the Company evaluates
the perceived merits of any legal proceedings or un-asserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been
incurred and the amount of the liability can be estimated, then the estimated liability would be
accrued in the Company’s consolidated financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably possible, or is probable
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but cannot be estimated, then the nature of the contingent liability, and an estimate of the
range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the guarantees would be disclosed. Management does not believe,
based upon information available at this time, that these matters will have a material adverse
effect on the Company’s consolidated financial position, results of operations or cash flows.
However, there is no assurance that such matters will not materially and adversely affect the
Company’s business, financial position, and results of operations or cash flows.
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Comprehensive Income
Professional Standards Regarding Comprehensive Income disclosure -- Currently, there are no
specific professional standard requirements for footnote disclosure regarding comprehensive
income -- unless the reporting entity believes that the financial statement presentation needs to
be supplemented, on a case-by-case basis. Notice that some reporting entities (SEC registrants)
elect to make this type of supplemental disclosure. The topic of comprehensive income is
addressed in the ASC in topic/area 220.
Examples
1 Comprehensive income (loss) includes net loss as currently reported by the Company
adjusted for other comprehensive income, net of comprehensive losses. Other comprehensive
income for the Company consists of unrealized gains and losses related to the Company's
foreign currency cumulative translation adjustment. The comprehensive loss for the periods
presented in the accompanying consolidated financial statements was not material.
2 Comprehensive income is the same as reported net income.
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Research and Development
Professional Standards Regarding Research and Development disclosure --
ASC 730-10-50-1 states that financial statements should include disclosure of the total amount
of research and development cost charged to expense for the reporting period(s). This
disclosure can be made on the face of a financial statement (line item), or as a note to the
financial statements.
Examples
1 Research and development costs as defined in ASC Topic 730, Research and
Development, were $4,497,000, $2,947,000, and $2,592,000 for the years ended March 31,
2012, 2011 and 2010, respectively, and are classified as general and administrative expense in
the consolidated statements of operations.
2 Research and development expenses consist primarily of labor and related expenses
and are charged to operations as incurred. Participation by third parties in the Company’s
research and development costs as well as credits arising from qualifying research and
experimental development expenditures are netted against research and development.
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Selling, General and Administrative Expense
Professional Standards Regarding Selling, General and Administrative Expense disclosure --
Currently, there are no specific professional standard requirements for footnote disclosure
regarding selling, general and administrative expenses -- unless the reporting entity believes
that the financial statement presentation needs to be supplemented, on a case-by-case basis.
Notice that some reporting entities (SEC registrants) elect to make this type of supplemental
disclosure.
Examples
1 SG&A expenses consist primarily of employee compensation and benefit costs related to
the selling and administrative support functions; advertising; operating and maintenance costs;
proprietary credit card promotion, issuance and servicing costs; insurance programs;
telecommunications; shipping and handling costs; and other operating expenses not specifically
categorized elsewhere on the Consolidated Statements of Income. Payroll taxes, rent,
depreciation, and property taxes are not included in SG&A.
The Company receives allowances and expense reimbursements from merchandise vendors and
from the owner of the proprietary credit card portfolio which are netted against the related
expense -- Allowances received from merchandise vendors in conjunction with:
Incentive compensation programs for employees who sell the vendors' merchandise and netted
against the related compensation expense were $35,657, $36,098, and $41,846 in 2011, 2010,
and 2009, respectively.
Jointly produced and distributed print and television media and netted against the gross
expenditures for such advertising were $30,526, $29,323, and $33,287 in 2011, 2010, and 2009,
respectively. Net advertising expenses were $59,036, $45,465, and $36,025 in 2011, 2010, and
2009, respectively.
2 Selling and marketing expenses are expensed as incurred. These expenses were $11,368
and $4,016, respectively, for the years ended December 31, 2011 and 2010.
General and administrative expenses are expensed as incurred. These expenses were $140,358
and $111,100, respectively, for the years ended December 31, 2011 and 2010.
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Cash Flow Statement
Professional Standards Regarding Cash Flow Statement Disclosure --
230-10-50-2 through 6 addresses supplemental disclosures that, circumstantially, should
accompany the cash flow statement, in addition to the disclosure of the entity's cash equivalent
policy. Such additional disclosures are:
1. Interest and income taxes paid -- supplemental when the indirect method is used, line item
when the direct method is employed,
2. Non-cash investing and/or financing activities -- supplemental in all cases -- may not be
folded into the body of the cash flow statement
Note that the example, below, cites area/topics 230-10-45 and 830 -- these sections present
alternative methods of presenting elements within the body of the cash flow statement (by
activity, and indirect or direct method of addressing operating cash). Area/topic 830 deals with
foreign exchange matters.
Example
1 The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards
Codification for cash flows reporting, classifies cash receipts and payments
according to whether they stem from operating, investing, or financing activities
and provides definitions of each category, and uses the indirect or reconciliation
method (Indirect method) as defined by paragraph 230-10-45-25 of the FASB
Accounting Standards Codification to report net cash flow from operating activities
by adjusting net income to reconcile it to net cash flow from operating activities by
removing the effects of (a) all deferrals of past operating cash receipts and
payments and all accruals of expected future operating cash receipts and payments
and (b) all items that are included in net income that do not affect operating cash
receipts and payments. The Company reports the reporting currency equivalent of
foreign currency cash flows, using the current exchange rate at the time of the cash
flows and the effect of exchange rate changes on cash held in foreign currencies is
reported as a separate item in the reconciliation of beginning and ending balances
of cash and cash equivalents and separately provides information about investing
and financing activities not resulting in cash receipts or payments in the period
pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
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Cost of Sales
Professional Standards Regarding Cost of Sales disclosure -- Currently, there are no specific
professional standard requirements for footnote disclosure regarding cost of sales -- unless the
reporting entity believes that the financial statement presentation needs to be supplemented,
on a case-by-case basis. Notice that some reporting entities (SEC registrants) elect to make this
type of supplemental disclosure. The topic of cost of sales is addressed in the ASC in topic/area
705.
Example
1 Cost of sales represents primarily food cost for Restaurants and cost of materials in
the Foods segments. Cash rebates that we receive from suppliers are recorded as a
reduction of cost of sales in the periods in which they are earned. The amount of
each rebate is directly related to the quantity of product purchased from the
supplier.
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Equity and Cost investments
Professional Standards Regarding equity and cost investments disclosure --
323-10-50-3 -- Describes disclosure matters for investments carried using the equity method
1. Name of the investee,
2. Applicable accounting policies of the investor entity with respect to non-controlling
investments in common stock,
3. Any difference between underlying equity in the investee and the carrying amount of the
investment -- and how that difference is accounted for.
4. Market value of the investment -- if a quoted market price is available.
5. For equity investees that constitute a material investment by the reporting entity --
summarized information regarding assets, liabilities and results of operations,
6. If conversion of securities or exercise of options would have a material effect on the
reporting entity's share of earnings and/or losses -- this fact should be disclosed.
Example
1 Investments in other non-consolidated entities are accounted for using the equity
method or cost basis depending upon the level of ownership and/or the Company’s ability to
exercise significant influence over the operating and financial policies of the investee. When the
equity method is used, investments are recorded at original cost and adjusted periodically to
recognize the Company’s proportionate share of the investees’ net income or losses after the
date of investment. When net losses from an investment accounted for under the equity
method exceed its carrying amount, the investment balance is reduced to zero and additional
losses are not provided for as the Company is not obligated to provide additional capital. The
Company resumes accounting for the investment under the equity method if the entity
subsequently reports net income and the Company’s share of that net income exceeds the share
of net losses not recognized during the period the equity method was suspended.
When an investment accounted for using the equity method issues its own shares, the
subsequent reduction in the Company’s proportionate interest in the investee is reflected in
equity as an adjustment to paid-in-capital. The Company evaluates its investments in companies
accounted for by the equity or cost method for impairment when there is evidence or indicators
that a decrease in value may be other than temporary.
The Company’s investment in GS was accounted for by the equity method until the Company
completed its acquisition of GS in May 2010 (see Note V) at which time the Company began
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consolidating GS's results. The Company’s investment in US was accounted for by the cost
method until the Company increased its investment and began consolidating US’s results in
February 2010 (see Note X). The Company’s investment in ETC (see Note XX) was accounted for
by the cost method until its disposition in December 2010.
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Intangible assets
Professional Standards Regarding intangible assets disclosure --
350-30-50-1 through 3 --
1. With respect to intangible assets that are subject to amortization
A. Amount assigned to the intangible asset/class of assets
B. Any presumed, significant, residual value,
C. Average amortization period
2. For those intangible assets not subject to amortization -- the amount assigned to such asset.
3. Amounts attributable to purchased research and development costs
350-30-50-2 -- Required disclosures for each period for which a position statement is presented
1. For intangible assets subject to amortization
A. Gross carrying amount and accumulated amortization,
B. Amortization expense for the reporting period,
C. Estimated amortization expense for each of the subsequent five years.
2. For intangible assets not subject to amortization -- total carrying amount of such assets.
3. Reporting entity's accounting policy regarding treatment of costs incurred to renew or
extend use of an intangible asset,
4. With respect to renewals -- costs incurred during the reporting period and the average
period before the next renewal.
350-30-50-3 -- Disclosures dealing with impairment losses related to intangible assets
1. Both a description of the impaired intangible asset and why the intangible asset is deemed
to be impaired,
2. Amount of the impairment loss,
3. Method(s) used in arriving at the impairment amount,
4. Line item, in the income statement, where the impairment loss appears (unless it is a line
item),
5. When applicable, the segment in which the impaired intangible asset appears.
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Examples
1 At acquisition, the Company estimates and records the fair value of purchased
intangible assets which primarily consist of trade names, customer relationships and technology.
The fair values are estimated based on management's assessment as well as independent third
party appraisals. Such valuations may include a discounted cash flow of anticipated revenues
resulting from the acquired intangible asset.
Amortization of intangible assets with finite lives is recognized over their estimated useful lives
using an amortization method that reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise realized. The straight line method is used for
customer relationships. As a result of the negligible attrition rate in our customer base, the
difference between the straight line method and attrition method is not considered significant.
The estimated useful lives for our intangible assets range from 3 to 18 years.
2 The Corporation also determines the fair value of indefinite-lived trade names on an
annual basis or whenever indications of impairment exist. The Corporation estimates the fair
value of the trade names based on a discounted cash flow model using inputs which include
projected revenues from management’s long-term plan, assumed royalty rates that could be
payable if the trade names were not owned and a discount rate. Determining the fair value of a
trade name involves the use of significant estimates and assumptions. Actual results may differ
from those estimates.
The Corporation has definite-lived intangibles that are amortized over their estimated useful
lives. Impairment losses are recognized if the carrying amount of an intangible, subject to
amortization, is not recoverable from expected future cash flows and its carrying amount
exceeds its fair value. Intangibles, net of amortization, of approximately $87 million are
included in other assets on the consolidated balance sheet as of the end of fiscal 2012.
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Leases
Professional Standards Regarding Lease disclosure -- 840-10-50-1 through 5
840-10-50-1 -- Requires that reporting entities disclose any leasing activities with related parties
(both lessee and lessor).
840-10-50-2 -- This section contain the generic requirement (general description that includes,
but not limited to) for lessees to disclose the following matters, as applicable
1. Basis for determination of contingent rentals,
2. Existence of elements such as; renewal, purchase option, escalation provisions, and
3. Restrictive covenants in the leasing arrangement (payment of dividends, entering into other
leases, etc.)
840-10-50-3 -- If a lessee reporting entity has provided guarantees regarding a lease, ASC 460-
10-50-4 delineates significant disclosure requirements
840-10-50-4 and 5 -- Disclosure requirements for lessor reporting entities
1. When leasing is a significant activity of a reporting entity, that entity should provide a
general description of its leasing line of business,
2. Lessors should disclose accounting policies regarding contingent rentals -- when lessor
accrues contingent rental prior to lessee achievement of target, disclosure of the impact of such
a procedure should be disclosed, as well (subject to materiality)
Example
1 The Company leases the land or the land and building at many of its stores, as well
as its distribution centers, administrative facilities, and certain equipment. Most of
these leases are classified as operating leases. Most of the Company's lease
agreements include renewal periods at the Company's option. Store lease
agreements generally include rent holidays, rent escalation clauses, and contingent
rent provisions that require additional payments based on a percentage of sales in
excess of specified levels. Contingent rental payments are recognized when the
Company determines that it is probable that the specified levels will be reached
during the fiscal year. For leases that contain rent holiday periods and scheduled
rent increases, the Company recognizes rent expense on a straight-line basis over
the lease term from the date the Company takes possession of the leased property.
The difference between the straight-line rent amounts and amounts payable under
the leases are recorded as deferred rent. Tenant improvement allowances and
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other lease incentives are recorded as deferred rent liabilities and are recognized on
a straight–line basis over the life of the lease. As of January 28, 2012 and January 29,
2011, deferred rent liabilities were $66,524 and $57,042, respectively. These
amounts are included in other long-term liabilities on the Consolidated Balance
Sheets.
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Long-lived Assets
Professional Standards Regarding Long-lived Assets -- 360-10-50-1 and 2
360-10-50-1 -- This section sets out minimum disclosures regarding each significant
category of long-lived assets (predominantly Property, Plant, and Equipment)
1. Balances of major classes of depreciable assets,
2. Accumulated depreciation, by major class of asset,
3. Depreciation expense for the reporting period, and
4. A general description of the method(s) of depreciation used -- by major class of asset
360-10-50-2 -- This section provided disclosure guidance regarding impairment of long-
lived assets
1. A description of the impaired asset(s), along with why the asset is deemed to be
impaired,
2. The line item in the income statement where the impairment loss is presented (unless
the loss is its own line item),
3. Method(s) used by the reporting entity to determine the fair value estimate, and when
applicable
4. The segment in which the impaired asset appears.
Examples
1 Long-lived assets are reviewed for impairment as events or changes in circumstances
occur indicating the amount of the asset reflected in the Corporation’s balance sheet may
not be recoverable. An estimate of undiscounted cash flows produced by the asset, or the
appropriate group of assets, is compared to the carrying value to determine whether
impairment exists. The estimates of future cash flows involve considerable management
judgment and are based upon assumptions about expected future operating
performance. The actual cash flows could differ from management’s estimates due to
changes in business conditions, operating performance and economic conditions. Asset
impairment charges recorded in connection with the Corporation’s restructuring activities
are discussed in Restructuring Related Charges. These assets included real estate,
manufacturing equipment and certain other fixed assets. The Corporation’s continuous
focus on improving the manufacturing process tends to increase the likelihood of assets
being replaced; therefore, the Corporation is regularly evaluating the expected lives of its
equipment and accelerating depreciation where appropriate.
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2 The Company assesses impairment of its long-lived assets in accordance with the
provisions of ASC Topic 360 Property, Plant, and Equipment. This statement requires long-
lived assets, such as property and equipment and purchased intangibles subject to
amortization to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset group may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an
asset group to estimated undiscounted future cash flows expected to be generated by the
asset group. If the carrying amount of an asset group exceeds its estimated future cash
flows, an impairment charge is recognized equal to the amount by which the carrying
amount of the asset group exceeds the fair value of the asset group.
In assessing long-lived assets for an impairment loss, assets are grouped with other assets
and liabilities at the lowest level for which identifiable cash flows are largely independent of
the cash flows of other assets and liabilities. Asset grouping requires a significant amount of
judgment. Accordingly, facts and circumstances will influence how asset groups are
determined for impairment testing. In assessing long-lived assets for impairment,
management considered the Company's product line portfolio, customers and related
commercial agreements, labor agreements and other factors in grouping assets and
liabilities at the lowest level for which identifiable cash flows are independent. The
Company considers projected future undiscounted cash flows, trends and other factors in its
assessment of whether impairment conditions exist. While the Company believes that its
estimates of future cash flows are reasonable, different assumptions regarding such factors
as future production volumes, customer pricing, economics and productivity and cost
initiatives, could significantly affect its estimates. In determining fair value of long-lived
assets, management uses management estimates, discounted cash flow calculations, and
appraisals where necessary.
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Marketable Securities
Professional Standards Regarding Marketable Securities -- 320-10-50-2 through 10
320-10-50-2 -- This section of the ASC address disclosures related to marketable securities
classified as available-for-sale, and includes the following:
1. Cost,
2. Fair value,
3. Any other-than-temporary impairment reflected in accumulated other comprehensive
income,
4. Total gains for those securities with net gains in accumulated comprehensive income,
5. Total losses for those securities with a net loss position in accumulated comprehensive
income, and
6. For those securities that mature, information about the contractual maturity attendant
to the instrument.
320-10-50-3 -- With respect to maturity disclosure (see above), such disclosure must be
presented with the following level of detail
1. One year,
2. Greater than one year to five years,
3. Greater than five years and through ten years, and
4. Greater than ten years.
320-10-50-5 -- Disclosures required for securities (debt) classified as held-to-maturity
1. Cost basis,
2. Fair value,
3. Gross unrecognized holding gains and/or losses,
4. Net carrying amount,
5. Any other-than-temporary impairment reflected in accumulated comprehensive
income,
6. Gross gains and/or losses included in other comprehensive income attendant to hedge
derivatives intended to offset acquisition risks of held to maturity securities,
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7. Information regarding contractual maturities, at the same level of detail described
above for available for sale securities.
