Intermediate Accounting I - Fall Session 3 Accounting Assumptions and Principles Balance Sheet Wrap-up The Complete Income Statement Separately Reported Items

Intermediate Accounting I - Fall 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 & MEASUREMENT SFAC 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 X 4)

Intermediate Accounting I - Fall Additional Disclosures n Footnotes n Accounting Policies n Subsequent Events n Noteworthy Transactions n Management Discussion and Analysis (MD&A) n Management’s Responsibilities n Auditors’ Report n Compensation in the Proxy Statement

Intermediate Accounting I - Fall The Complete Income Statement n Single or multiple step n Major components n Income from continuing operations n Gross margin n Operating income n Other income and expense n Separately reported items n Discontinued operations n Extraordinary items n Earnings per share n Basic n Diluted

Intermediate Accounting I - Fall Earnings Quality Issues n Income shifting n One time gains and losses n Operating versus non-operating income n Specific topics n Restructuring costs—ASC or FAS 146, when incurred n Transitory or routine n Investment gains and losses n Pro-forma reporting, reconciliation required

Intermediate Accounting I - Fall Comprehensive Income n Net income n Other Comprehensive Income* n Unrealized gains & losses on available for sale securities n Translation gains and losses n Deferred gains & losses from derivatives n Post retirement benefit plan adjustments (*all net of tax)

Intermediate Accounting I - Fall Comprehensive Income-- Reporting n Flexible n Extension to the P&L (p.194) n Separate statement (p.195) n Often in footnotes

Intermediate Accounting I - Fall Balance Sheet Presentation n Accumulated Other Comprehensive Income n Note that the “accumulated” net income is included in Retained Earnings (Astro-Med Inc. p. 196)

Intermediate Accounting I - Fall Separately Reported Items n Discontinued Operations n Extraordinary Items n Mandated Changes in Accounting Principles

Intermediate Accounting I - Fall 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 Intraperiod Income Tax Allocation n Associate tax on a pro-rata basis with continuing operations and separately reported items

Intermediate Accounting I - Fall Discontinued Operations n What is an operation? n Component of an entity n Two key requirements n Operations and cash flows will be eliminated (generally this means separate internal reporting), and n No further significant involvement

Intermediate Accounting I - Fall Reporting Discontinued Operations n Footnote disclosure, as appropriate n Sale before the end of the reporting period n Operating income and loss thru the disposal date n Gain or loss on disposal (clearly presented) n Held for sale (sale after the end of the reporting period) n Operating income and loss thru the end of the reporting period n Impairment loss (clearly presented) n B/S assets valued at lower of BV or FV less cost to sell n B/S assets reported separately n Additional gain or loss on sale reported when sold

Intermediate Accounting I - Fall Held for Sale Definition n See ASC or FAS 144 n Likely to be sold within a year

Intermediate Accounting I - Fall Impairment on Held for Sale n Selling price versus FV less cost to sell n Footnote disclosure, as appropriate (p. 185)

Intermediate Accounting I - Fall Extraordinary Items n Unusual and infrequent n Unusual or infrequent n Separate item in operating income n Footnote disclosure as appropriate

Intermediate Accounting I - Fall Accounting Changes n Change in accounting principle n Change in estimate n Change in reporting entity n Correction of errors (not an accounting change)

Intermediate Accounting I - Fall Change in Actg. Principle n Footnote disclosure, as necessary n Voluntary n Retrospective: apply historically n Journal entry in current year, impacts R/E n Mandated n FASB may allow voluntary treatment n Cumulative effect as Separately Reported Item

Intermediate Accounting I - Fall Change in Estimate n Prospective n Footnote disclosure, if material n Includes depreciation with mandated footnote disclosure

Intermediate Accounting I - Fall Change in Entity n Not comparative; therefore, restate prior F/S n Footnote disclosure, as appropriate

Intermediate Accounting I - Fall Correction of Errors n If not material, just correct n If material n Prior period adjustment and restatement of prior financial statements n Adjust Retained earnings and Statement of R/E

Intermediate Accounting I - Fall Earnings Per Share n Basic n Income to common shareholders / weighted average of common shares outstanding n Diluted n Adjusted income to common shareholders / weighted average of total common share outstanding n Disclose for continuing operations, discontinued operations and extraordinary items