Which of the following would not typically be disclosed in the notes to the financial statements?
It is important to distinguish the treatment from a change in accounting principle, as defined above, from a change that results from moving from an accounting principle that is not generally accepted to one that is generally accepted. This type of change is an error correction – refer to Section 3 for further discussion. Show
DisclosuresAn entity is required to disclose the nature of and reason for the change in accounting principle, including a discussion of why the new principle is preferable. The method of applying the change, the impact of the change to affected financial statement line items (including income from continuing operations and earning per share), and the cumulative effect to opening retained earnings (if applicable) must be disclosed. Additional disclosures are required for any indirect effects of the change in accounting principle. Financial statements of subsequent periods are not required to repeat these disclosures. If the change in accounting principle does not have a material effect in the period of change, but is expected to in future periods, any financial statements that include the period of change should disclose the nature of and reasons for the change in accounting principle.Change in Accounting EstimateA change in accounting estimate is:
BDO Insight:A critical element of analyzing whether a change should be accounted for as a change in estimate relates to the nature and timing of the information that is driving the change. Companies should carefully assess whether such information is truly “new” information identified in the reporting period or corrects inappropriate assumptions or estimates in prior periods (which would be evaluated under the error correction guidance in Section 3). For example, a change made to the allowance for uncollectible receivables to include data that was accidentally omitted from the original estimate or to correct a mathematical error or formula represents an error correction. Conversely, a change made to the same allowance to incorporate updated economic data (e.g., unemployment figures) and the impact it could have on the customer population would represent a change in estimate.DisclosuresAn entity is required to disclose the impact of the change in accounting estimates on its income from continuing operations, net income (including per share amounts) of the current period. If the change in estimate is made in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence, disclosure is not required unless the effect is material. If the change in estimate does not have a material effect in the period of change, but is expected to in future periods, any financial statements that include the period of change should disclose a description of the change in estimate.Change in Reporting EntityA change in reporting entity is:
DisclosuresFor financial statements of periods in which there has been a change in reporting entity, an entity should disclose the nature of and reasons for the change. In addition, the effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), other comprehensive income, and any related per-share amounts shall be disclosed for all periods presented. If the change in reporting entity does not have a material effect in the period of change, but is expected to in future periods, any financial statements that include the period of change should disclose the nature of and reasons for the change in reporting entity.Step 1 – Identify an ErrorAccounting changes should be distinguished from error corrections. An error in previously issued financial statements is:
Step 2 – Assess Materiality of ErrorOnce an error is identified, the accounting and reporting conclusions will depend on the materiality of the error(s) to the financial statements. In connection with decisions related to the interpretation of federal securities laws, the Supreme Court has concluded that an item is considered material if there is "a substantial likelihood that the…fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." While assessing the materiality of an error is not the subject of this publication, companies (particularly SEC registrants) are directed to consider both the quantitative and qualitative considerations outlined in the extensive materiality guidance set forth in SEC Staff Accounting Bulletin (“SAB”) Topics 1.M and 1.N (formerly referred to as SAB Nos. 99 and 108, respectively). Materiality should be assessed with respect to the misstatement’s impact on prior period financial statements and, in the event prior period financial statements are not restated or adjusted, with respect to the impact of the misstatement’s correction on the current period financial statements.
Step 3 – Report Correction of ErrorReporting the correction of the error(s) depends on the materiality of the error(s) to both the current period and prior period financial statements. The error is corrected through one of the following three methods:
Little R RestatementCommunicationAs the prior period financial statements are not determined to be materially misstated, the entity is not required to notify users that they can no longer rely on the prior period financial statements. Reporting Approach Disclosures Big R RestatementsCommunicationWhen a Big R restatement is appropriate, the previously issued financial statements cannot be relied upon. Therefore, the entity is obligated to notify users of the financial statements that those financial statements and the related auditor’s report can no longer be relied upon. For an SEC registrant, this is accomplished by filing an Item 4.02 Form 8-K (Non-reliance on previously issued financial statements or a related audit report or completed interim review) within 4 business days of the determination by the entity or its auditor that a Big R restatement is necessary.[3] Reporting Approach When the errors’ effect on the financial statements cannot be determined without a prolonged investigation (or the preparation of and auditing of the restated financial statements will simply take a longer period of time due to the nature of the errors), the issuance of the restated financial statements and auditor’s report will necessarily be delayed. In some cases, the process may cause an SEC registrant to fall behind on its periodic reports. Questions often arise about the filing approach in this situation, particularly whether each “missing” periodic report should be filed, or a comprehensive report on Form 10-K can be filed (i.e., a Super Form 10-K). The Financial Reporting Manual of the SEC’s Division of Corporation Finance contains the following guidance (see 1320.4) SEC registrants may wish to consider if they become delinquent in their filings (whether due to restatements or otherwise):
Disclosures
When correcting the error by restating under the Big R restatement approach, an explanatory paragraph will be included within the auditor’s report with a statement that the previously issued financial statements have been restated for the correction of a material misstatement in the respective period and a reference to the footnote disclosure of the correction of the material misstatement. Additionally, an entity will need to consider the impact of such errors on its internal controls over financial reporting – refer to Section 5 below for further discussion. ReclassificationsChanges in the classification of financial statement line items in previously issued financial statements generally do not require restatements, unless the change represents the correction of an error (i.e., a misapplication of GAAP in the prior period). Reclassifications represent changes from one acceptable presentation under GAAP to another acceptable presentation.Disclosures that indicate certain prior period financial information has been reclassified to conform with the current period presentation should be reserved solely for reclassifications that do not constitute errors. Consider the following examples: What should be disclosed in notes to the financial statements?Notes to financial statements
Notes to the financial statements disclose the detailed assumptions made by accountants when preparing a company's: income statement, balance sheet, statement of changes of financial position or statement of retained earnings.
Which is not a type of note found in a set of financial statements?Direct information is not the type of note found in a set of financial statements. Explanation: The explanatory notes or any kind of information is not found in the 'financial statements' or 'account statements'.
Which of the following is not a component of the financial statements?Hence cash budget would not be included in financial statements.
Which of these statements is not one of the financial statements?Explanation for correct answer:
Statement of owner's investments is not one of the financial statements.
|