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320-10-50-6 -- Following, are the disclosures required for impairment of marketable
securities (such disclosures are to grouped by investments that have been in a continuous
unrealized loss position for less than 12 months, and those in such position for greater than
12 months 320-10-50-7)
1. For each position statement presented, by category of investment, the following
quantitative information:
A. Fair value of investments with unrealized losses, and
B. Aggregate amount of unrealized losses.
2. As of the date of the most recent position statement presented, sufficient information
to enable users to understand the need for impairment recognition. At a minimum, such
disclosure should include -- but is not limited to:
A. Nature of the affected investment,
B. Cause that gave rise to the impairment,
C. Number of investment positions that are in an unrealized loss position,
D. Relative severity, and expected duration of the impairment,
E. Other information to enable users to understand the impairment situation (examples
provided in the ASC)
320-10-50-8 -- Clarifies that the starting point for calculating period of continuous unrealized
loss is the balance sheet date in the period in which the impairment occurred. The period
ends when the reporting entity
1. Recognizes the impairment as other than temporary, or
2. The amount of the impairment is recovered.
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320-10-50-9 -- This section begins the disclosure requirements related to the income
statement relative to marketable securities: For each income statement presented
1. Proceeds from sale of available-for-sale securities and the amount of gain or loss
included in earnings for the period,
2. Cost flow assumption for both the security and any balances in other comprehensive
income (lifo, fifo, etc.),
3. Gross gains and/or losses reflected in earnings resulting from a transfers from available-
for-sale to trading category,
4. Gross period inputs to and outputs from accumulated comprehensive income related to
available-for-sale securities,
5. Trading gains and/or losses relating to trading securities still held as the report date.
320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the
following disclosures are required:
1. Carrying amount of the security,
2. Any gain or loss in accumulated comprehensive income related to hedges that were
intended to offset risk associated with sold/transferred securities,
3. Realized gain or loss,
4. Circumstances leading to the decision to sell or transfer held-to-maturity security.
320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the
following disclosures are required:
1. Carrying amount of the security,
2. Any gain or loss in accumulated comprehensive income related to hedges that were
intended to offset risk associated with sold/transferred securities,
3. Realized gain or loss,
4. Circumstances leading to the decision to sell or transfer held-to-maturity security.
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Example
1 All of the Company's marketable securities, which consist of equity securities, have been
classified as available-for-sale securities and are therefore recorded at their fair values with
the unrealized gains and losses, net of tax, reported in accumulated other comprehensive
loss in the shareholders' equity section of the balance sheet unless unrealized losses are
deemed to be other than temporary. In such instance, the unrealized losses are reported in
the consolidated statements of operations within investment income. Estimated fair value is
based on published trading values at the balance sheet dates. The cost of securities sold is
based on the specific identification method. Interest and dividend income are included in
investment income in the consolidated statements of operations.
The marketable securities are carried as long-term assets since they are held for the
settlement of the Company's general and products liability insurance claims filed through a
wholly owned captive insurance subsidiary. The marketable securities are not available for
general working capital purposes.
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Pension Cost
Professional Standards Pension Cost -- 715-20-50-5 through 8 for defined benefit plans, and
715-70-50-1 for defined contribution plans
715-20-50-5 -- Basic defined benefit pension plan disclosures for a non-public reporting
entity are comprised of the following elements:
1. Benefit obligation,
2. Fair value of plan assets,
3. Funded status,
4. Employer contributions,
5. Participant contributions,
6. Benefits paid,
7. Accumulated benefit obligation balance,
8. Benefits expected to be paid for each of the succeeding five years, and the balance
expected for the next five year period,
9. Employer estimate of contributions expected to be received by the plan during the
following year from the latest position statement presented.
10. Amounts recognized in the position statement -- level of detail -- postretirement
benefit assets, current and noncurrent postretirement benefit obligations,
11. Significant underpinning assumptions used, namely: Assumed discount rate, rate of
compensation increase, long-term rate of return on plan assets,
12. Assumed health care cost trend,
13. Any employer securities and/or related parties included in plan assets (amounts and
types of)
14. The nature and effect of significant non-routine events,
15, Any amounts in accumulated comprehensive income expected to be recognized as part
of the periodic benefit cost in the next year,
16. Amounts expected to be returned to the employer within the succeeding twelve
months (timing, as well)
715-20-50-7 -- Interim financial statements should disclose: 1. Employer contributions paid,
and 2. Contributions expected to be paid during the current year.
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715-20-50-8 -- Normally the expected rate of return is used, consistently, throughout the
reporting year -- however, if the rate is changed, that fact should be disclosed.
715-70-50-1 -- Professional standards requires the following disclosure for defined
contribution plans -- amount of cost recognized, and any other changes that could affect the
comparability of amounts presented for pension cost.
Example
1 Pension expense is based on actuarial models used to estimate the total benefits
ultimately payable to participants and is allocated to the respective service periods. The
Company's funding policy provides that contributions to the pension trusts shall be at
least equal to the minimum funding requirement of the Employee Retirement Income
Security Act of 1974. The Company may provide additional contributions from time to
time, generally not to exceed the maximum tax-deductible limitation. The Company's
pension plans are valued annually as of the fiscal year-end balance sheet date. Actuarial
gains and losses are amortized over the average life expectancy of the plan's
participants, to the extent the cumulative gains or losses exceed 10% of the greater of
the projected benefit obligation or market-related value of plan assets.
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Related Party Transactions
Professional Standards Regarding Related Party Transactions -- 850-10-50-1 through 6
850-10-50-1 -- The basic, required, disclosures for related party transactions are:
1. Nature of the relationship,
2. A description of the types of transactions that occur between the parties,
3. Dollar amounts of transactions that actually transpired during the reporting period
(shown gross ins and outs)
4. Any report date due to/from balance.
850-10-50-2 -- Balances related to officers, employees, or affiliated entities should not be
combined with notes or accounts receivable.
850-10-50-3 -- Aggregation of related party transactions by type of related party is
permitted.
850-10-50-5 -- Prohibits stating that any related party transaction transpired at arm's-
length, unless the statement can be objectively substantiated.
850-10-50-6 -- Brother/sister organizations may comprise related party relationships
Example
1 The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for
the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the Related parties include a. affiliates of the Company;
b. Entities for which investments in their equity securities would be required, absent the
election of the fair value option under the Fair Value Option Subsection of Section 825–10–
15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit
of employees, such as pension and profit-sharing trusts that are managed by or under the
trusteeship of management; d. principal owners of the Company; e. management of the
Company; f. other parties with which the Company may deal if one party controls or can
significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g. Other parties that can significantly influence the management or operating
policies of the transacting parties or that have an ownership interest in one of the
transacting parties and can significantly influence the other to an extent that one or more of
the transacting parties might be prevented from fully pursuing its own separate interests.
The financial statements shall include disclosures of material related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the
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ordinary course of business. However, disclosure of transactions that are eliminated in the
preparation of consolidated or combined financial statements is not required in those
statements. The disclosures shall include: a. the nature of the relationship(s) involved.
description of the transactions, including transactions to which no amounts or nominal
amounts were ascribed, for each of the periods for which income statements are presented,
and such other information deemed necessary to an understanding of the effects of the
transactions on the financial statements; c. the dollar amounts of transactions for each of
the periods for which income statements are presented and the effects of any change in the
method of establishing the terms from that used in the preceding period; and d. amounts
due from or to related parties as of the date of each balance sheet presented and, if not
otherwise apparent, the terms and manner of settlement.
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Subsequent Events
Professional Standards Regarding Subsequent Events -- 855-10-50-1 through 3
855-10-50-1 -- Disclosure of the date through which subsequent events have been
evaluated, at the following level of detail:
1. The date through which subsequent events were evaluated, and
2. Whether that date was
A. The issue date, or
B. The date available to be issued.
855-10-50-2 -- For beta-type subsequent events (disclosure-type), the following disclosures
should be made:
1. The nature of the event, and
2. A estimate of the effect of the event, or a statement that such an estimate cannot be
made.
855-10-50-3 -- Depending on the significance of the beta-type subsequent event, reporting
entities should consider pro forma presentations.
Example
1 The Company follows the guidance in Section 855-10-50 of the FASB Accounting
Standards Codification for the disclosure of subsequent events. The Company will
evaluate subsequent events through the date when the financial statements were
issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the
Company as an SEC filer considers its financial statements issued when they are widely
distributed to users, such as through filing them on EDGAR.
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CHAPTER 4 -- SPECIALIZED INDUSTRIES
CONSTRUCTION CONTRACTORS
Construction contractors are a specialized industry unto themselves in several ways. Following
are example financial statements and disclosures that are specially geared for entities in the
construction industry:
DISCLOSURES COMMONLY APPLICABLE TO CONSTRUCTION CONTRACTORS
INCLUDE:
REVENUE AND COST RECOGNITION Revenues from fixed-price and modified fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of labor hours incurred to date to
estimated total labor hours for each contract. * This method is used because management
considers expended labor hours to be the best available measure of progress on these contracts.
Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the
period plus the fee earned, measured by the cost-to-cost method.
Contracts to manage, supervise, or coordinate the construction activity of others are recognized
only to the extent of the fee revenue. The revenue earned in a period is based on the ratio of hours
incurred to the total estimated hours required by the contract.
Contract costs include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs.
Selling, general, and administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated profitability, including
those arising from contract penalty provisions, and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization is reasonably assured.
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An amount equal to contract costs attributable to claims is included in revenues when realization
is probable and the amount can be reliably estimated.
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,”
represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs
and estimated earnings on uncompleted contracts,” represents billings in excess of revenues
recognized.
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CONTRACT RECEIVABLES Contract receivables at year end were comprised of the following components:
Contract receivables
Billed:
Completed contracts 18,110$
Contracts in progress 89,569
Retained 11,580
Unbilled: 14,986
134,245
Less: Allowances for doubtful collections (7,646)
126,599$
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REVENUES, JOB COSTS, AND BILLINGS (WORK-IN-PROCESS) – BALANCE SHEET
PRESENTATION
Costs incurred on uncompleted contracts 265,964$
Estimated earnings 55,852
Total costs incurred and estimated earnings 321,816
Less: Billings to date (259,034)
Net amount 62,782$
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts 115,282$
Billings in excess of costs and estimated earnings on uncompleted contracts (52,500)
Net amount 62,782$
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NOTES PAYABLE (NOTHING REALLY UNIQUE TO CONTRACTORS – JUST A GOOD
EXAMPLE)
Unsecured note payable to bank, due in quarterly installments of $12,500 plus interest
at 1% over prime 100,000$
Note payable to bank, collateralized by equipment, due in monthly installments of
$1,667 plus interest at 10% through January, 20X6 75,000
Total 175,000$
Principal payments on note payables are due as follows:
Year ending December 31,
20X2 70,004$
20X3 70,004
20X4 34,992
20X5 -
20X6 -
Total 175,000$
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EXAMPLES OF TYPICAL CONTRACTOR FINANCIAL STATEMENTS FOLLOW:
Assets
Cash and cash equivalents 27,711$
Contract receivables 126,599
Costs and estimated earnings in excess of billings
on uncompleted contracts 115,282
Inventory, at lower of cost, on a first-in
first-out basis 13,250
Prepaid charges and other assets 17,283
Note receivable, related company 33,000
Property and equipment, net of accumulated
depreciation and amortization 315,908
Total Assets 649,033$
Liabilities and Shareholders’ Equity
Liabilities
Notes payable 175,000$
Lease obligations payable 28,789
Accounts payable 179,875
Billings in excess of costs and estimated
earnings on uncompleted contracts 52,500
Other accrued liabilities 36,250
Deferred tax liability 9,782
482,196
Contingent liability (see footnote number ##)
Shareholders’ equity
Common stock — $1 par value,
500,000 authorized shares, 100,000 shares
issued and outstanding. 100,000
Retained earnings 66,837
Total shareholders’ equity 166,837
Total Liabilities and Shareholders’ Equity 649,033$
Build-It-From-Scratch, Inc.
Consolidated Balance Sheet
December 31, 20X1
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Contract revenues earned 31,254$
Cost of revenues earned (23,440)
Gross profit 7,814
Selling, general, and administrative expense (6,125)
Income from operations 1,689
Other income (expense)
Gain on sale of equipment 986
Interest expense (net of interest income of $880) (125)
Total Other income (expense) 861
Income before taxes 2,550
Provision for income taxes (663)
Net income 1,887
Retained earnings, beginning of year 64,950
Retained earnings, end of year 66,837$
Consolidated Statement of Income and Retained Earnings
Year Ended December 31, 20X1
Build-It-From-Scratch, Inc.
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NOT-FOR-PROFIT ORGANIZATIONS
Professional standards, in SFAS 117, states that a complete set of Not-For-Profit financial
statements include the following four elements:
1. Statement of financial position,
2. Statement of activities, and a
3. Statement of cash flows, as well as
4. Notes to the financial statements, and
If the not-for-profit entity is a voluntary health and welfare organization, and this is not a
topic for debate, the financial statements must include a statement of functional expenses.
The statement of financial position should focus on the organization as a whole and should
report the amounts of its assets, liabilities, and net assets. SFAS 117 requires that the Statement
of Financial Position (Balance Sheet) include six specific totals:
1. Assets
2. Liabilities
3. Net Assets
4. Unrestricted Net Assets
5. Temporarily Restricted Net Assets, and
6. Permanently Restricted Net Assets
Assets and liabilities within the statement of financial position should be combined into
reasonably homogeneous groups. Assets need not be broken out on the basis of the presence of
donor- imposed restrictions on their use; for example, cash available for unrestricted current
use need not be reported separately from cash received with donor-imposed restrictions that is
also available for current use. However, cash or other assets that are either, designated for long-
term purposes or, received with donor-imposed restrictions that limit their use to long-term
purposes should not be reflected in a statement of financial position with cash or other assets
that are available for current use.
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Professional standards (SFAS 117) provides considerable flexibility in how the statement of
financial position should appear, however, it does restrict the formats to one of three options:
1. Sequencing assets according to their liquidity, and sequencing liabilities according to
their respective maturities.
2. Classifying assets and liabilities as current and non-current, i.e. a classic example of a
classified balance sheet.
3. Disclosing relevant information about the liquidity or maturity of assets and liabilities in
the notes to the financial statements.
The statement of activities, just as the statement of financial position, should focus on the
organization as a whole and should report the amount of the change in net assets for the period
for the entity as a total unit, as well as for each of the net asset categories described earlier.
Revenues, expenses, gains, and losses should be classified by net asset class. However,
professional standards clearly states that all expenses should be reported in the statement of
activities as reduction from unrestricted net assets. If expenses are (appropriately) incurred that
should be handled through the use of temporarily or permanently restricted net assets, then an
amount equal to the expenses paid should be reclassified from the restricted net asset balance
and reflected as an increase in the unrestricted net assets. This reclassification should not be
included with other revenues recorded in the statement of activities. Normally, such
reclassifications are presented as a separate line item below total revenues and before expenses
paid in the unrestricted net asset section of the statement of activities. The reclassification
amounts (out of the restricted net asset groups) are reflected as reductions in the respective net
asset group.
SFAS No. 117 requires subtotals within a statement of activities for the change in each class of
net assets.
In the absence of donor imposed restrictions, revenues are to be reported as increases in
unrestricted net assets. Gains or losses should be reported in unrestricted net assets unless their
use is temporarily or permanently restricted by explicit donor stipulations or by law. Expirations
of donor-imposed restrictions (time and/or purpose) should be reported as separate
reclassification items in the respective net asset categories.
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Formatting guidance was intended to provide a good deal of latitude. SFAS 117 offers several
equally acceptable ways that financial statement items could be sequenced: (a) revenues and
gains, reclassifications, expenses, and losses; (b) revenues, expenses, gains, losses, and
reclassifications; and (c) certain revenues, less directly related expenses, followed by a subtotal,
then other revenues, other expenses, gains and losses, and reclassifications.
All not-for-profit organizations are required to present a statement of activities that reflects
expenses by their functional classification, such as major programs, support, membership, and
fund raising activities. Additionally, voluntary health and welfare organizations are required to
report expenses by their natural classification in a matrix format in a separate financial
statement. Natural expense classification presents expense categories such as salaries, rent,
electricity, interest expense, depreciation, awards and grants to others, and professional fees.
Professional standards encourage, but pull up short of requiring, similar matrix-type
presentation by not-for-profit organizations other than voluntary health and welfare
organizations.
With the effectiveness of SFAS 117, the statement of cash flows became a required basic
financial statement for all not-for-profit organizations presenting financial statements in
accordance with generally accepted accounting principles. A statement of cash flows provides
relevant information about an organization’s cash receipts and cash payments during a period.
Just like its commercial counterpart, the statement is required to classify receipts and payments
as investing, financing, or operating activities. Separate disclosure of non-cash transactions (for
example, receiving contributions of buildings, securities, or recognized collection items) is also
required by professional standards.
Operating activities are defined as the default classification for cash receipts and disbursements
and include “all transactions and other events that are not defined as investing or financing
activities”. FASB Statement No. 117 permits entities to use either the direct or the indirect
method of reporting cash flows from operating activities. The direct method of presenting
operating cash is encouraged, but either presentation is acceptable. If the direct method of
analyzing cash provided or used from operations is used, there must also be a reconciliation of
the increase of decrease in (total) net assets to cash provided by or used in operations (the
classic indirect approach).
FASB Statement No. 117 expands the description of financing activities to include receipts of
contributions that are donor-restricted for long-term purposes.
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Not all cash in not-for-profit organizations that meet the definition of cash and cash equivalents
in SFAS 95 will be considered cash and/or cash equivalents for purposes of preparing statements
of financial position and cash flows. Cash balances that relate to net assets that bear donor
imposed restrictions that would be considered long-term in nature are not cash for purposes of
cash and cash equivalents presentation purposes. Such amounts should be reclassified and
changes reflected in the reclassified (non-unrestricted cash balance) balance.
