2. 23 OTHER MEASUREMENT AND DISCLOSURE ISSUES
After studying this chapter, you should be able to:
Understand the importance of disclosure from a business perspective.
Review the full disclosure principle and describe problems of implementation.
Explain the use of accounting policy notes in financial statement preparation.
Describe the disclosure requirements for major segments of a business.
Describe the accounting problems associated with interim reporting.
Discuss the accounting issues for related-party transactions.
Identify the difference between the two types of subsequent events.
Identify the major disclosures found in the auditor’s report.
Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis.
Identify the major differences in accounting between ASPE and IFRS, and what changes are expected in the near future.

3. Other Measurement and Disclosure Issues
The importance of disclosure from a business perspective
Full disclosure principle
Accounting policies
Segmented reporting
Interim reporting
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

4. Importance of Disclosure
Information disclosure is an important part of capital markets:
Financial statements are only one source of information for investors
Other sources include:
Annual information forms
Management’s discussion and analysis (MD&A)
New releases
Users must use caution because not all disclosure is good disclosure
LO1

5. The Full Disclosure Principle
The full disclosure principle calls for financial reporting of significant facts affecting the judgment of an informed reader
The problems of implementing this principle are costs of disclosure or information overload
Over the past several decades, disclosures for public companies have significantly increased
LO2

6. Types of Financial Information
LO2

7. Increase in Reporting Requirements
Reasons for increasing reporting requirements of public companies:
Complexity of the business environment (e.g. derivatives, business combinations, pensions)
Need for timely information (e.g. interim data, financial forecasts)
Accounting used as a control and monitoring device (e.g. disclosure of management compensation, related-party transactions, errors and irregularities)
LO2

8. Accounting Policies
The accounting policies of the entity must be disclosed as the first note or in a separate section preceding the notes
This note is called Summary of Significant Accounting Policies
LO3

9. Illegal Acts
Illegal acts are defined by the CICA as “a violation of a domestic or foreign statutory law or government regulation attributable to the entity…or to management or employees acting on the entity’s behalf.”
The item may require recognition in the statement of financial position or income statement
Note disclosure may be required
LO3

10. Segmented Reporting
Information on how the segment contributes to the total business operations
Investors want information from the income statement, statement of financial position, and statement of cash flows about individual segments
Reporting segmented information helps users:
Better understand the enterprise’s performance
Better assess future net cash flows prospects
Make more informed judgments about the company
ASPE does not provide guidance for reporting segmented information
LO4

11. Segmented Reporting
IFRS requires that the financial statements include selected information on a single basis of segmentation
The segments are evident from their organizational structure (operating segments)
This method is called the management approach
This approach includes information the perspective of the chief operating decision maker
LO4

12. Segmented Reporting
An operating segment is a component of an enterprise that:
Engages in business activities from which it earns revenues and incurs expenses
Has the chief operating decision maker regularly review results to:
Assess performance
Allocate resources
Has discrete financial information available
LO4

13. Segmented Reporting
Operating segments may be aggregated if they have the same basic characteristics
The nature of the products and services provided
The nature of the production process
The type or class of customer
The methods of product or service distribution
The nature of the regulatory environment, if applicable
LO4

14. Reportable Segments
An operating segment is significant and thus identified as a reportable segment if it satisfies one or more of the following criteria:
The revenue criterion
The profit or loss criterion
The identifiable assets criterion
LO4

15. Reportable Segments Criterion Thresholds
Revenue percent or more of the combined
revenue of all operating segments
Profit or loss 10 percent or more of the greater of:
(a) the combined profit of all operating
segments not showing a loss or
(b) the combined loss of all operating
segments reporting a loss
LO4
Identifiable assets percent or more of the combined
assets of all operating segments

16. Reportable Segments
Three other factors are considered in addition to the above tests:
Segment results are 75% or more of combined sales to unrelated customers
No more than 10 segments are required to be disclosed
Segment may be presented separately on grounds that separate information would be useful to users (even if not meet any of the tests)
LO4

17. Measurement Principles
The accounting principles used for segment reporting and for consolidated statements need not be the same
Some accounting principles may not apply at the segment level
For example, common costs are not required to be allocated among the segments
Such allocation is arbitrary and may not produce an objective division of costs among segments
LO4

18. Required Segmented Information
IFRS requires reporting of the following:
General information about its reportable segments
Segment profit and loss, assets, liabilities, and related information
Reconciliation of segment revenues, profits and losses, and segment assets and liabilities
The amount of revenues from external customers for products and services
Information about geographical areas and if amounts are material, foreign information (e.g. revenue) must be disclosed by country
Information about major customers (if 10% or more of revenue from one customer, must disclose)
LO4

19. Interim Reporting
IFRS provides guidance but does not mandate which entities need to provide interim information
Annual reports and interim reports must use the same accounting principles (e.g. inventory cost formula, revenue recognition)
Costs and expenses other than product costs (i.e., period costs) are often recorded in the interim period as they are incurred
ASPE does not provide guidance on interim reporting
LO5

20. Interim Reporting
At a minimum, condensed statement of financial position, comprehensive income statement, statement of changes in equity, statement of cash flows, and selected notes are required
Earnings per share (EPS) information is also required if the company must present this information in its annual information
LO5

21. Interim Reporting
The statement of financial position should be presented as at the end of the current interim period with a comparative statement of financial position as of the end of the immediately preceding fiscal year
The income statement should be presented for the current interim period and interim year to date with comparatives
The statement of changes in equity should be presented cumulatively for the current fiscal year to date with comparatives, and
The statement of cash flows should be presented cumulatively for the current fiscal year to date with comparatives
LO5

