Intermediate Accounting I - Fall 2011 3-1

Session 3Accounting Assumptions and Principles

Balance Sheet Wrap-upThe Complete Income Statement

Separately Reported Items

Intermediate Accounting I - Fall 2011 3-2

SFAC Schematic-I (updated)SFAC 8: OBJECTIVES OF FINANCIAL REPORTING

•Useful

•Cash Flow Prediction

•Economic Resource Information

SFAC 2: QUALITATIVE CHARACTERISTICS

(Understandibility)

•Primary

•Relevance

•Predictive value

•Confirmatory value

•Faithful Representation

•Completeness

•Neutrality

•Free from material error

•Enhancing

•Comparability (including consistency)

•Verifiability

•Timeliness

•Understandability

•Constraints

•Cost Effectiveness

•Materiality

SFAC 5: RECOGNITION & MEASUREMENTSFAC 7: CASH FLOWS & P,V. MEASUREMENT

•Recognition

•Definition

•Measurability

•Relevance

•Reliability

•Measurement

•Unit

•Method

•Underlying Assumptions

•Economic entity

•Going concern

•Periodicity

•Monetary unit

•Principles

•Historical cost

•Realization

•Matching

•Full disclosure

(1 X 3)

(2 X 3)

+

2

+

3

4

+

2

+

(2 X 4)

Intermediate Accounting I - Fall 2011 3-3

Additional Disclosures

Footnotes Accounting Policies Subsequent Events Noteworthy Transactions

Management Discussion and Analysis (MD&A) Management’s Responsibilities Auditors’ Report Compensation in the Proxy Statement

Intermediate Accounting I - Fall 2011 3-4

The Complete Income Statement

Single or multiple step Major components

Income from continuing operations Gross margin Operating income Other income and expense

Separately reported items Discontinued operations Extraordinary items

Earnings per share Basic Diluted

Intermediate Accounting I - Fall 2011 3-5

Earnings Quality Issues

Income shifting One time gains and losses Operating versus non-operating income Specific topics

Restructuring costs—ASC 420-10-20 or FAS 146, when incurred

Transitory or routine Investment gains and losses Pro-forma reporting, reconciliation required

Intermediate Accounting I - Fall 2011 3-6

Comprehensive Income

Net income Other Comprehensive Income*

Unrealized gains & losses on available for sale securities

Translation gains and losses Deferred gains & losses from derivatives Post retirement benefit plan adjustments(*all net of tax)

Intermediate Accounting I - Fall 2011 3-7

Comprehensive Income--Reporting

Flexible Extension to the P&L (p.194) Separate statement (p.195)

Often in footnotes

Intermediate Accounting I - Fall 2011 3-8

Balance Sheet Presentation

Accumulated Other Comprehensive Income Note that the “accumulated” net income is

included in Retained Earnings (Astro-Med Inc. p. 196)

Intermediate Accounting I - Fall 2011 3-9

Separately Reported Items

Discontinued Operations Extraordinary Items Mandated Changes in Accounting Principles

Intermediate Accounting I - Fall 2011 3-10

Reporting Format

Income from continuing operations before income taxes and extraordinary items

Income tax expense

Income from continuing operations before extraordinary items

Discontinued operations, net of tax

Extraordinary items, net of tax

Net Income

Intermediate Accounting I - Fall 2011 3-11

Intraperiod Income Tax Allocation

Associate tax on a pro-rata basis with continuing operations and separately reported items

Intermediate Accounting I - Fall 2011 3-12

Discontinued Operations

What is an operation? Component of an entity

Two key requirements Operations and cash flows will be eliminated

(generally this means separate internal reporting), and

No further significant involvement

Intermediate Accounting I - Fall 2011 3-13

Reporting Discontinued Operations

Footnote disclosure, as appropriate Sale before the end of the reporting period

Operating income and loss thru the disposal date Gain or loss on disposal (clearly presented)

Held for sale (sale after the end of the reporting period) Operating income and loss thru the end of the reporting

period Impairment loss (clearly presented) B/S assets valued at lower of BV or FV less cost to sell B/S assets reported separately Additional gain or loss on sale reported when sold

Intermediate Accounting I - Fall 2011 3-14

Held for Sale Definition

See ASC 360-10-45-9 or FAS 144 Likely to be sold within a year

Intermediate Accounting I - Fall 2011 3-15

Impairment on Held for Sale

Selling price versus FV less cost to sell Footnote disclosure, as appropriate (p. 185)

Intermediate Accounting I - Fall 2011 3-16

Extraordinary Items

Unusual and infrequent Unusual or infrequent

Separate item in operating income Footnote disclosure as appropriate

Intermediate Accounting I - Fall 2011 3-17

Accounting Changes

Change in accounting principle Change in estimate Change in reporting entity Correction of errors (not an accounting

change)

Intermediate Accounting I - Fall 2011 3-18

Change in Actg. Principle

Footnote disclosure, as necessary Voluntary

Retrospective: apply historically Journal entry in current year, impacts R/E

Mandated FASB may allow voluntary treatment Cumulative effect as Separately Reported Item

Intermediate Accounting I - Fall 2011 3-19

Change in Estimate

Prospective Footnote disclosure, if material Includes depreciation with mandated footnote

disclosure

Intermediate Accounting I - Fall 2011 3-20

Change in Entity

Not comparative; therefore, restate prior F/S Footnote disclosure, as appropriate

Intermediate Accounting I - Fall 2011 3-21

Correction of Errors

If not material, just correct If material

Prior period adjustment and restatement of prior financial statements

Adjust Retained earnings and Statement of R/E

Intermediate Accounting I - Fall 2011 3-22

Earnings Per Share

Basic Income to common shareholders / weighted average of

common shares outstanding Diluted

Adjusted income to common shareholders / weighted average of total common share outstanding

Disclose for continuing operations, discontinued operations and extraordinary items