The financial statements include certain prior-year summarized comparative information in total
but not by net asset class. Such information does not include sufficient detail to constitute a
presentation in conformity with generally accepted accounting principles. Accordingly, such
information should be read in conjunction with the organization’s financial statements for the
year ended June 30, I9PY, from which the summarized information was derived.
In the absence of donor-imposed restrictions, net assets should be classified as unrestricted.
Paragraph 16 of FASB Statement No. 117 permits organizations to disclose self- imposed
limitations on the use of unrestricted net assets (such as board-designated endowments) in the
notes to the financial statements or on their face, provided that total unrestricted net assets are
displayed.
Professional standards require that not-for-profit organizations prepare footnote disclosures.
Many of the disclosures are similar to that of a commercial enterprise, but there are some
disclosures that are fairly unique to the industry. Following is a listing of topics of disclosure that
are required for not-for-profit organizations:
1. Information that describes the nature and extent of restrictions on the use of various
net assets, including any instances of noncompliance,
2. Information concerning liquidity,
3. Any derivative instruments held by the organization,
4. Risks and Uncertainties,
5. Investments,
6. Collection items — Stewardship policies, disposals, changes in valuation,
7. Gifts of long-lived assets — policies regarding classification as unrestricted or
temporarily restricted,
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8. Unconditional promises to give — Receivable in less than one year, 1-5 years, more than
5 years. The allowance for uncollectible pledges must also be disclosed,
9. Conditional promises to give — total amounts that have been promised by general
category,
10. Restrictions — Entity policy for accounting for contributions that will have restrictions
met within the same accounting period, and
11. Contributed services — Recorded and not recorded because of failure to meet
qualifications for recording.
Following are examples of footnotes that might appear in a typical not-for-profit set of financial
statements that are unique to the type of industry:
Nature of the Organization:
Not-For-Profit (the Organization) is a nonprofit organization dedicated to providing for the basic
survival needs of homeless families with children in the metropolitan area. Revenues to the
Organization are derived principally through grants provided by various local and federal
governmental agencies, as well as through contributions from individuals and organizations.
ACCOUNTING TREATMENT OF REVENUES AND EXPENSES:
Contributions received, and pledges receivable evidenced by signed pledge cards or approved
grant applications are measured at their fair values and are measured at the fair value at the date
of receipt of the contribution or unconditional promise. In the absence of a donor stipulation, such
support is reflected as an increase in the unrestricted net assets of the organization in the period
in which such support is received. Support received subject to donor stipulations is recorded as an
increase in restricted net assets (temporary or permanent, depending on the nature of the
stipulation). When a donor stipulation is satisfied, either as a result of the passage of time or
having been used for the stipulated purpose, the temporarily restricted net assets are reclassified
to unrestricted net assets, and are reflected in the statement of activities as “Net Assets Released
from Restrictions”. The Organization has adopted a policy whereby restricted contributions whose
restrictions will be met in the same reporting period (year) are initially recorded as unrestricted
support. The Organization has also adopted a policy with respect to the receipt of contributions
other than cash (goods in kind, and equipment) that states that such support will be reflected as
unrestricted support, unless there are express donor stipulations with respect to the use of such
donated items. Such donor-restricted contributions are reflected as increases in restricted net
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assets. The policy further states that, absent restrictions as to how the donated resource is to be
used and/or maintained, restrictions surrounding the contribution will be considered satisfied in
the accounting period when the asset is placed in (its intended) service. Expenses are recorded as
reductions in unrestricted net assets in accordance with the accrual-based accounting principles.
DONATED SERVICES, GOODS, AND USE OF FACILITIES:
The Organization depends heavily on volunteers to accomplish its mission. Donated professional
services, such as accounting, dietician, and physicians are reflected in the statement of activities
as contributions at the fair value of such donated services. However, many other volunteer hours
(that do not require the use of “specialized skills” as defined in accounting standards) must be
expended in order to carry out the operation of the Organization and those hours have not been
reflected in monetary amounts in the statement of activities. To that end, the organization has
benefited from approximately 8,000 hours of other volunteer time. Goods and use of facilities are
recorded at their respective fair values in the period of receipt and/or when the unconditional
promise is received.
Conditional promises to give:
The Organization does not reflect conditioned promises to give in the financial statements as
contribution revenues or increases in net assets until any and all conditions attendant to the
conveyance have been met. As of the date of this financial statement, an anonymous benefactor
of the Organization has agreed to match all contributions received from the general public during
the next fiscal year, up to a maximum amount of $10,000.
Functional Allocation of Expenses:
The Statement of Activities reflects expenses and costs of the Organization allocated between
various programs of the entity, as well as other functional areas such as support, membership,
and fund raising functions. In developing such presentation of costs and expenses, it is necessary
that certain costs and expenses be allocated between and among functions and programs.
(Generally followed by a brief description of the significant allocated costs and the principal
methodology for allocation)
Policies with respect to classification of net assets:
The Organization reports gifts of cash and other assets as restricted support when they are
received with donor stipulations that limit either the time the Organization has use of the donated
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assets or purpose for which the donated assets may be used. When such donor restrictions expire,
that is, when a stipulated time restriction ends or purpose (use) restriction is accomplished,
temporarily restricted net assets are reclassified to unrestricted net assets and reported in the
statement of activities as net assets released from restrictions. In those instances where it is the
intention of the donor that a restriction never expire, as in the case of endowments to the
organization, such gifts are classified as permanently restricted net assets.
The Organization reports gifts of long-lived assets such as land, buildings, and equipment as
unrestricted support unless there are explicit donor stipulations that specify how the donated
assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets
are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are
reported as restricted support. The Organization has adopted a policy of reflecting expiration of
any (temporary) donor restrictions when the donated or acquired long-lived assets are placed in
its intended service, provided that there are no explicit donor stipulations to the contrary.
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(Footnote disclosure as to further information with respect to assets classified as
restricted) Temporarily restricted net assets are available for the following purposes or
periods:
Detail by program, within each (significant) program provide detail of restricted (natural) uses.
Example: Certain net assets are restricted to use in the Assistance to the homeless program.
These net assets may only be used to purchase food, clothing, and/or provide housing vouchers
to individuals over the age of sixty who have been certified as eligible for assistance in this
program.
Permanently restricted net assets are restricted to:
Disclosure should be made of each category of permanently restricted net assets, as well as the
purpose for which the funds exist. Normally, this disclosure also speaks to the use of earnings
attributable to the corpus of the permanently restricted net assets as well.
Net assets were released from donor restrictions by incurring expenses satisfying the restricted
purposes or by occurrence of other events specified by donors. (Detailed by major category or
program, as appropriate)
Purpose restrictions accomplished
Time restrictions expired
Organization policies regarding investments:
Investments are carried at market or appraised value, and realized and unrealized gains and losses
are reflected in the statement of activities. The Organization invests cash in excess of daily
requirements in short-term investments. Most long-term investments are held in two investment
pools. Annuity trusts, term endowments, and certain permanent endowments are separately
invested. The board of trustees has interpreted state law as requiring the preservation of the
purchasing power (real value) of the permanent endowment funds unless explicit donor
stipulations specify how net appreciation must be used.
EXAMPLES OF NOT-FOR-PROFIT FINANCIAL STATEMENTS
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2000 1999
Assets:
Cash and cash equivalents 75$ 460$
Accounts and interest receivable 2,130 1,670
Inventories and prepaid expenses 610 1,000
Contributions receivable 3,025 2,700
Short-term investments 1,400 1,000
Assets restricted to investment
in land, buildings, and equipment 5,210 4,560
Land, buildings, and equipment 61,700 63,590
Long-term investments 218,070 203,500
Total assets 292,220$ 278,480$
Liabilities and net assets:
Accounts payable 2,570$ 1,050$
Refundable advance 650
Grants payable 875 1,300
Notes payable 1,140
Annuity obligations 1,685 1,700
Long-term debt 5,500 6,500
Total liabilities 10,630 12,340
Net assets:
Unrestricted 115,228 103,670
Temporarily restricted 24,342 25,470
Permanently restricted 142,020 137,000
Total net assets 281,590 266,140
Total liabilities and net assets 292,220$ 278,480$
Not-for-Profit Organization
Statements of Financial Position
June 30, 2000 and 1999
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Changes in unrestricted net assets:
Revenues and gains:
Contributions 8,640$
Fees 5,400
Income on long-term investments 5,600
Other investment income 850
Long-term investments 8,228
Other 150
Total unrestricted revenues and gains 28,868
Net assets released from restrictions:
Satisfaction of program restrictions 11,990
Satisfaction of equipment acquisition restrictions 1,500
Expiration of time restrictions 1,250
Total net assets released from restrictions 14,740
Total unrestricted revenues, gains, and other support 43,608
Expenses and losses:
Program A 13,100
Program B 8,540
Program C 5,760
Management and general 2,420
Fund raising 2,150
Total expenses 31,970
Fire loss 80
Total expenses and losses 32,050
Increase in unrestricted net assets 11,558
Changes in temporarily restricted net assets:
Contributions 8,110
Income on long-term investments 2,580
Net unrealized and realized gains on
long-term investments 2,952
Actuarial loss on annuity obligations (30)
Net assets released from restrictions (14,740)
Decrease in temporarily restricted net assets (1,128)
Changes in permanently restricted net assets:
Contributions 280
Income on long-term investments 120
Net unrealized and realized gains on
long-term investments 4,620
Increase in permanently restricted net assets 5,020
Increase in net assets 15,450
Net assets at beginning of year 266,140
Net assets at end of year 281,590$
Not-for-Profit Organization
Statement of Activities
Year Ended June 30, 2000
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Temporarily Permanently
Unrestricted Restricted Restricted Total
Revenues, gains, and other support:
Contributions 8,640$ 8,110$ 280$ 17,030$
Fees 5,400 5,400
Income on long-term investments 5,600 2,580 120 8,300
Other investment income 850 850
Net unrealized and realized gains on Long-term Investments 8,228 2,952 4,620 15,800
Other 150 - - 150
28,868 13,642 5,020 47,530
Net assets released from restrictions:
Satisfaction of program restrictions 11,990 (11,990)
Satisfaction of equipment acquisition restrictions 1,500 (1,500)
Expiration of time restrictions 1,250 (1,250) - -
Total revenues, gains, and other support 43,608 (1,098) 5,020 47,530
Expenses and losses:
Program A 13,100 13,100
Program B 8,540 8,540
Program C 5,760 5,760
Management and general 2,420 2,420
Fund raising 2,150 - - 2,150
Total expenses 31,970 - - 31,970
Fire loss 80 80
Actuarial loss on annuity obligations 30 - 30
Total expenses and losses 32,050 30 - 32,080
Change in net assets 11,558 (1,128) 5,020 15,450
Net assets at beginning of year 103,670 25,470 137 266,140
Net assets at end of year 115,228$ 24,342$ 5,157$ 281,590$
Not-for-Profit Organization
Statement of Activities
Year Ended June 30, 2000
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Cash flows from operating activities:
Cash received from service recipients 5,220$
Cash received from contributors 8,030
Cash collected on contnbutions receivable 2,615
Interest and dividends received 8,570
Miscellaneous receipts 150
Interest paid (382)
Cash paid to employees and suppliers (23,808)
Grants paid (425)
Net cash used by operating activities (30)
Cash flows from investing activities:
Insurance proceeds from fire loss on building 250
Purchase of equipment (1,500)
Proceeds from sale of investments 76,100
Purchase of investments (74,900)
Net cash used by investing activities (50)
Cash flows from financing activities:
Proceeds from contributions restricted for: Investment in endowment 200
Investment in term endowment 70
Investment in plant 1,210
Investment subject to annuity agreements 200
Interest and dividends restricted for reinvestment 300
Payments of annuity obligations (145)
Payments on notes payable (1,140)
Payments on long-term debt (1,000)
Net cash used by financing activities (305)
Net decrease in cash and cash equivalents (385)
Cash and cash equivalents at beginning of year 460
Cash and cash equivalents at end of year 75$
Reconciliation of change in net assets to net cash used by operating activities:
Change in net assets 15,450$
Adjustments to reconcile change in net assets to net cash used by operating activities:
Depreciation 3,200
Fire loss 80
Actuarial loss on annuity obligations 30
Increase in accounts and interest receivable (460)
Decrease in inventories and prepaid expenses 390
Increase in contributions receivable (325)
Increase in accounts payable 1,520
Decrease in refundable advance (650)
Decrease in grants payable (425)
Contributions restricted for long-term investment (2,740)
Interest and dividends restricted for long-term investment (300)
Net unrealized and realized gains on long-term investments (15,800)
Net cash used by operating activities (30)$
Not-for-Profit Organization
Statement of Cash Flows
Year Ended June 30, 2000
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Supplemental data for noncash investing and financing activities:
Gifts of equipment 140$
Gift of paid-up life insurance, cash surrender value 80$
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A B C Management Fund raising Total
Salaries 2,500$ 1,120$ 1,425$ 500$ 5,545$
Rent 1,180 1,300 450 350 150 3,430
Insurance 975 789 250 250 2,264
Payroll Taxes 400 193 238 150 981
Outside Services 2,300 1,438 3,100 200 1,500 8,538
Telephone 1,289 970 87 120 2,466
Office Supplies 35 35
Depreciation 45 20 65
Lease and Maintenance 220 220
Dues 150 150
Accounting and Legal 200 200
Postage 755 382 72 200 1,409
Advertising 125 100 225
Mileage reimbursements 972 661 38 80 1,751
Newsletter 1,804 1,256 200 200 3,460
Awards 500 256 756
Miscellaneous 300 175 - - - 475
13,100$ 8,540$ 5,760$ 2,420$ 2,150$ 31,970$
Program
Not-for-Profit Organization
Statements of Functional Expenses (Matrix Format)
For the Year Ended June 30, 20X1
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PERSONAL FINANCIAL STATEMENTS
Personal financial statements are one of the most perplexing financials that are produced by
professional accountants. The biggest reason for difficulty with these financial statements is the
infrequency of requests for personal financial statements. Personal financial statements also are
high-risk financial statements for several reasons; 1. The need for personal financial statements
generally arises when there is a specific need for dealing with a potentially adverse party such as
a lender or divorcing spouse, 2. It is a rare situation where an individual maintains records that
allow for the easy development of complete financial statements, and 3. Many individuals in
need of personal financial statements drastically underestimate the time necessary to prepare
reliable financial statements.
Fortunately, many requests for personal financial statements involve the filling out of a pre-
printed form provided by the principal user. However, even this type of presentation can be a
difficult task. For the participants in public accounting, there are some special reporting
provisions that apply to “prescribed form engagements”. Typically pre-printed forms request
specific information, and since the user developed the form, no additional information is
necessary. Sometimes these forms have statements that the preparing individual (accountant) is
asked to sign. Before signing, read the statement carefully to determine the level of
responsibility (liability) that you assume by doing this.
GAAP for personal financial statements is based upon full-accrual accounting of assets at their
estimated current values and liabilities at their estimated current amounts at the date of the
financial statements, however, other comprehensive bases of accounting (OCBOA) are
recognized by the Guide. These OCBOAs, we are told, include historical cost, tax, and cash.
The basic financial statement for personal financial statement purposes is a position statement
(like a balance sheet), generally referred to as a Statement of Financial Condition. It was
determined by the standard setters that the primary focus of personal financial statements
should be a person’s assets and liabilities, and the primary users of personal financial
statements normally consider estimated current value information to be more relevant than
historical cost in the majority of situations. The form of this statement is markedly different
from what most of us are accustomed to seeing in a position statement. The top part of the
statement reflects total assets of the reporting entity. Following assets is an enumeration of the
liabilities of the individual. This difference is net assets before income taxes. A unique liability for
income taxes is deducted from this subtotal to arrive at the prime term “net worth”. This is the
bottom line in the Statement of Financial Condition. Net worth, in summary, is the difference
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between total assets and total liabilities, after deducting estimated income taxes on the
differences between the estimated current values of assets and the estimated current amounts
of liabilities and their tax bases.
There are other terms that shed light on the definition of net worth discussed above. The first
term is “estimated current value of an asset”. The estimated current value of an asset in
personal financial statements is that amount at which the item could be exchanged between a
buyer and seller, each of whom is well informed and willing, and neither of whom is compelled
to buy or sell said asset. The other term that enters into the definition of net worth is
“estimated current amounts of liabilities”. The estimated current amount of a liability is that
amount necessary to settle the claim that counter-party has with respect to the assets of the
individual. There are times when this amount can be considerably different from the face
amount of a liability.
There is another financial statement covered in professional standards — the Statement of
Changes in Net Worth. This financial statement is a close relative to the income statement of a
commercial entity, but the breadth of what is included in the changes in net worth statement is
much broader that what is included in a commercial income statement. In general terms, it
should present the major sources of increases in net worth: income, increases in the estimated
current values of assets, decreases in the estimated current amounts of liabilities, and decreases
in estimated income taxes on the differences between the estimated current values of assets
and the estimated current amounts of liabilities and their tax bases. Presentation of a statement
of changes in net worth is optional.
Personal financial statements may be prepared for an individual, a husband and wife, or a
family. The individual(s) comprising the reporting unit must qualify in one of the above
categories in order to qualify as a personal financial statement. This is a prime consideration in
determining whether a given transaction should be reflected in a defined unit’s personal
financial statements. The presentation of comparative financial statements is optional.
Professional standards prescribe that the presentation of assets and liabilities in personal
financial statements be in order of liquidity and maturity, without classification as current and
non-current. Therefore, a classified personal financial statement is contrary to prescribed GAAP.
