Accounting Assumptions and Principles Balance Sheet Wrap-up

1
Session 3

• Accounting Assumptions and PrinciplesBalance
  Sheet Wrap-up
• The Complete Income Statement
• Separately Reported Items

2
SFAC Schematic-I (updated)

• SFAC 8 OBJECTIVES OF FINANCIAL REPORTING
• Useful
• Cash Flow Prediction
• Economic Resource Information

(1 X 3)

• 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

4 2 (2 X 4)
(2 X 3) 2 3
3
Additional Disclosures

• Footnotes
• Accounting Policies
• Subsequent Events
• Noteworthy Transactions
• Management Discussion and Analysis (MDA)
• Managements Responsibilities
• Auditors Report
• Compensation in the Proxy Statement

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

5
Earnings Quality Issues

• Income shifting
• One time gains and losses
• Operating versus non-operating income
• Specific topics
• Restructuring costsASC 420-10-20 or FAS 146,
  when incurred
• Transitory or routine
• Investment gains and losses
• Pro-forma reporting, reconciliation required

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)

7
Comprehensive Income--Reporting

• Flexible
• Extension to the PL (p.194)
• Separate statement (p.195)
• Often in footnotes

8
Balance Sheet Presentation

• Accumulated Other Comprehensive Income
• Note that the accumulated net income is
  included in Retained Earnings (Astro-Med Inc. p.
  196)

9
Separately Reported Items

• Discontinued Operations
• Extraordinary Items
• Mandated Changes in Accounting Principles

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

11
Intraperiod Income Tax Allocation

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

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

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

14
Held for Sale Definition

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

15
Impairment on Held for Sale

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

16
Extraordinary Items

• Unusual and infrequent
• Unusual or infrequent
• Separate item in operating income
• Footnote disclosure as appropriate

17
Accounting Changes

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

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

19
Change in Estimate

• Prospective
• Footnote disclosure, if material
• Includes depreciation with mandated footnote
  disclosure

20
Change in Entity

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

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

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