If the personal financial statement was prepared using an OCBOA, it would still be a departure
from the promulgated formatics for such financial statements.
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When financial statements are prepared for one of a group of joint owners of assets, the
statements of that separate owner should include only that person’s interest, as determined
under the laws of the state having jurisdiction over the assets in question.
Personal financial statements should reflect the estimated current value of an investment in a
separate entity, such as a closely held corporation, a partnership, or a sole proprietorship, as
one amount. The investment in the assets and liabilities of that separate entity should not be
combined with similar personal items. That is to say, there is no consolidation of personal assets
with the assets of an investee. The investment appears as a line-item on the face of the financial
statements. Several procedures or combinations of procedures may be used to determine the
estimated current value of a closely held business, including a multiple of earnings, liquidation
value, reproduction value, appraisals, discounted amounts of projected cash receipts and
payments, or adjustments of book value or cost of the person’s share of the equity of the
business. An important point that has to be considered in determining an estimated current
value regarding an interest in a closely held business is that the individual may have entered into
a buy-sell agreement that specifies an amount (or the basis of determining the amount) to be
received in the event of withdrawal, retirement, or sale. If such an agreement exists, it needs to
be considered. Valuation of this type of investment at its estimated current value can be a very
difficult task.
This last thought must be contrasted with the situation where estimated current values of assets
and the estimated current amounts of liabilities of limited business activities not conducted in a
separate business entity, such as an investment in real estate and a related mortgage, should be
presented as separate amounts. This is an example of the standard setter’s aversion to netting.
Estimated current value of assets is a term that professional standards has interpreted in
professional standards. Some of the guidelines follow in the section below.
Amounts receivable, due to the individual, are generally the result of advances made to others.
There seems to be a presumption that, at least a portion of, the amount receivable is long-term
in nature. This brings up the issue of time value of money. This can be a real consideration, and
can significantly change the reflected values related to amounts due in future years.
Professional standards requires that, when time is an issue with respect to an amount
receivable, that the financial statements present receivables at the discounted amounts of cash
the person estimates will be collected, using appropriate interest rates as at the date of the
financial statements.
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Non-forfeitable rights to receive future sums that have each of the following characteristics are
reflected as assets at their discounted amounts: The rights are
1. For fixed or determinable amounts, that are
2. Not contingent on the holders life expectancy or the occurrence of a particular event,
such as disability or death, and
3. Not such that they require future performance of service by the holder.
Disclosures of the following elements related to guaranteed minimum portions of pensions are
also required:
1. Vested interests in pension or profit sharing plans,
2. Deferred compensation contracts,
3. Beneficial interests in trusts,
4. Remainder interests in property subject to life estates, and lastly
5. Annuities.
Also, there are guidelines for reflection of the estimated current amount of certain liabilities.
Non-cancelable commitments to pay future amounts that exhibit all the following characteristics
should be reflected as liabilities at the appropriate discounted amounts if:
1. The commitments are for fixed or determinable amounts,
2. The commitments are not contingent on others’ life expectancies or the occurrence of a
particular event, such as disability or death., and
3. The commitments do not require future performance of service by others.
Examples of non-cancelable commitments that more often than not have the characteristics
enumerated above include fixed amounts of alimony for a definite future period and charitable
pledges.
With respect to securities, the general rule with respect to valuation is that the estimated
current values of such securities are their quoted market prices. There are variations on this
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theme, but third-party objectivity in determining the reported value is the benchmark set by
professional standards. All circumstances surrounding the investment must be considered. For
instance an investor may hold a large block of the equity securities of a company. In some cases
this might mean that the investment could not be liquidated without reducing the amount that
the market would be willing to pay. On the other hand, if that large holding represented a
controlling interest, then that might cause the position to sell at a premium.
One of the most critical areas in personal financial statements is the reflection of the income tax
liability. This liability is actually composed of three separate elements: 1. Any amount that is
currently due and owing, 2. An accrual for taxes from the date of the last return to the date of
the financial statement (even if no return is due as of the date of the financial statements), and
3. An amount that reflects the amount of income tax that would be due if the assets were
disposed of at their current (reflected) values, and liabilities liquidated at their estimated
current amounts using applicable income tax laws and regulations, considering recapture
provisions and available carryovers. Element three can be very difficult to estimate. Estimated
income taxes should be presented in the statement of financial condition between liabilities and
net worth. The methods and assumptions used to compute the estimated income taxes must
always be fully disclosed.
The AICPA Guide to Personal Financial Statements prescribes additional disclosures that, when
applicable, should always accompany personal financial statements. These disclosures can
appear either on the face of the financial statement or in the notes to the financial statement(s).
1. A clear indication of the individuals covered by the financial statements
2. That assets are presented at their estimated current values and liabilities are presented
at their estimated current amounts
3. The methods used in determining the estimated current values of major assets and the
estimated current amounts of major liabilities or major categories of assets and
liabilities, since several methods are available, and changes in methods from one period
to the next
4. If assets held jointly by the person and by others are included in the statements, the
nature of the joint ownership
5. If the person’s investment portfolio is material in relation to his or her other assets and
is concentrated in one or a few companies or industries, the names of the companies or
industries and the estimated current values of the securities
6. If the person has a material investment in a closely held business, at least the following:
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a. The name of the company and the person’s percentage of ownership
b. The nature of the business
c. Summarized financial information about assets, liabilities, and results of
operations for the most recent year based on the financial statements of the
business, including information about the basis of presentation (for example,
generally accepted accounting principles, income tax basis, or cash basis) and
any significant loss contingencies
7. Descriptions of intangible assets and their estimated useful lives
8. The face amount of life insurance the individuals own
9. Non-forfeitable rights such as pensions based on life expectancy
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10. The following tax information:
a. The methods and assumptions used to compute the estimated income taxes on
the differences between the estimated current values of assets and the
estimated current amounts of liabilities and their tax bases and a statement that
the provision will probably differ from the amounts of income taxes that might
eventually be paid because those amounts are determined by the timing and
the method of disposal, realization, or liquidation and the tax laws and
regulations in effect at the time of disposal, realization, or liquidation
b. Unused operating loss and capital loss carryforwards
c. Other unused deductions and credits, with their expiration periods, if applicable
d. The differences between the estimated current values of major assets and the
estimated current amounts of major liabilities or categories of assets and
liabilities and their tax bases
11. Maturities, interest rates, collateral, and other pertinent details relating to receivables
and debt
12. Non-cancelable commitments that do not have the characteristics discussed earlier in
this section, for example, operating leases
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EXAMPLES OF PERSONAL FINANCIAL STATEMENTS
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20X1 20X0
Assets
Cash 3,700$ 15,600$
Bonus receivable 20,000 10,000
Investments
Marketable securities 160,500 140,700
Stock options 28,000 24,000
K Associates 48,000 42,000
D Company, Inc. 550,000 475,000
Vested interest in deferred profit sharing plan 111,400 98,900
Remainder interest in testamentary trust 171,900 128,800
Cash value of life insurance ($43,600 and $42,900),
less loans payable to insurance companies ($38,100 and $37,700) 5,500 5,200
Residence 190,000 180,000
Personal effects (excluding jewelry) 55,000 50,000
Jewelry 40,000 36,500
Total Assets 1,384,000 1,206,700
Liabilities
Income taxes - current year balance 8,800 400
Demand 10.5% note payable to bank 25,000 26,000
Mortgage payable 98,200 99,000
Contingent liabilities
Total Liabilities 132,000 125,400
Estimated income taxes on the differences between the estimated current values of
assets and the estimated current amounts of liabilities and their tax bases 239,000 160,000
Net worth 1,013,000$ 921,300$
December 31,
Individual, Married Unit, Family Unit
Statements of Financial Condition
December 31, 20X1 and 20X0
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20X1 20X0
Realized increases in net worth
Salary and bonus 95,000$ 85,000$
Dividends and interest income 2,300 1,800
Distribution from limited partnership 5,000 4,000
Gains on sales of marketable securities 1,000 500
103,300 91,300
Realized decreases in net worth
Income taxes (26,000) (22,000)
Interest expense (13,000) (14,000)
Real estate taxes (4,000) (3,000)
Personal expenditures (36,700) (32,500)
(79,700) (71,500)
Net realized increase in net worth 23,600 19,800
Unrealized increases in net worth
Marketable securities (net of realized gains on securities sold) 3,000 500
Stock options 4,000 500
D Company, Inc. 75,000 25,000
K Associates 6,000
Deferred profit sharing plan 12,500 9,500
Remainder interest in testamentary trust 43,100 25,000
Jewelry 3,500 -
147,100 60,500
Unrealized decrease in net worth
Estimated income taxes on the differences between the estimated
current values of assets and the estimated current amounts of liabilities
and their tax bases (79,000) (22,000)
Net unrealized increase in net worth 68,100 38,500
Net increase in net worth 91,700 58,300
Net worth at the beginning of year 921,300 863,000
Net worth at the end of year 1,013,000$ 921,300$
Individual, Married Unit, Family Unit
Statements of Changes in Net Worth
For the Years Ended December 31, 20X1 and 20X0
Year ended December 31
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PROSPECTIVE FINANCIAL INFORMATION
Prospective financial statements are another type of financial statement that might have to be
prepared in the course of a professional accountant’s career. In fact, one of the frequent
findings in peer reviews is that public accountants frequently come into contact with
prospective information, and don’t recognize that information for what it really is. Whenever
there is a column for “budget”, if any of the budgeted amount(s) is other than already expired,
you are dealing with prospective information. Just as with historical financial information, if the
financial statements are for use within the organization then the form and contents is strictly a
matter of user need within the company. However, if any of the prospective information is
destined for limited or general distribution (see the definitions below), then the guidance
provided by professional standards is useful, and required if a public accountant is to be
involved with the prospective information. Prospective information is, by definition, difficult to
assemble because it requires looking into the future. Prospective information contains an aspect
of subjectivity because anticipated events may well not occur as planned. Users of such
information need to be adequately informed about the assumptions and risks attendant to such
information. The rest of this chapter will briefly describe some of the key points regarding the
actual prospective financial statement formatics, as well as provide a discussion and examples
with respect to disclosures that are applicable, and unique, to such presentations. It is strongly
suggested that you obtain a copy of the AICPA Guide to Prospective Financial Information, or
another reliable resource for assistance in actually preparing prospective financial statements.
Prospective financial statements have a lexicon that is somewhat unique. Following is a selected
glossary of key definitions used in describing the preparation of prospective financial
statements.
Financial forecast — A financial forecast is a prospective financial statement(s) that presents, to
the best of the responsible party’s knowledge and belief at the time the information for the
prospective financial statement is gathered, an entity’s expected financial position, results of
operations, and cash flows. (Loosely speaking, the most likely scenario). Financial statement
titles for a financial forecast should describe the nature of the presentation and should (must)
include the word forecast or forecasted.
Hypothetical assumption – This type of assumption in the deciding factor in determining
whether a presentation qualifies as a forecast, as defined above, or is a projection as discussed
below. A hypothetical assumption is an assumption used in a financial projection or in a partial
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presentation of projected information that is not necessarily expected to occur, but is consistent
(not unrealistic) with the purpose of the presentation.
Financial projection — A financial projection is a prospective financial statement(s) that
presents, to the best of the responsible party’s knowledge and belief at the time the information
for the prospective financial statement is gathered, given one or more hypothetical
assumptions, an entity’s expected financial position, results of operations, and cash flows. There
is a common misconception that a financial projection is somewhat inferior to a financial
forecast. This is just not the case. In fact, there are times when a projection is more useful to the
user than a forecast would be in the same circumstances. If an entity does not have much
experience with a certain area, a set of prospective financial statements that reflect best-case
and worst-case scenarios or a range could well be far more useful than a forecast that reflects
the most-likely scenario of someone who doesn’t have a strong experience base to draw upon in
the first place.
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Full presentation — A full presentation is a presentation that contains, at least, each of the
twelve elements that are discussed below. The first nine elements relate to what is contained in
the financial statement(s), as opposed to in the form of footnotes. If a set of prospective
financial statements omit any of those nine elements (and they are applicable to the entity and
not otherwise able to be derived from the presentation) it is a partial presentation. Full
presentations can range from prospective counterparts to complete GAAP historical financial
statements to little more than an abbreviated income statement with some added disclosure(s)
for significant changes in financial position.
The essential items for a full presentation are:
1. Sales or gross revenues
2. Gross profit or cost of sales
3. Unusual or infrequently occurring items
4. Provision for income taxes
5. Income from continuing operations
6. Discontinued operations or extraordinary items
7. .Net income
8. Basic and diluted earnings per share (if the entity is required or elects to present EPS)
9. Significant changes in financial position (not cash flows)
10. A description of what the responsible party intends for the financial forecast to present,
a statement that the assumptions are based on the responsible party’s judgment at the
time the prospective information was prepared, and a caveat that the forecasted results
may not be achieved
11. Summary of significant assumptions
12. Summary of significant accounting policies
The omission of any of the items numbered 10, 11, or 12 does not result in a partial
presentation; in all cases it results in a deficient presentation because of the lack of required
disclosures. Public accountants cannot be associated with deficient presentations.
Partial presentation – A partial presentation of prospective financial information excludes one or
more of the applicable items required for prospective financial statements as discussed below.
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Statement titles in financial projections should, just as in the case of forecasts, be descriptive of
the presentation. Financial statement titles must not imply that the presentation is a forecast.
Professional standards also requires that partial presentation titles describe or reference to any
significant hypothetical assumptions. For example, a break-even analysis might be titled
“Projected Results of Operations and Cash Flows at Break-Even Sales Volume.” (Break-even level
of sales being an unlikely level of operations, and thus a hypothetical assumption).
Responsible party – The person or persons who are responsible for the assumptions underlying
the prospective financial information. The responsible party usually is management, but it can
be persons outside the entity who currently do not have the authority to direct operations (for
example, a party considering acquiring the entity).
Key factors – Key factors are the underpinnings of the prospective presentation. Key factors are
generally few in number, but variance in factors defined by the responsible party as key factors
could significantly influence the outcome of the scenario. Such factors are basic to the entity’s
operations and some financial statement elements that are usually seen as key factors include:
sales, production, service, and financing activities. Key factors serve as the bases for the
assumptions.
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General use – General use prospective financial statements can be distributed to anyone that
the organization or client deems necessary to receive such information. Technically, general use
prospective financial statements can be provided to individuals who do not have direct access to
the responsible party.
Limited use – Limited use prospective financial statements should only be distributed to those
persons with whom the responsible party is negotiating directly. This means that such recipients
are able to ask questions of, and (potentially) negotiate the terms or structure of a transaction
directly with, the responsible party. Limited use presentations may be a financial forecast (if so
deemed by the entity), a financial projection, or a partial presentation.
There are some other considerations regarding the formatics and preparation of prospective
financial statements that need to be discussed at this point. Sometimes there is a level of
confusion as to what constitutes a prospective financial statement. The professional standards
clearly state that pro forma financial statements and partial presentations are not considered to
be prospective financial statements. Pro forma financial statements always are historic financial
statements restated “as if” a certain event had occurred in the past.
There is a protocol for obtaining information for prospective financial statements. This listing is
actually relatively intuitive, but variance from the protocol can result in faulty financial
reporting.
1. Identify all key factors underpinning the financial forecast
2. Develop specific assumptions that are responsive to each of the key factors. For
example, if a key factor is labor, develop assumptions regarding manpower availability
and anticipated labor rates.
Prospective information presented in the format of historical financial statements lends itself to
comparisons with historical financial position, results of operations, and cash flows of prior
periods. Financial forecasts preferably should be in the same format as the historical financial
statements that are expected to be issued for the expired prospective period(s). Other
presentation formats are permitted, provided there is an agreement between the responsible
party and potential users specifying another mutually acceptable format. Financial forecasts
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may take the form of complete basic financial statements or may be limited to the minimum
elements discussed in the definition of a full presentation.
The topic of adequate disclosure in prospective financial statements focuses on those additional
disclosures that are unique to prospective financial statements. Do be aware that prospective
financial statement must have a summary of significant accounting policies, just like their
historic counterpart. Professional standards does, however, permit the use of cross-referencing
in those cases where a financial forecast is included in a document that already contains some
of the information included in a summary of significant accounting policies
Ordinarily a financial projection should use the same accounting principles expected to be used
in the historical statements. Sometimes because of the special purpose a presentation might
require, it may be prepared using other accounting principles. In such cases, those different
accounting principles should be disclosed. Differences in financial position and results of
operations arising from the use of different accounting principles should be reconciled and
disclosed in the financial statements. An example of such a disclosure might state:
The projection assumes that revenues will be recognized on the completed contract basis, whereas
the company has historically used the percentage complete method of revenue recognition. If the
latter method were used in this projection, income before income taxes would be increased by
$XX, provision for income taxes would be increased and other working capital decreased by $XX,
and net income and shareholders’ equity would be increased by $XX.
If the historical financial statements for the prospective period are expected to be prepared in
conformity with a comprehensive Special Purpose Framework (basis of accounting) other than
generally accepted accounting principles, the financial forecast, preferably, should be prepared
on that Special Purpose Framework (basis of accounting), and the specific information required
to be presented should be adapted as appropriate for the Special Purpose Framework (basis of
accounting) used. The Special Purpose Framework (basis of accounting) used should be
disclosed, along with the fact that the disclosed basis is different than generally accepted
accounting principles.
The use of a different framework (basis) should be disclosed, and differences in results of
operations and changes in financial position or cash flows resulting from the use of a different
framework (basis) usually would be reconciled in the financial forecast. In some circumstances,
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such as certain tax shelters, a detailed reconciliation would not be useful. In such a case, a
general description of the differences resulting from the use of different frameworks (bases)
should be presented.
Financial forecasts are normally expressed in specific monetary amounts as a single- point
estimate of forecasted results, but also can be expressed as a range if the responsible party
selects key assumptions to form a range within which it reasonably expects, to the best of its
knowledge and belief, the item or items subject to the assumptions actually to fall.
If financial forecasts and projections are presented together, each needs to be clearly labeled.
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Notes to the financial statements must include disclosures surrounding the underpinning
assumptions inherent to presentation. The assumptions disclosed should include:
1. Assumptions about which there is a reasonable possibility of the occurrence of a
variation that may significantly affect the prospective results; that is, sensitive
assumptions. This is a requirement for the financial statement preparer to isolate
particularly volatile assumptions, and provide information regarding the impact that a
level of imprecision in estimation could have upon the overall presentation.
2. Assumptions about anticipated conditions that are expected to be significantly different
from current conditions, which may not otherwise reasonably be apparent to the user.
3. Other matters deemed important to the prospective information or its interpretation.
The responsible party should, in addition to the above, identify which, if any, assumptions in the
projection are hypothetical. The resulting disclosure should indicate whether the hypothetical
assumptions are improbable.
Examples of disclosures of assumptions that are typically deemed significant in most prospective
financial presentations include:
An introduction preceding the summary of assumptions should be provided to make clear that
the assumptions disclosed are not an all-inclusive list of those used in the preparation of the
prospective information, and that they were based on the responsible party’s judgment at the
time the prospective information was prepared.
This financial forecast presents, to the best of management’s knowledge and belief, the
Company’s expected financial position, results of operations, and cash flows for the forecast
period. Accordingly, the forecast reflects its judgment as of September 30, 2000, the date of this
forecast, of the expected conditions and its expected course of action. The assumptions disclosed
herein are those that management believes are significant to the forecast There will usually be
differences between the forecasted and actual results because events and circumstances
frequently do not occur as expected and those differences may be material
A presentation with an improbable hypothetical assumption; the example should be modified as
appropriate in the circumstances.
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This financial projection is based on ideal-capacity sales volume to make use of the Company’s
maximum productive capacity and presents, to the best of management’s knowledge and belief,
the Company’s expected financial position, results of operations, and cash flows for the projection
period if such ideal-capacity sales volume were to be attained. This projection reflects the
responsible party’s judgment as of September 30, 2000, the date of this projection, of the expected
conditions and the entity’s expected course of action if such sales volume actually occurred. The
presentation is designed to provide information to the Company’s board of directors concerning
the maximum profitability that might be achieved if current production were expanded to its
(theoretic) maximum capacity, and should not be considered to be a presentation of expected
future results Accordingly, this projection may not be useful for other purposes The assumptions
disclosed herein are those that management believes are significant to the projection.
Management considers it highly unlikely that the stated sales volume will be experienced during
the projection period. Furthermore, even if the stated sales volume were attained, there will
usually be differences between projected and actual results, because events and circumstances
frequently do not occur as expected, and those differences may be material
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Some examples of disclosure of assumptions follow:
The projection is based on the assumption that production capacity will be increased by
approximately 20 percent by the construction of a 160,000 square foot production facility in
Anywhere, USA.
Materials used by the Company are expected to be readily available, and the Company has
generally used producer estimates of prices in the projection period to project material costs. The
Company expects to be able to assure a sufficient supply of materials and estimates that the cost
of materials will increase by 12 percent per annum.
The Company’s labor union contract, which covers substantially all manufacturing personnel, will
be subject to renegotiation in 20X3. Labor cost until that time are projected based on the existing
contract.
The forecast assumes that management is able to maintain tight controls over manufacturing
costs and inventory levels. If the downturn in the economy continues, management plans to
continue substantial reduction in inventory levels.
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Power Point Handouts
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Slide 1
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Slide 2
Today’s Topics
Today’s Topics
1. Overview of presentation and
disclosure processes,
2. Formatics – matters involving
financial statement
A. Appearance and
B. Content 2
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Slide 3
Today’s Topics
3. Researching Presentation and
Disclosure Issues
4. Summary of Significant
Accounting Policies
5. Other Footnote Disclosures
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Slide 4
Why Spend a Day?
Peer Review Feedback!
Largest source of findings.
Potential for Value-Added Service to Client
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Slide 5
Protocol for Effective Presentation and Disclosure
Protocol for Effective Financial
Statement Presentation and
Disclosure
1. Identify the Principal Users of the
financial statements. A. You can’t even get started without knowing
who will use the financial statements.
B. Users, generally, include the following
1) Management
2) Lenders
3) Owners
4) Regulators
5) Sureties 5
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Slide 6
Protocol for Effective Financial
Statement Presentation and
Disclosure1. Identify the Principal Users of the financial statements.
2. Determine the key points users
are looking for.
A. Restrictive Covenants
B. Compliance with budgets
C. Asset amounts (balances)
D. Income
E. What is material to the user (focus) 6
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Slide 7
Protocol for Effective Financial
Statement Presentation and
Disclosure1. Identify the Principal Users of the financial statements.
2. Determine the key points users are looking for.
3. Provide options to users. A. Level of detail – Does one-size fit all?
B. Non-traditional formats (charts, graphs)
C. Cost-Volume-Profit analysis
D. Variance analysis
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Slide 8
Protocol for Effective Financial
Statement Presentation and
Disclosure1. Identify the Principal Users of the financial statements.
2. Determine the key points users are looking for.
3. Provide options to users.
4. “Test-Drive” the financial
statements (or significant changes
to) prior to issuance. A. Use “blank format” or pro-forma approach
B. Ask for inputs and/or suggestions
C. Respond (positively) to feedback
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Slide 9
The three “A”s in
Presentation and Disclosure
1.Appearance A. Unsophisticated User
B. Peer Review shock
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Slide 10
The three “A”s in
Presentation and Disclosure1. Appearance
2.Approach A. Compliance (What’s the least I
have to do?)
B.Value-Added – How do I
1) Meet user needs, and
2) Distinguish myself from the
competition 10
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Slide 11
The three “A”s in
Presentation and Disclosure1. Appearance
2. Approach
3.Acceptance – The
other side of approachA. Who provides this (commodity)
product at the lowest price?
B. User sees little or no value, or
C. This is valuable input 11
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Slide 12
Characteristics of a Financial Statement
Characteristics of a Financial Statement
Derived from Accounting Records.
Intended to Communicate: Economic Resources or Claims Against Resources
In accordance with a financial reporting framework.
Principally financial in nature.
IFRS
for
SMEs
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Slide 13
IFRS for SMEs
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Slide 14
Characteristics of a Financial Statement
Derived from Accounting Records.
Intended to Communicate: Economic Resources or Claims Against Resources
In accordance with a financial reporting framework.
Principally financial in nature.
IFRS
for
SMEs
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Slide 15
Special Purpose Framework (Other Comprehensive Bases of Accounting)
Statutory -
Insurance
Utility
Regulatory
Modified
CashFair
Value?
Cash Accrual
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Slide 16
Titling of SPF
Financial
Statements. Disclosures
Cash Flow Statement
Level of Detail
Parenthetic, or
Footnote Disclosure
Summary of
Significant
Accounting Policies
Standard Required Generic
1. Balance Sheet
2. Statement of
Financial
Position
3. Income
Statement,
4. Statement of
Income
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Slide 17
Financial Statement Formatics
Titling
Elements
Refer to
Footnotes?
$
Comparative
or Stand-
Alone
Tombstone --
Content
Underscore
-- Subtotals
--Terminal or Balancing
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Slide 18
Titling
Elements
1.Name of Entity
2.Title of Financial
Statement, and
3.Dating
information.18
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Slide 19
Tombstone --
Content
Only Required When Third-Party Accountant is Involved
1. When the level of service is covered by SSARS
(Compilation and Review) – The tombstone (footer)
must refer to the accountants’ report..
2. When the level of service is covered by SAS (Audits)
– The tombstone (footer) must refer to the notes to
the financial statements.
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Slide 20
Comparative
or Stand-
Alone
1.Comparative presentations not
required for U.S. GAAP or SPF
financial statements.
2.Two-period comparative financial
statements are required for
financial statements prepared in
accordance with IFRS (for SMEs).
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Slide 21
Comparative
or Stand-
Alone
1. Comparative presentations not required for U.S.
GAAP or SPF financial statements.
2. Two-period comparative financial statements are
required for financial statements prepared in
accordance with IFRS (for SMEs).
1.Two-period comparative financial statements are
used to establish a common reference point for
analysis purposes.
2.More than two periods are necessary when trend
(or trend-break) information is to be conveyed by
the presentation. 21
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Slide 22
$
Not Required by Professional Standards
Generally used to indicate
Initial monetary amounts, and
Terminal and/or balancing amounts.
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Slide 23
$
Underscore
-- Subtotals
--Terminal or
Balancing
Not Required by Professional Standards
Generally used to indicate
Initial monetary amounts, and
Terminal and/or balancing amounts.
Not Required by Professional Standards
1. Single underscore used to indicate/set-off
subtotals
2. Double underscore used to indicate
terminal and/or balancing amounts.
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Slide 24
Refer to
Footnotes?
$
Underscore
-- Subtotals
--Terminal or
Balancing
Not Required by Professional Standards
Generally used to indicate
Initial monetary amounts, and
Terminal and/or balancing amounts.
Not Required by Professional Standards
1. Single underscore used to indicate/set-off
subtotals
2. Double underscore used to indicate
terminal and/or balancing amounts.
Not Required by Professional Standards
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Slide 25
Balance Sheet Formatics
1.Classified vs. Unclassified
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Slide 26
1. Classified vs. Unclassified
ASSETS
5,096$ -$
2,429,185 2,750,801
1,439,218 1,226,258
170,478 167,500
4,043,977 4,144,559
1,435,506 1,048,717
(470,204) (330,804)
965,302 717,913
56,622 45,677
56,622 45,677
5,065,901$ 4,908,149$ TOTAL ASSETS
Fixed Assets
Accumulated Depreciation
Cash
Trade Accounts Receivable
Inventories
Prepaid Expenses
Current Assets:
Deposits
OTHER ASSETS
CURRENT ASSETS
FIXED ASSETS
26
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Slide 27
1. Classified vs. Unclassified
-$ 253,070$
832,518 1,000,005
110,332 189,443
484,826 6,836
21,873 832,944
1,574,075 282,086
3,023,624 2,564,384
714,546 713,873
3,738,170 3,278,257
490,000 490,000
837,731 1,139,892
1,327,731 1,629,892
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 5,065,901$ 4,908,149$
shares outstanding
Retained Earnings
LONG TERM DEBT, LESS CURRENT PORTION
TOTAL LIABILITIES
STOCKHOLDERS EQUITY
Common Stock, no par value, 100,000,000 shares
authorized and 500,000 shares issued and 500,000
Current Liabilities
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft
Trade Accounts Payable
Sales Tax Payable
Accrued Expenses
Other Liabilities
Current Portion of Long Term Debt
27
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Slide 28
5,096$ -$
2,429,185 2,750,801
1,439,218 1,226,258
56,622 45,677
170,478 167,500
1,435,506 1,048,717
(470,204) (330,804)
5,065,901$ 4,908,149$
-$ 253,070$
832,518 1,000,005
110,332 189,443
484,826 6,836
21,873 832,944
2,288,621 995,959
490,000 490,000
837,731 1,139,892
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 5,065,901$ 4,908,149$
See Accompanying Notes and Accountants' Compilation Report
STOCKHOLDERS EQUITY
Common Stock, no par value, 100,000,000 shares
authorized and 500,000 shares issued and 500,000
shares outstanding
Retained Earnings
Deposits
TOTAL ASSETS
Bank Overdraft
Trade Accounts Payable
Sales Tax Payable
Accrued Expenses
Other Liabilities
Long Term Debt (with explanation)
LIABILITIES AND STOCKHOLDERS' EQUITY
Prepaid Expenses
Fixed Assets
Accumulated Depreciation
Inventories
Cash
Trade Accounts Receivable
28
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Slide 29
1. Classified vs. Unclassified
2.Totals/Subtotals
29
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Slide 30
ASSETS
5,096$ -$
2,429,185 2,750,801
1,439,218 1,226,258
170,478 167,500
4,043,977 4,144,559
1,435,506 1,048,717
(470,204) (330,804)
965,302 717,913
56,622 45,677
56,622 45,677
5,065,901$ 4,908,149$ TOTAL ASSETS
Fixed Assets
Accumulated Depreciation
Cash
Trade Accounts Receivable
Inventories
Prepaid Expenses
Current Assets:
Deposits
OTHER ASSETS
CURRENT ASSETS
FIXED ASSETS
30
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Slide 31
-$ 253,070$
832,518 1,000,005
110,332 189,443
484,826 6,836
21,873 832,944
1,574,075 282,086
3,023,624 2,564,384
714,546 713,873
3,738,170 3,278,257
490,000 490,000
837,731 1,139,892
1,327,731 1,629,892
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 5,065,901$ 4,908,149$
shares outstanding
Retained Earnings
LONG TERM DEBT, LESS CURRENT PORTION
TOTAL LIABILITIES
STOCKHOLDERS EQUITY
Common Stock, no par value, 100,000,000 shares
authorized and 500,000 shares issued and 500,000
Current Liabilities
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft
Trade Accounts Payable
Sales Tax Payable
Accrued Expenses
Other Liabilities
Current Portion of Long Term Debt
31
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Slide 32
1. Classified vs. Unclassified
2. Totals/Subtotals
3. Method of Presentation
A. Portrait (over/under)
B. Landscape (side-by-side)
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Slide 33
Income Statement Formatics
Basic Level of Detail1) Revenues (OR)
2) Cost of Sales (AND)
3) Gross Profit
33
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Slide 34
Basic Level of Detail1) Revenues (OR)
2) Cost of Sales (AND)
3) Gross Profit
4) Income from operations
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Slide 35
Basic Level of Detail1) Revenues (OR)
2) Cost of Sales (AND)
3) Gross Profit
4) Income from operations
5) Income Tax Expense
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Slide 36
Basic Level of Detail1) Revenues (OR)
2) Cost of Sales (AND)
3) Gross Profit
4) Income from operations
5) Income Tax Expense
6) Net Income
36
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Slide 37
Basic Level of Detail1) Revenues (OR)
2) Cost of Sales (AND)
3) Gross Profit
4) Income from operations
5) Income Tax Expense
6) Net Income
7) Below the Line Items
37
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Slide 38
Basic Level of Detail1) Revenues (OR)
2) Cost of Sales (AND)
3) Gross Profit
4) Income from operations
5) Income Tax Expense
6) Net Income
7) Below the Line Items
a) Discontinued Operations/ Disposal of a Segment
b) Extraordinary Items
c) Changes in Accounting Principle
38
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A RealisticApproach Seminar
Page 204 of 329
Slide 39
Extraordinary items (225-20-45-1 through 15)
1) Criteria
A.Unusual in nature, and
B.Infrequent in occurrence
C.There are no longer any definitional extraordinary items
2)Subject to materiality
39
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Slide 40
Extraordinary items
3) Not extraordinary, by definition
A. Write-down/off of receivables, inventories, leased equipment, other intangible assets
B. Translation of foreign currencies
C. Disposal of a component of an entity
D. Sale or abandonment of PPE used in a business
E. Effects of work stoppage
F. Adjustment of accruals on long-term contracts
4) 225-20-55-4 Provides eight specific examples of events that are not, by definition, extraordinary.
40
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Slide 41
16,333,643$ 12,916,911$ (1)
(87,139) (47,774) (1)
16,246,504 12,869,137 (1)
(9,460,815) (6,373,896) (2)
6,785,689 6,495,241 (3)
(6,493,219) (5,332,033)
292,470 1,163,208 (4)
23,680 733
(151,809) (113,307)
- 513,307
- (304,168)
164,341 1,259,773 (4)
(21,118) (250,437) (5)
143,223$ 1,009,336$ (6)
Proceeds from lawsuit
Abandonment of assets
Income From Continuing Operations before income taxes
Income taxes
Net Income
Cost of Goods Sold
Gross Income:
Selling and G&A Expenses
Income From Continuing Operations
Interest Income
Interest Expense
Sales
Returns & Allowances
Net Sales:
41
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Slide 42
Comprehensive Income
Other Comprehensive Income Elements– Available-For-Sale investment Unrealized
gains/losses
– Hedging unrealized gains/losses
– Foreign Exchange Translation adjustment
– SFAS No. 87 – Addl. Minimum Liability
– Changes Embodied in SFAS No. 158 – Re: Defined Benefit Pension
42
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Slide 43
Other Comprehensive Income Elements– Available-For-Sale investment Unrealized
gains/losses
– Hedging unrealized gains/losses
– Foreign Exchange Translation adjustment
– SFAS No. 87 – Addl. Minimum Liability
– Changes Embodied in SFAS No. 158 – Re: Defined Benefit Pension
Required Elements in DisclosureNet Income
Each (applicable) OCI component
Total Other Comprehensive Income
Comprehensive Income43
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Page 209 of 329
Slide 44
One Statement (Combined) approach
44
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Slide 45
Revenues 470,000$
Expenses (135,000)
Other gains and losses 10,500
Gain on sale of securities 2,000
Income from operations before tax 347,500
Income tax expense (83,400)
Income before extraordinary item and cumulative effect of accounting change 264,100
Extraordinary item, net of tax (198,350)
Cumulative effect of accounting change, net of tax (1,250)
Net income 64,500
Other comprehensive income, net of tax:
Foreign currency translation adjustments 8,000
Unrealized gains on securities
Unrealized holding gains arising during period 13,000$
Less: reclassification adjustment for gains included in net income (1,500) 11,500
Minimum pension liability adjustment (2,500)
Other comprehensive income 17,000
Comprehensive income 81,500$
45
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Slide 46
Presentation Options
Separate (Stand-Alone) Statement
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Slide 47
Net income 64,500$
Other comprehensive income, net of tax:
Foreign currency translation adjustments 8,000
Unrealized gains on securities
Unrealized holding gains arising during period 13,000$
Less: reclassification adjustment for gains included in net income (1,500) 11,500
Minimum pension liability adjustment (2,500)
Other comprehensive income 17,000
Comprehensive income 81,500$
47
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Slide 48
Presentation Options
Statement-of-Changes-in-Equity Approach
48
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Page 214 of 329
Slide 49
Accumulated
Other
Comprehensive Retained Comprehensive Common Paid-in
Total Income Earnings Income Stock Capital
Beginning balance 438,500$ 88,500$ 25,000$ 100,000$ 225,000$
Comprehensive income
Net income 64,500 64,500 64,500
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment 11,500 11,500
Foreign currency translation adjustments 8,000 8,000
Minimum pension liability adjustment (2,500) (2,500)
Other comprehensive income - 17,000 17,000 17,000
Comprehensive income 81,500
Common stock issued 150,000 50,000 100,000
Dividends declared on common stock (10,000) - (10,000) - - -
Ending balance 660,000$ 81,500$ 143,000$ 42,000$ 150,000$ 325,000$ 49
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Page 215 of 329
Slide 50
Statement of Cash Flows Formatics
Statement of Cash Flows
1. Better than APB 19 – By a
long-shot!
A.Changes in financial
position?
B.Little industry input.
C.No “meaningful” target - ∆ in
working capital
50
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Slide 51
Statement of Cash Flows
1. Better than APB 19 – By a long-shot!
A. Changes in financial position?
B. Little industry input.
C. No “meaningful” target - ∆ in
working capital
2. Cash is the defined target, and
3. Cash is looked at from the
perspective of activities – three
activities. 51
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Page 217 of 329
Slide 52
Defined Activities
Investing Financing
52
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Slide 53
Statement of Cash Flows
Investing and Financing
(10,945) (45,677)
15,000 (15,000) (386,789) (428,572)
(382,734) (489,249)
(832,944) 275,639
- (240,221)
1,292,662 800,000
- 82,500
(445,385) (281,716)
(253,070) 118,554
152,500 28,106
(86,237) 782,862
NET CASH USED BY INVESTING ACTIVITIES
CASH FLOWS (USED BY) INVESTING ACTIVITIES
Deposits
BondsAcquisition of Equipment
Dividends Paid
Decrease in Bank Overdraft
Due From Shareholder
NET CASH PROVIDED BY FINANCING ACTIVITIES
CASH FLOWS FROM & (USED BY) FINANCING ACTIVITIES
Decrease in Lines of Credit
Payment of Notes Payable
New Proceeds of Notes Payable
Sale of Treasury Stock
53
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Slide 54
Defined Activities
Operating
•Direct Method
•Indirect Method
Investing Financing
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Slide 55
Statement of Cash Flows
Operations – Indirect/Direct
55
Net Income 143,223$
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities
Depreciation 139,401
Trade Accounts Receivable 321,616
Inventory (212,960)
Prepaid Expenses (170,478)
Trade Accounts Payable (145,614)
Sales Tax Payable (79,111)
Accrued Expenses 477,990
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 474,067$
Sales (Net) 16,246,504$
Cost of Sales (9,460,815)
Gross Margin 6,785,689
Selling, General and Administrative Expense (6,493,219)
Other Income and Expense
Interest Income 23,680
Interest Expense (151,809)
(6,621,348)
Income Before Income Taxes 164,341
Income Tax Expense (21,118)
Net Income 143,223$
Cash Received From Customers 16,568,120$
Cash Paid Out To Suppliers and Employees (15,865,695)
Cash Paid Out For Interest Expense (151,809)
Cash Received From Interest 23,680
Cash Paid Out For Taxes (100,229)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 474,067$
Indirect Method
Direct Method
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Slide 56
Statement of Cash Flows
Operations – Direct Conversion
56
Cash Received From Customers
Sales (Net) 16,246,504$
Trade Accounts Receivable 321,616
16,568,120$
Cash Paid Out To Suppliers and Employees
Cost of Sales (9,460,815)$
Selling, General and Administrative Expense(6,493,219)
Depreciation 139,401
Inventory (212,960)
Prepaid Expenses (170,478)
Trade Accounts Payable (145,614)
Accrued Expenses 477,990
(15,865,695)$
Cash Paid Out For Taxes
Income Tax Expense (21,118)$
Sales Tax Payable (79,111)
(100,229)$
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Slide 57
Converting from the Indirect
Method to the Direct Method1. Complete the traditional
A. Income Statement, and
B. Cash flow statement – Indirect method
2. Combine income statement detail with
A. Revenues/Gains = Sources
B. Expenses/Losses = Uses
3. Reconciling items on cash flow statement
A. Non-Cash Reconcilers
B. Reclassification Reconcilers
C. Discretionary Reconcilers
57
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Slide 58
Defined Activities
Operating
•Direct Method
•Indirect Method
Investing FinancingCash
Equivalents
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Slide 59
Articulation RequirementsFormaticsAmounts
When the Indirect
method is used on
the face of the
statement of cash
flows:
1. Interest Paid, and
2. Income taxes
Paid
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Slide 60
Statement of Cash Flows
5,096 -
- -
5,096$ -$
131,809$ 78,307$
366,229$ 591,573$ Taxes Paid
SUPPLEMENTAL DISCLOSURES
Interest Paid
CASH AND CASH EQUIVALENTS AT END OF YEAR
NET CHANGE IN CASH
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
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Slide 61
Articulation RequirementsFormaticsAmounts
When the Indirect
method is used on
the face of the
statement of cash
flows:
1. Interest Paid, and
2. Income taxes
Paid
When the direct method is
used on the face of the
statement of cash flows:
Reconcile net income to
cash from operations
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Slide 62
Articulation RequirementsFormaticsAmounts
Non-Cash Transactions
When the Indirect
method is used on
the face of the
statement of cash
flows:
1. Interest Paid, and
2. Income taxes
Paid
When the direct method is
used on the face of the
statement of cash flows:
Reconcile net income to
cash from operations
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Page 228 of 329
Slide 63
Equity Statement Formatics
Is this a Basic Financial Statement?
When to Present?
How to Present?
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Page 229 of 329
Slide 64
Is this a Basic Financial Statement?
When to Present?
How to Present?
Stand-Alone
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Slide 65
Retained Earnings (Equity)
Statement – Stand-Alone
1,139,893$ 530,102$
143,223 1,009,336
- (117,830)
(445,385) (281,715)
837,731$ 1,139,893$ Ending Retained Earnings (Equity)
Dividends Paid
Loss on Sale of Treasury Stock
Net Income
Beginning Retained Earnings (Equity)
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Slide 66
Retained Earnings (Equity)
Statement – Enhanced Stand-Alone
Accumulated
Other
Comprehensive Retained Comprehensive Common Paid-in
Total Income Earnings Income Stock Capital
Beginning balance 438,500$ 88,500$ 25,000$ 100,000$ 225,000$
Comprehensive income
Net income 64,500 64,500 64,500
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment 11,500 11,500
Foreign currency translation adjustments 8,000 8,000
Minimum pension liability adjustment (2,500) (2,500)
Other comprehensive income - 17,000 17,000 17,000
Comprehensive income 81,500
Common stock issued 150,000 50,000 100,000
Dividends declared on common stock (10,000) - (10,000) - - -
Ending balance 660,000$ 81,500$ 143,000$ 42,000$ 150,000$ 325,000$ 66
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Page 232 of 329
Slide 67
Is this a Basic Financial Statement?
When to Present?
How to Present?
Stand-Alone
Combined on face of Income Statement –NB Titling of the Financial Statement
67
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Slide 68
Retained Earnings (Equity)
Statement – CombinedSales $ 16,333,643 $ 12,916,911
Returns & Allowances (87,139) (47,774)
Net Sales: 16,246,504 12,869,137
Cost of Goods Sold (9,460,815) (6,373,896)
Gross Income: 6,785,689 6,495,241
Selling and G&A Expenses (6,493,219) (5,332,033)
Income From Continuing Operations 292,470 1,163,208
Interest Income 23,680 733
Interest Expense (151,809) (113,307)
Proceeds from lawsuit - 513,307
Abandonment of assets - (304,168)
Income From Continuing Operations before income taxes 164,341 1,259,773
Income taxes (21,118) (250,437)
Net Income 143,223 1,009,336
Beginning Retained Earnings 1,139,893 530,102
Loss on Sale of Treasury Stock - (117,830)
Dividends Paid (445,385) (281,715)
Ending Retained Earnings $ 837,731 $ 1,139,893 68
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Financial Statement Presentation and Disclosure (2014)
A RealisticApproach Seminar
Page 234 of 329
Slide 69
Is this a Basic Financial Statement?
When to Present?
How to Present?
Stand-Alone
Combined on face of Income Statement –NB Titling of the Financial Statement
Combined on face of Balance Sheet --NB Titling of the Financial Statement
69
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A RealisticApproach Seminar
Page 235 of 329
Slide 70
What is Meant by “Disclosure”
What Constitutes “Disclosure”
in Financial Statements?
1. Level of Detail.
A. Every element of the title to a
financial statement is a form of
disclosure.
B. Each line item is a form of disclosure.
C. Does one size fit all?
70
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Slide 71
What Constitutes “Disclosure”
in Financial Statements?1. Level of Detail.
2. Parenthetic, and
3. Footnote
A. Parenthetic is an option to footnote
disclosure.
B. Financial statements that omit these
elements of disclosure have a
tendency to raise more questions
than they answer.71
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A RealisticApproach Seminar
Page 237 of 329
Slide 72
What Constitutes “Disclosure”
in Financial Statements?1. Level of Detail.
2. Parenthetic, and
3. Footnote content is comprised
of
A. Summary of Significant
Accounting Policies
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A RealisticApproach Seminar
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Slide 73
What Constitutes “Disclosure”
in Financial Statements?1. Level of Detail.
2. Parenthetic, and
3. Footnote content is comprised
ofA. Summary of Significant Accounting Policies
B.Standard Required,
1) Prescribed by a particular
standard.
2) Standard checklist matter73
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Slide 74
What Constitutes “Disclosure”
in Financial Statements?1. Level of Detail.
2. Parenthetic, and
3. Footnote content is comprised
ofA. Summary of Significant Accounting Policies
B. Standard Required, and
C.Generic
1) Such other disclosure as may be
necessary
2) Requirement has been expanded 74
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A RealisticApproach Seminar
Page 240 of 329
Slide 75
Researching Presentation and Disclosure Matters
Researching Presentation
and Disclosure Matters1. Check with the FASB.
75
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A RealisticApproach Seminar
Page 241 of 329
Slide 76
Access the FASB
Access the FASB – FASB.org
A RealisticApproach Seminar
Presentation
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A RealisticApproach Seminar
Page 242 of 329
Slide 77
Logging on to the Accounting
Standards Codification
A RealisticApproach Seminar
Presentation
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Page 243 of 329
Slide 78
Initial Codification Page
A RealisticApproach Seminar
Presentation
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A RealisticApproach Seminar
Page 244 of 329
Slide 79
FASB Accounting Standards
Codification – Areas Screen
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Slide 80
Topic Screen
80
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Page 246 of 329
Slide 81
Section Screen
81
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Slide 82
Sub-Section Screen
82
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Slide 83
FASB Accounting Standards
Codification – Areas and Topics100 General Principles
105 Generally Accepted Accounting Principles
200 Presentation205 Presentation of Financial Statements
210 Balance Sheet
215 Statement of Shareholder Equity
220 Comprehensive Income
225 Income Statement
230 Statement of Cash Flows
235 Notes to Financial Statements
250 Accounting Changes and Error Corrections
255 Changing Prices
260 Earnings Per Share
270 Interim Reporting
272 Limited Liability Entities
274 Personal Financial Statements
275 Risks and Uncertainties
280 Segment Reporting83
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Slide 84
FASB Accounting Standards
Codification – Areas and Topics300 Assets
305 Cash and Cash Equivalents
310 Receivables
320 Investments—Debt and Equity Securities
323 Investments—Equity Method and Joint Ventures
325 Investments—Other
330 Inventory
340 Other Assets and Deferred Costs
350 Intangibles—Goodwill and Other
360 Property, Plant, and Equipment
400 Liabilities405 Liabilities
410 Asset Retirement and Environmental Obligations
420 Exit or Disposal Cost Obligations
430 Deferred Revenue
440 Commitments
450 Contingencies
460 Guarantees
470 Debt
480 Distinguishing Liabilities from Equity
500 Equity505 Equity
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Slide 85
FASB Accounting Standards
Codification – Areas and Topics
600 Revenue605 Revenue Recognition
700 Expenses705 Cost of Sales and Services
710 Compensation—General
712 Compensation—Nonretirement Postemployment Benefits
715 Compensation—Retirement Benefits
718 Compensation—Stock Compensation
720 Other Expenses
730 Research and Development
740 Income Taxes85
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Slide 86
FASB Accounting Standards
Codification – Areas and Topics
800 Broad Transactions805 Business Combinations
808 Collaborative Arrangements
810 Consolidation
815 Derivatives and Hedging
820 Fair Value Measurements and Disclosures
825 Financial Instruments
830 Foreign Currency Matters
835 Interest
840 Leases
845 Nonmonetary Transactions
850 Related Party Disclosures
852 Reorganizations
855 Subsequent Events
860 Transfers and Servicing 86
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Slide 87
FASB Accounting Standards
Codification – Areas and Topics900 Industry
905 Agriculture
908 Airlines
910 Contractors—Construction
912 Contractors—Federal Government
915 Development Stage Entities
920 Entertainment—Broadcasters
922 Entertainment—Cable Television
924 Entertainment—Casinos
926 Entertainment—Films
928 Entertainment—Music
930 Extractive Activities—Mining
932 Extractive Activities—Oil and Gas
940 Financial Services—Broker and Dealers
942 Financial Services—Depository and Lending
944 Financial Services—Insurance
946 Financial Services—Investment Companies
948 Financial Services—Mortgage Banking
950 Financial Services—Title Plant
952 Franchisors
954 Health Care Entities
958 Not-for-Profit Entities
960 Plan Accounting—Defined Benefit Pension Plans
962 Plan Accounting—Defined Contribution Pension Plans
965 Plan Accounting—Health and Welfare Benefit Plans
970 Real Estate—General
972 Real Estate—Common Interest Realty Associations
974 Real Estate—Real Estate Investment Trusts
976 Real Estate—Retail Land
978 Real Estate—Time-Sharing Activities
980 Regulated Operations
985 Software
995 U.S. Steamship Entities87
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Page 253 of 329
Slide 88
FASB Accounting Standards
Codification – Section Screen
88
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Slide 89
FASB Accounting Standards
Codification – Sections
Standard Section Titles5 Overview and Background
10 Objectives
15 Scope and Scope Exceptions
20 Glossary
25 Recognition
30 Initial Measurement
35 Subsequent Measurement
40 Derecognition
45 Other Presentation Matters
50 Disclosure
55 Implementation Guidance and Illustrations
60 Relationships
65 Transition and Open Effective Date Information
70 Grandfathered Guidance
75 XBRL Definitions
S99 SEC Materials 89
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A RealisticApproach Seminar
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Slide 90
FASB Accounting Standards
Codification – Sub-Sections
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A RealisticApproach Seminar
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Slide 91
FASB Accounting Standards
Codification – Cross Reference
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A RealisticApproach Seminar
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Slide 92
FASB Accounting Standards
Codification – Cross Reference
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A RealisticApproach Seminar
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Slide 93
Researching Presentation
and Disclosure Matters1. Check with the FASB.
2. Resist the urge to be original.
A. See how the “big-guys” do (did) it.
93
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Slide 94
Use the SEC – Access EDGAR
Check with the SEC
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Slide 95
Check with the SEC
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Slide 96
Check with the SEC
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Slide 97
Check with the SEC
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Slide 98
Check with the SEC
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Slide 99
Check with the SEC
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Slide 100
Check with the SEC
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Slide 101
Check with the SEC
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Slide 102
Check with the SEC
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Slide 103
Check with the SEC
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Slide 104
Check with the SEC
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Slide 105
Check with the SEC
105
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Researching Presentation
and Disclosure Matters1. Check with the FASB.
2. Resist the urge to be original. A. See how the “big-guys” do (did) it.
B. Develop a library of footnotes.
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Researching Presentation
and Disclosure Matters1. Check with the FASB.
2. Resist the urge to be original. A. See how the “big-guys” do (did) it.
B. Develop a library of footnotes.
C. Professional accountant should do the
“cut-and-paste”
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Researching Presentation
and Disclosure Matters1. Check with the FASB.
2. Resist the urge to be original. A. See how the “big-guys” do (did) it.
B. Develop a library of footnotes.
C. Professional accountant should do the “cut-and-paste”
D. Use a professional writer (English PhD) to
finish the job.
1) Draft original footnotes (very rare in
practice),
2) Conform “voice” of cut-and-paste
contents108
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Slide 109
Footnotes – Summary of Significant Accounting Policies
Footnote Disclosures
1. Summary of Significant
Accounting Policies
A. Alternative approaches allowed by
applicable reporting framework.
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Footnote Disclosures
1. Summary of Significant
Accounting Policies
A. Alternative approaches allowed by
applicable reporting framework.
B. Policies and/or approaches that are
unique to a specialized industry.
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Footnote Disclosures
1. Summary of Significant
Accounting Policies
A. Alternative approaches allowed by
applicable reporting framework.
B. Policies and/or approaches that are
unique to a specialized industry.
C. Unusual and/or innovative applications
of the applicable reporting framework.
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Footnote Disclosures
1. Summary of Significant
Accounting Policies
A. Alternative approaches allowed by
applicable reporting framework.
B. Policies and/or approaches that are
unique to a specialized industry.
C. Unusual and/or innovative applications
of the applicable reporting framework.
D. Other matters – usage.112
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Slide 113
Cash and Cash Equivalents
Cash and Cash Equivalents
Professional Standards Regarding Cash and Cash
Equivalents (ASC 230-10-50-1)
When a reporting entity presents a cash flow
statement, it is required to state its policy regarding
cash equivalents
A. This is required, whether or not the entity currently
has cash equivalents, because it is an election,
B. A change in policy regarding cash equivalents is
defined/disclosed
1. As a change in accounting policy, that is to be
reflected
2. Through restatement of all periods presented for
comparative purposes. 113
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Use of Estimates
Use of Estimates
Professional Standards Regarding Use ofEstimates (ASC 275-10-50-4, 275-10-55-6(example language))
When a reporting entity presents financialstatements that include footnotes is shouldinclude a footnote disclosure that notes thatthe preparation of financial statementsrequires that management make estimates.
The example language, provided in theCodification, suggests that the footnote shouldconclude by stating that certain estimates maynot be achieved. 114
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Income Taxes
Income TaxesProfessional Standards Regarding Income Taxes (ASC740-10-50-2 - 21)
1. 50-2 -- Balance sheet disclosures
A. Total deferred tax
1) Liabilities, and/or
2) Assets
B. Total valuation allowance recognized, re. deferred tax assets, as well
as change in valuation allowance during reporting period.
2. 50-3 Amounts and expiration dates of
A. Loss carryforwards, and/or
B. Tax credit carryforwards
C. Valuation allowance amounts that will be credited directly to
contributed capital.
3. 50-4 When a reporting entity's tax status changes with respect to the
following reporting period, but prior to the issuance of financial
statements, this matter should be disclosed in the notes.
4. 50-8 For nonpublic reporting entities, disclosure of the types of
significant temporary differences is required -- numeric reconciliation is
permitted, but not required. 115
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Income Taxes5. 50-9 Significant components of income tax need to bedisclosed, either on the face of the financial statement or withinthe footnotes, elements that commonly comprise such itemsinclude
A. Current expense,
B. Deferred expense,
C. Benefit of loss carryforwards, and/or
D. Adjustments to deferred tax liability and/or asset resultingfrom changes in tax laws and/or rates.
6. 50-10 When applicable, amount of income tax expenseallocated to continuing operations and other separately reportedelements (intraperiod tax allocation).
7. 50-13 Nonpublic reporting entities are required to disclose thenature of significant matters that cause a difference betweenexpected and reflected income tax expense (effect of the surtaxexemption).
8. 50-14 Any matters that may affect comparability of financialstatements included in a particular presentation.
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Income Taxes9. 50-15 Non Public entities are required to disclose the following
matters regarding unrecognized income tax benefits
A. Total interest and/or penalties recognized in the balance sheet
and/or income statement,
B. For positions for which it is reasonable possible there will be a
significant change within the following 12 months
1) Nature of the uncertainty,
2) The type of event that could give rise to the change,
3) An estimate of the range of the effect of the change, or a
statement that such a range cannot be reasonable estimated
C. Tax years open -- subject to examination, by jurisdiction.
10. 50-18 Choice(s) between alternative acceptable tax options.
11. 50-19 Interest and/or penalty recognition policy(ies).
12. 50-20 Policy regarding recognition of investment tax credits, and
13. 50-21 Generic disclosure requirement -- to prevent the financial
statements from being misleading (for their intended usage).117
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New Accounting Pronouncements
New Accounting Pronouncements
While the Codification does not provideany specific guidance/requirementregarding disclosure of a reportingentity's treatment of new accountingpronouncements, 70 percent of thefinancial statements reviewed incompiling data for this session includedthis category of disclosure within theSummary of Significant AccountingPolicies.
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Slide 119
Reclassification of Amounts
Reclassification of amounts
Professional Standards Reclassification
of amounts appearing in financial
statements (ASC 250-10-50 -1) -- When
significant reclassifications have been
made within financial statements,
presented for comparative purposes,
with the current period, information
should be included that will explain the
reason for and nature of the change.
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Slide 120
Revenue Recognition
Revenue RecognitionProfessional Standards Regarding RevenueRecognition -- Currently, there is no specificrequirement for an entity to discloserevenue recognition policies, unless thatreporting entity is a member of an industrywhere the revenue recognition approach isunique to that industry (constructioncontractor, or franchise operations).However, because of a stated preference bythe SEC (for its registrants) for suchdisclosure, non-registrants are includingdisclosure regarding revenue recognitionpolicies, even when such approaches arenot unique to the industry.
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Slide 121
Property, Plant and Equipment
Property, Plant and EquipmentProfessional Standards Regarding Property, Plant and
Equipment (ASC 360-10-50-1 through 3)
1. 50-1 Each of the following matters should be disclosed
either on the face of the financial statement or notes
thereto:
A. Depreciation expense for each period presented,
B. Disaggregated balance information for PP&E by the
following categories (for each balance sheet presented)
1) Major class,
2) Nature and/or function
C. Accumulated depreciation -- by either -- major class or
total -- for each balance sheet presented.
D. General description of method(s) used to depreciate --
by major class of assets subject to depreciation121
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Property, Plant and Equipment
2. 50-2 Impairment of long-lived assets (toinclude those assets that are currently heldand used within the reporting entity)
A. A description of the impaired long-livedasset(s)
B. Reason(s) for impaired status,
C. If given other than line-item status -- theamount of the impairment loss, and where theamount appears within the income statement,
D. When applicable, disclosure of whichsegment of the reporting entity in which theimpairment appears.
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Slide 123
Consolidation Policies
Consolidation PoliciesProfessional Standards Regarding Consolidation Policies (ASC810-10-50-1 through 2)
1. 50-1 Consolidation policies should be disclosed -- eithercommunicated on the face of the financial statement or a note tothe financial statements
2. 50-1A When the consolidated financial statements reflectconsolidation of less-than-wholly-owned subsidiaries, thefollowing additional information should be disclosed for suchsubsidiaries
A. Consolidated net income, and when applicable,comprehensive income (appears on the face of the financialstatement -- not to be a footnote disclosure)
B. Net income and comprehensive income attributable to theparent and non-controlling interest (minority) -- (appears on theface of the financial statement -- not to be a footnote disclosure)
C. The following subtotals, with respect to the Parentorganization, should be disclosed either on the face of thefinancial statement or as a footnote disclosure
1) Income from continuing operations,
2) Discontinued operations, and/or
3) Extraordinary items. 123
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Consolidation Policies
D. Reporting entities are to report, either within the equitystatement or notes to the financial statements
1) Reconciliation of the equity accounts of the following,from the beginning to the end of the reporting period,
a. Total equity -- at the consolidated level,
b. Parent,
c. Non-controlling (minority) interests
2) The level of detail of the reconciliations shoulddisclose the following elements
a. Net income,
b. Transactions with owners -- acting as owners, and
c. Each component, as applicable, of othercomprehensive income.
E. Any changes in parent ownership of a consolidatedsubsidiary should be disclosed in a footnote.
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Slide 125
Inventories
InventoriesProfessional Standards Regarding Inventories (ASC 330-10-50-1through 6)
1. 50-1 Requires
A. Consistency in application (statement if not followed), and
B. Disclosure of the basis of stating inventories
C. If there has been a change that affects consistency, thenature of the change and effect (subject to materialityconsiderations) on income should be provided
2. 50-2 Significant losses arising from the application of lower-of-cost-or-market should be disclosed -- potentially as a separateline item.
3. 50-3 Inventory stated above cost should be disclosed.
4. Inventory stated as sales price should be disclosed.
5. 50-5 Any losses resulting from firm purchase (inventory)commitments should be disclosed, and separately presented inthe income statement.
6. 50-6 Significant estimates made in development of amountsfor inventory should be disclosed. 125
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Slide 126
Nature of Operations
Nature of OperationsProfessional Standards Regarding Nature ofOperations (ASC 275-10-50-2)
50-2 All reporting entities should disclose thefollowing matters, as applicable, regarding thenature of their operations;
1. Major products and/or services,
2. Principal markets,
3. Location(s) of markets,
4. Relative significance of operations/services inreporting entities that provide multipleproducts/services,
5. Not-for-Profit reporting entities should disclosethe services performed, and significant revenuesources
6. Disclosures need not be quantified.126
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Slide 127
Accounts Receivable
Accounts ReceivableProfessional Standards Regarding Accounts Receivable(ASC 310-10-50-1 through 14) Note: Guidance provided isrestricted, primarily, to trade and financing receivables --this section is much broader in coverage.
1. 50-3 The following matters, as applicable, must appearin the Summary of Significant Accounting Policies;
A. Basis for accounting for loans, as well as, tradereceivables,
B. How lower-of-cost-or-market considerations apply tonon-mortgage loans that are held for sale,
C. Classification and method of accounting for accountsreceivable that can be settled in a manner whereby themaker (reporting entity) would not recover substantially allof its recorded investment in such receivable(s),
D. The method used to recognize interest income onreceivables for which interest accrues.
2. 50-3 If there is more than one significant category ofreceivables, accounts receivable by category -- either on theface of the balance sheet or notes thereto. 127
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Accounts Receivable3. 50-4 The allowance for doubtful accountsshould appear on the face of the financialstatements, and 50-14, the valuation allowanceshould be netted on the face of the balance sheet
4. 50-4A -- For all trade receivables (other thancredit card), reporting entities should disclosetheir policy for writing off short-term receivablesthat arose from the sale of goods and/or services(trade)
5. 50-5 The amount of any receivables that havebeen pledged as collateral, as well as the amountof related debt
6. 50-6 (Partial) The entity's policy fordetermining that accounts receivable are pastdue/delinquent
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Slide 129
Asset Impairments
Asset ImpairmentProfessional Standards Regarding Asset Impairment -- As indicated,below
1. Long-lived assets -- ASC 360-10-50-1 through 3 -- The following itemsare the minimum disclosure matters when an impairment of a long-livedasset that is currently held and used by a reporting entity occurs
A. A description of the impaired asset,
B. Circumstances that led to the presumed impairment,
C. If the impairment loss is not a line item in the income statement, theamount of the loss and the line item in which it appears,
D. How fair value was determined, and
E. When applicable, the segment in which the impaired asset appears.
2. Goodwill Impairment -- 350-20-50-2 -- Following are the minimumdisclosures required when it has been determined that there is animpairment related to goodwill
A. Facts and/or circumstances that indicate that an impairment hasoccurred,
B. Amount of the impairment loss,
C. The manner by which fair value was determined, and
D. When an estimate of the impairment loss has yet to be finalized, astatement that the impairment loss has not been finalized, and thereasons for the delay
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Asset Impairment
3. Intangible assets other than goodwill -- 320-30-50-3-- When an impairment of an intangible asset, otherthan goodwill, is identified the following disclosuresare to be made by the reporting entity
A. Description of the impaired asset,
B. Facts and/or circumstances resulting in theimpairment,
C. Amount of the impairment loss,
D. Method of estimating fair value,
E. If the impairment loss does not appear as a lineitem in the income statement, the amount and linewhere such loss appears in the income statement,
F. When applicable, the segment in which theimpaired asset appears.
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Slide 131
Basis of Presentation
Basis of Presentation
Professional Standards Regarding Basis
of Presentation -- There does not appear
to be any specific professional standard
requiring the disclosure of the basis of
presentation. However, this disclosure
appears in approximately 40 to 50
percent of the reporting entities reviewed
for this session.
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Fair Value
Fair Value MeasurementProfessional Standards Regarding Fair ValueMeasurement -- 820-10-50-1 through 10, 825-10-50-2through 19 (optional for non-public entities -- detailsof disclosures not included in this discussion) --Note: Examples do not include tabular requireddisclosure
1. 820-10-50 Fair Value Measurement -- General
A. 50-1 Reporting entities should discloseinformation regarding fair value in each of thefollowing two circumstances:
1) Assets and/or liabilities measured at fair valueon a recurring basis -- Both the techniques andinputs used in development of the estimate, and
2) For fair value estimates dealing with level 3(unobservable) inputs -- the effect of themeasurement on earnings for the reporting period.
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Fair Value MeasurementB. In meeting the above disclosure
requirement, the disclosure should besufficient to address the following areas ofuser concern:
1) An appropriate level of detail for theintended use of the financial statements,
2) Appropriate emphasis on disclosureelements,
3) Appropriate level of summarization,and
4) Generic need to prevent the financialstatement disclosure(s) from beingmisleading
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Fair Value MeasurementC. 50-2 Disclosure of fair value information should include
reconciliations, by class/category of asset or liability, at the followinglevel of detail:
1) Fair value a the reporting date,
2) The level of the fair value hierarchy (see examples, below) thatthe asset/liability attaches to,
3) Significant transfers between levels one and two,
4) For assets/liabilities whose fair value was determined throughthe use of unobservable inputs, a reconciliation of the beginning andending balance, to include the following as applicable
a. Gains and losses for the period -- split between those appearingin the calculation of net income and comprehensive income
b. Purchases, sales, issuances, and/or settlements,
c. Transfers in and out of the level three category,
e. Gains and/or losses included in income resulting from changesin unrealized gains and/or losses during the reporting period (andwhere such amounts appear within the income statement.
f. For all significant assets/liabilities whose inputs are derivedfrom either level two or level three -- a description of the valuationtechnique used (market approach, income approach, cost approach)
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Fair Value MeasurementD. 50-3 There is additional disclosure guidance for derivative assets and/orliabilities, which includes:
1) Fair value disclosure related to levels 1 through 3 are to be made on a grossbasis, while
2) Reconciliations that involve transfers to/from level three may be preparedeither on a gross or net basis.
E. 50-5 For those assets and/or liabilities measured at fair value on a non-recurring basis, the following disclosures should be made:
1) Fair value measurement amount,
2) Reason for the (re) measurement,
3) The level of the fair value hierarchy (see examples, below) that theasset/liability attaches to, and
4) Other disclosure requirements attendant to the level of the inputs used indetermining the fair value
F. 50-7 A change in valuation technique and/or method of application is not achange in accounting estimate, as used in ASC Section 250
G. 50-8 Quantitative disclosures regarding fair value should by made in tabular(table) form.
2. 825-10-50-1 through 19 -- this is guidance on fair value relating to financialinstruments that is mandatory for public reporting entities, but is optional for non-public reporting entities -- No further specific guidance will be presented in thisseminar.
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Financial Instruments
Financial InstrumentsProfessional Standards Regarding Financial Instruments --825-10-50-2 through 10, 825-10-50-1 through 19 (optionalfor non-public entities -- details of disclosures not includedin this discussion), 825-10-50-20 through 22 --Concentrations of credit risk, 825-10-50-23 -- Market risk ofall financial instruments, and 825-10-50-28 through 32 -- Fairvalue option
825-10-50-20 et seq -- Concentrations of credit risk shouldinclude the following disclosures for each type ofconcentration:
1. Information about the nature of the concentration(activity, geography, economic characteristic, customertype)
2. Maximum amount of loss as if counterparty failed toperform,
3. Matters related to any collateral attendant to theaffected financial instrument, and
4. Policies regarding master netting arrangements, if any.136
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Financial Instruments825-10-50-23 Disclosures regarding the existence of
Market risk (encouraged, but not required) should
address the following matters:
1. Details regarding instruments subject to market
risk,
2. Hypothetical effects on income (net and
comprehensive),
3. Gap analysis regarding relevant interest rates,
4. Life of the affected financial instruments, and
5. The reporting entity's value at risk at the end of the
reporting period, as well as the average value at risk
during the reporting period.
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Slide 138
Financial Instruments825-10-50-28 through 30 -- Regarding assets and/or liabilities forwhich the reporting entity has opted for the fair value option, thefollowing disclosures should be made:
1. Managements reason(s) for opting for fair value,
2. If the option is used for some items, but not all, in a similargrouping -- the reason for the selectivity,
3. For each line item on the position statement that includes itemsresulting from the fair value option:
A. Information that relates the line item to the class of asset and/orliability presented at fair value, and
B. Aggregate carrying amount of items in a particular line that arenot eligible for fair value presentation.
4. The difference between fair value and contractual principalamounts of loans receivable, long-term receivables, and long-termdebt instruments,
5. Regarding loans held a assets, disclosure is required regardingpast due (90 days) instruments, and
6. Disclosures are required for investments that would have beenpresented using the equity method, if the fair value option had notbeen used. 138
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Slide 139
Financial Instruments825-10-50-30 Fair value option income statement-related disclosures
1. For each affected line item within an income statement, theamounts of gains and/or losses included in the line item related to fairvalue,
2. Disclosure of how interest and/or dividends are measured, andwhere they appear within the income statement
3. For loans and other receivables (assets)
A. Amount of gains or losses included attributable to changes incredit risk, and
B. How the amount of gains and/or losses was determined
4. For those liabilities that have been significantly affected by creditrisk
A. Estimated gains/losses as a result of the change in credit risk,
B. Qualitative inputs considered in determining change in creditrisk, and
C. The method of determination of credit risk gains and/or losses.
825-10-50-31 -- Other Fair Value option disclosures -- In annualfinancial statements -- methods and/or assumptions that underpinfair value estimate.
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Slide 140
Goodwill
Goodwill
Professional Standards Regarding Goodwill -- 350-20-50-1 through 2
350-20-50-1 -- When goodwill is presented in a statement of financial position,the following disclosures, as applicable, should be made:
1. Gross amount of goodwill and, if applicable, accumulated impairment loss,
2. Additional goodwill recognized during the period,
3. Adjustments resulting from subsequent recognition of deferred tax assets,
4. Goodwill included in a group of assets designated for disposal,
5. Impairment losses recognized during the reporting period,
6. Exchange differences,
7. Other changes in carrying amounts, and
8. Gross and accumulated impairment losses at the end of the reportingperiod.
350-20-50-2 -- In each period in which a goodwill impairment arises, thefollowing matters should be disclosed:
1. Facts and/or circumstances leading to recognition of an impairment,
2. Amount of the impairment loss,
3. Method(s) employed in determining fair value,
4. When the estimated impairment loss has not been finalized, this fact shouldbe disclosed as well as disclosure of the reason for the incomplete estimate.
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Slide 141
Warranties
WarrantiesProfessional Standards Regarding Warranties --There is no specific requirement, in theAccounting Standards Codification, that requiresdisclosure of warranty expense. However,warranty expense is a form of contingency, and assuch, is subject to those provisions. The followingguidance is specific to contingencies:
450-20-50- 3 and 4 --
1. Disclosure is to be made when it is at leastpossible, or probable that a loss may exist inexcess of any amount accrued, and should include
2. The nature of the contingency, and
3. An estimate of a possible range of loss inexcess of the amount accrued (subject tomateriality considerations).
141
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Slide 142
Advertising
Advertising
Professional Standards Regarding
Advertising -- 720-35-50-1
1. Disclose the approach taken with respect
to the options available (720-35-25-1)
A. As incurred, or
B. The first time that the advertising
(project) takes place
2. The total amount charged to advertising
for each period for which an income statement
is presented.142
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Slide 143
Commitments and Contingencies
Commitments and Contingencies
Professional Standards RegardingCommitments and Contingencies --
1. The following guidance is specific tocontingencies: 450-20-50- 3 and 4 --
A. Disclosure is to be made when it is atleast possible, or probable that a loss mayexist in excess of any amount accrued, andshould include
B. The nature of the contingency, and
C. An estimate of a possible range of lossin excess of the amount accrued (subject tomateriality considerations).
143
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Slide 144
Commitments and Contingencies2. Professional standards discusses disclosure of commitments at 440-10-50-1 through 7
A. If any of the following commitments exist, they should be disclosed within the financial
statements (each of the following items have item-specific disclosure requirements)
1) Unused letters of credit,
2) Long-term leases,
3) Assets pledged as collateral for loans,
4) Pension plans,
5) Dividend arrearage for cumulative preferred stock,
6) Firm commitments (examples included in ASC)
B. Regarding unconditional purchase orders (UPO) that have not been recognized within
the current financial statements (by virtue of another issue-specific standard) should have
the following matters disclosed (subject to materiality)
1) Nature and term of the commitment,
2) Amount of the fixed and determinable portion of the commitment -- for the current
period and each of the succeeding five years (subject to practicability)
3) The nature of variable attributes attendant to the commitment,
4) Amounts, if any, purchased under the UPO for each reporting period for which an
income statement is presented.
C. With respect to UPOs that have been recognized in the financial statements, the amount
of payments required by the instrument for each of the succeeding five years (5 year
schedule) 144
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Slide 145
Comprehensive Income
Comprehensive Income
Professional Standards Regarding ComprehensiveIncome disclosure –
Currently, there are no specific professionalstandard requirements for footnotedisclosure regarding comprehensive income -- unless the reporting entity believes that thefinancial statement presentation needs to besupplemented, on a case-by-case basis.Notice that some reporting entities (SECregistrants) elect to make this type ofsupplemental disclosure. The topic ofcomprehensive income is addressed in theASC in topic/area 220.
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Slide 146
Research and Development
Research and Development
Professional Standards Regarding
Research and Development disclosure -
ASC 730-10-50-1 states that financial
statements should include disclosure of
the total amount of research and
development cost charged to expense
for the reporting period(s). This
disclosure can be made on the face of a
financial statement (line item), or as a
note to the financial statements.146
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Slide 147
Selling, General and Administrative Expenses
Selling, General and Administrative Expense
Professional Standards Regarding Selling,General and Administrative Expensedisclosure --
Currently, there are no specific professionalstandard requirements for footnotedisclosure regarding selling, general andadministrative expenses -- unless thereporting entity believes that the financialstatement presentation needs to besupplemented, on a case-by-case basis.Notice that some reporting entities (SECregistrants) elect to make this type ofsupplemental disclosure.
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Slide 148
Cash Flow
Cash Flow Statement
Professional Standards Regarding Cash Flow StatementDisclosure --
230-10-50-2 through 6 addresses supplemental disclosuresthat, circumstantially, should accompany the cash flowstatement, in addition to the disclosure of the entity's cashequivalent policy. Such additional disclosures are:
1. Interest and income taxes paid -- supplemental whenthe indirect method is used, line item when the directmethod is employed,
2. Non-cash investing and/or financing activities --supplemental in all cases -- may not be folded into the bodyof the cash flow statement
Note that the example, below, cites area/topics 230-10-45and 830 -- these sections present alternative methods ofpresenting elements within the body of the cash flowstatement (by activity, and indirect or direct method ofaddressing operating cash). Area/topic 830 deals withforeign exchange matters.
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Slide 149
Cost of Sales
Cost of Sales
Professional Standards Regarding Cost ofSales disclosure -- Currently, there are nospecific professional standard requirementsfor footnote disclosure regarding cost ofsales -- unless the reporting entity believesthat the financial statement presentationneeds to be supplemented, on a case-by-case basis. Notice that some reportingentities (SEC registrants) elect to make thistype of supplemental disclosure. The topicof cost of sales is addressed in the ASC intopic/area 705.
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Slide 150
Equity and Cost Investments
Equity and Cost investmentsProfessional Standards Regarding equity and costinvestments disclosure --
323-10-50-3 -- Describes disclosure matters for investmentscarried using the equity method
1. Name of the investee,
2. Applicable accounting policies of the investor entity withrespect to non-controlling investments in common stock,
3. Any difference between underlying equity in the investeeand the carrying amount of the investment -- and how thatdifference is accounted for.
4. Market value of the investment -- if a quoted market priceis available.
5. For equity investees that constitute a materialinvestment by the reporting entity -- summarized informationregarding assets, liabilities and results of operations,
6. If conversion of securities or exercise of options wouldhave a material effect on the reporting entity's share ofearnings and/or losses -- this fact should be disclosed. 150
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Slide 151
Intangible Assets
Intangible assetsProfessional Standards Regarding intangible assets disclosure --
350-30-50-1 through 3 --
1. With respect to intangible assets that are subject to amortization
A. Amount assigned to the intangible asset/class of assets
B. Any presumed, significant, residual value,
C. Average amortization period
2. For those intangible assets not subject to amortization -- the amount assignedto such asset.
3. Amounts attributable to purchased research and development costs
350-30-50-2 -- Required disclosures for each period for which a position statementis presented
1. For intangible assets subject to amortization
A. Gross carrying amount and accumulated amortization,
B. Amortization expense for the reporting period,
C. Estimated amortization expense for each of the subsequent five years.
2. For intangible assets not subject to amortization -- total carrying amount ofsuch assets.
3. Reporting entity's accounting policy regarding treatment of costs incurred torenew or extend use of an intangible asset,
4. With respect to renewals -- costs incurred during the reporting period and theaverage period before the next renewal. 151
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Slide 152
Intangible assets
350-30-50-3 -- Disclosures dealing with impairment
losses related to intangible assets
1. Both a description of the impaired intangible asset
and why the intangible asset is deemed to be impaired,
2. Amount of the impairment loss,
3. Method(s) used in arriving at the impairment
amount,
4. Line item, in the income statement, where the
impairment loss appears (unless it is a line item),
5. When applicable, the segment in which the
impaired intangible asset appears.152
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Slide 153
Leases
LeasesProfessional Standards Regarding Lease disclosure -- 840-10-50-1 through 5
840-10-50-1 -- Requires that reporting entities disclose any leasing activitieswith related parties (both lessee and lessor).
840-10-50-2 -- This section contain the generic requirement (general descriptionthat includes, but not limited to) for lessees to disclose the following matters,as applicable
1. Basis for determination of contingent rentals,
2. Existence of elements such as; renewal, purchase option, escalationprovisions, and
3. Restrictive covenants in the leasing arrangement (payment of dividends,entering into other leases, etc.)
840-10-50-3 -- If a lessee reporting entity has provided guarantees regarding alease, ASC 460-10-50-4 delineates significant disclosure requirements
840-10-50-4 and 5 -- Disclosure requirements for lessor reporting entities
1. When leasing is a significant activity of a reporting entity, that entity shouldprovide a general description of its leasing line of business,
2. Lessors should disclose accounting policies regarding contingent rentals -- when lessor accrues contingent rental prior to lessee achievement of target,disclosure of the impact of such a procedure should be disclosed, as well(subject to materiality)
153
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Slide 154
Other Long-lived Assets
Long-lived AssetsProfessional Standards Regarding Long-lived Assets -- 360-10-50-1and 2
360-10-50-1 -- This section sets out minimum disclosures regardingeach significant category of long-lived assets (predominantlyProperty, Plant, and Equipment)
1. Balances of major classes of depreciable assets,
2. Accumulated depreciation, by major class of asset,
3. Depreciation expense for the reporting period, and
4. A general description of the method(s) of depreciation used -- bymajor class of asset
360-10-50-2 -- This section provided disclosure guidance regardingimpairment of long-lived assets
1. A description of the impaired asset(s), along with why the asset isdeemed to be impaired,
2. The line item in the income statement where the impairment lossis presented (unless the loss is its own line item),
3. Method(s) used by the reporting entity to determine the fair valueestimate, and when applicable
4. The segment in which the impaired asset appears.154
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Slide 155
Marketable Securities
Marketable SecuritiesProfessional Standards Regarding MarketableSecurities -- 320-10-50-2 through 10
320-10-50-2 -- This section of the ASC addressdisclosures related to marketable securities classifiedas available-for-sale, and includes the following:
1. Cost,
2. Fair value,
3. Any other-than-temporary impairment reflected inaccumulated other comprehensive income,
4. Total gains for those securities with net gains inaccumulated comprehensive income,
5. Total losses for those securities with a net lossposition in accumulated comprehensive income, and
6. For those securities that mature, information aboutthe contractual maturity attendant to the instrument.
155
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Slide 156
Marketable Securities320-10-50-3 -- With respect to maturity disclosure (see above), suchdisclosure must be presented with the following level of detail
1. One year,
2. Greater than one year to five years,
3. Greater than five years and through ten years, and
4. Greater than ten years.
320-10-50-5 -- Disclosures required for securities (debt) classified asheld-to-maturity
1. Cost basis,
2. Fair value,
3. Gross unrecognized holding gains and/or losses,
4. Net carrying amount,
5. Any other-than-temporary impairment reflected in accumulatedcomprehensive income,
6. Gross gains and/or losses included in other comprehensiveincome attendant to hedge derivatives intended to offset acquisitionrisks of held to maturity securities,
7. Information regarding contractual maturities, at the same level ofdetail described above for available for sale securities.
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Slide 157
Marketable Securities320-10-50-6 -- Following, are the disclosures required for impairmentof marketable securities (such disclosures are to grouped byinvestments that have been in a continuous unrealized loss positionfor less than 12 months, and those in such position for greater than12 months 320-10-50-7)
1. For each position statement presented, by category ofinvestment, the following quantitative information:
A. Fair value of investments with unrealized losses, and
B. Aggregate amount of unrealized losses.
2. As of the date of the most recent position statement presented,sufficient information to enable users to understand the need forimpairment recognition. At a minimum, such disclosure shouldinclude -- but is not limited to:
A. Nature of the affected investment,
B. Cause that gave rise to the impairment,
C. Number of investment positions that are in an unrealized lossposition,
D. Relative severity, and expected duration of the impairment,
E. Other information to enable users to understand theimpairment situation (examples provided in the ASC) 157
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Slide 158
Marketable Securities320-10-50-8 -- Clarifies that the starting point for calculating period ofcontinuous unrealized loss is the balance sheet date in the period inwhich the impairment occurred. The period ends when thereporting entity
1. Recognizes the impairment as other than temporary, or
2. The amount of the impairment is recovered.
320-10-50-9 -- This section begins the disclosure requirementsrelated to the income statement relative to marketable securities: Foreach income statement presented
1. Proceeds from sale of available-for-sale securities and theamount of gain or loss included in earnings for the period,
2. Cost flow assumption for both the security and any balances inother comprehensive income (lifo, fifo, etc.),
3. Gross gains and/or losses reflected in earnings resulting from atransfers from available-for-sale to trading category,
4. Gross period inputs to and outputs from accumulatedcomprehensive income related to available-for-sale securities,
5. Trading gains and/or losses relating to trading securities stillheld as the report date. 158
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Slide 159
Marketable Securities320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the following disclosures are required:
1. Carrying amount of the security,
2. Any gain or loss in accumulated comprehensive income relatedto hedges that were intended to offset risk associated withsold/transferred securities,
3. Realized gain or loss,
4. Circumstances leading to the decision to sell or transfer held-to-maturity security.
320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the following disclosures are required:
1. Carrying amount of the security,
2. Any gain or loss in accumulated comprehensive income relatedto hedges that were intended to offset risk associated withsold/transferred securities,
3. Realized gain or loss,
4. Circumstances leading to the decision to sell or transfer held-to-maturity security. 159
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Slide 160
Pension Cost
Pension CostProfessional Standards Pension Cost -- 715-20-50-5 through 8 for definedbenefit plans, and 715-70-50-1 for defined contribution plans
715-20-50-5 -- Basic defined benefit pension plan disclosures for a non-public reporting entity are comprised of the following elements:
1. Benefit obligation,
2. Fair value of plan assets,
3. Funded status,
4. Employer contributions,
5. Participant contributions,
6. Benefits paid,
7. Accumulated benefit obligation balance,
8. Benefits expected to be paid for each of the succeeding five years, andthe balance expected for the next five year period,
9. Employer estimate of contributions expected to be received by the planduring the following year from the latest position statement presented.
10. Amounts recognized in the position statement -- level of detail --postretirement benefit assets, current and noncurrent postretirement benefitobligations,
11. Significant underpinning assumptions used, namely: Assumeddiscount rate, rate of compensation increase, long-term rate of return onplan assets,
12. Assumed health care cost trend, 160
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Slide 161
Pension Cost
13. Any employer securities and/or related parties included inplan assets (amounts and types of)
14. The nature and effect of significant non-routine events,
15, Any amounts in accumulated comprehensive incomeexpected to be recognized as part of the periodic benefit costin the next year,
16. Amounts expected to be returned to the employer withinthe succeeding twelve months (timing, as well)
715-20-50-7 -- Interim financial statements should disclose: 1.Employer contributions paid, and 2. Contributions expected tobe paid during the current year.
715-20-50-8 -- Normally the expected rate of return is used,consistently, throughout the reporting year -- however, if therate is changed, that fact should be disclosed.
715-70-50-1 -- Professional standards requires the followingdisclosure for defined contribution plans -- amount of costrecognized, and any other changes that could affect thecomparability of amounts presented for pension cost. 161
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Slide 162
Related Party Transactions
Related Party Transactions
Professional Standards Regarding Related Party Transactions -- 850-10-50-1
through 6
850-10-50-1 -- The basic, required, disclosures for related party transactions
are:
1. Nature of the relationship,
2. A description of the types of transactions that occur between the parties,
3. Dollar amounts of transactions that actually transpired during the
reporting period (shown gross ins and outs)
4. Any report date due to/from balance.
850-10-50-2 -- Balances related to officers, employees, or affiliated entities
should not be combined with notes or accounts receivable.
850-10-50-3 -- Aggregation of related party transactions by type of related
party is permitted.
850-10-50-5 -- Prohibits stating that any related party transaction transpired at
arm's-length, unless the statement can be objectively substantiated.
850-10-50-6 -- Brother/sister organizations may comprise related party
relationships162
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Slide 163
Subsequent Events
Subsequent EventsProfessional Standards Regarding Subsequent Events -- 855-10-50-1
through 3
855-10-50-1 -- Disclosure of the date through which subsequent
events have been evaluated, at the following level of detail:
1. The date through which subsequent events were evaluated, and
2. Whether that date was
A. The issue date, or
B. The date available to be issued.
855-10-50-2 -- For beta-type subsequent events (disclosure-type), the
following disclosures should be made:
1. The nature of the event, and
2. A estimate of the effect of the event, or a statement that such an
estimate cannot be made.
855-10-50-3 -- Depending on the significance of the beta-type
subsequent event, reporting entities should consider pro forma
presentations. 163
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Financial Statement Presentation and Disclosure (2014)
A RealisticApproach Seminar
Page 329 of 329
Slide 164
RealisticApproach Seminars, Inc. Email Information
THANK YOU for attending
Financial Statement
Presentation & Disclosure
If you have questions and/or comments
164
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