22. Interim Reporting Minimum disclosure requirements include:
1. Whether statements are in compliance with IFRS
2. Accounting policies and methods
3. Any seasonal or cyclical period considerations
4. Nature and amount of unusual items
5. Nature and amount of estimate changes
6. Issuances, repurchases, and repayments of debt and equity securities
LO5

23. Interim Reporting Minimum disclosure requirements include (cont’d):
7. Dividends paid
8. Information about reportable segments
9. Subsequent events
10. Changes in composition of entity
11. Any other information required for fair presentation and/or material to understanding of period
LO5

24. Interim Reporting Problem Areas
Changes in Accounting
Changes applied retroactively to prior interim periods
Comparable interim periods from previous fiscal years also restated
Earnings per share
Each interim period EPS is stand alone
Seasonality
Defer recognition of costs and expenses only if it would also be appropriate at year-end
Continuing Controversy
Auditor’s involvement in the interim reporting process
Timeliness of information
LO5

25. Internet Financial Reporting
Companies are increasingly disclosing financial information through websites
Corporations can reach more users using the Internet
Internet reporting can make traditional reports more useful:
Corporations can report more timely information
They can also report disaggregated data, therefore financial reports are more relevant
The major concerns are equality of access to electronic reports, and reliability of information distributed via the Internet
LO5

26. Other Measurement and Disclosure Issues
The importance of disclosure from a business perspective
Full disclosure principle
Accounting policies
Segmented reporting
Interim reporting
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

27. Related Party Transactions
Related-party transactions arise when a business engages in transactions with another party that can significantly influence its policies
Related party transactions are individually assessed
Related parties include the following:
Companies or individuals with control
Investors and investees with significant influence or joint control
Company management
Members of immediate family
The other party in a management contract
LO6

28. Related Party Transactions
Measurement is a major accounting and reporting issue
A basic assumption is that the transactions are between arm’s length parties
If this condition not met, should disclose that transaction is between related parties
Should report economic substance rather than legal form of transactions
Under ASPE, some related-party transactions must be remeasured to the carrying amount of assets or services exchanged
LO6

29. Related Party Transactions – Decision Tree
LO6

30. Related Party Transactions
The following disclosures are recommended:
The nature of the relationship
Description of the transactions
The recorded amounts of transactions
Measurement basis used
Amounts due from or due to related parties at the statement of financial position date, and terms and conditions
Contractual obligations with related parties
Contingencies involving related parties
Under IFRS, management compensation and name of parent company (as well as ultimate controlling entity/individual)
LO6

31. Related Party Transactions – Example
Given:
Assume Knudson Limited sells land worth $20,000 (with a carrying value of $15,000) to Bay Limited (a related party)
In exchange, Bay Limited transfers a building that has a NBV of $12,000
LO6

32. Related Party Transactions – Example
This transaction is not in normal operations and does not change ownership interests
Therefore, must be measured at carrying value; journal entry required by Knudson:
PP&E 12,000
Retained Earnings 3,000
Land 15,000
LO6

33. Subsequent Events
Notes to the financial statements must explain any significant financial events that occurred after the statement of financial position (SFP) date, but before the date of issue (under IFRS, date of financial statement completion)
Financial statement period
Subsequent events period
LO7
SFP date
Issue date

34. Subsequent Events
Two types of post-statement of financial position events must be disclosed:
Events that provide additional evidence about conditions that existed at statement of financial position date and require adjustment
Examples:
loss on accounts receivable due to customer’s bankruptcy, where customer’s poor financial condition existed at the statement of financial position date
Settlement of litigation if event giving rise to litigation existed prior to statement of financial position date
LO7

35. Subsequent Events
Events that provide evidence about conditions that did not exist at statement of financial position date and do not require adjustment
Examples:
A fire or flood resulting in a loss
A purchase of a business
Changes in foreign exchange rates
A bond or share issuance
LO7

36. Unincorporated Businesses
Key accounting issues include:
Clear definition of the business entity
Statements should clearly report the business name and that the business is not incorporated
Clear reporting of any amounts accruing to the owners
There is no provision for income taxes
ASPE provides specific guidance for unincorporated business but IFRS does not
LO7

37. Other Measurement and Disclosure Issues
The importance of disclosure from a business perspective
Full disclosure principle
Accounting policies
Segmented reporting
Interim reporting
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

38. Auditor’s Report
Another important source of information is the auditor’s report
The auditor conducts an independent examination of a company’s accounting data to determine whether the financial statements are prepared fairly in accordance with the applicable financial reporting framework
The auditor’s report reflects the auditor’s conclusions
In most cases, the auditor issues a standard unqualified or clean opinion
LO8

39. Auditor’s Opinion The auditor can render or provide:
An Unqualified (clean) opinion
A Qualified opinion
An Adverse opinion (circumstances)
A disclaimer of an opinion (no opinion can be given)
LO8

40. Unqualified Auditor’s Report
If the auditor is satisfied that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in accordance with GAAP, an unqualified opinion is expressed
LO8

41. Qualified Opinion
A qualified opinion contains an exception to the standard opinion
That is, except for the effects of the matter related to the qualification, the financial statements are fairly presented in accordance with GAAP
It may also relate to a scope limitation; that is, where the auditor has not been able to obtain sufficient and appropriate audit evidence
LO8

42. Adverse Opinion
An adverse opinion is required if exceptions to fair presentation are so material that, in the independent auditor’s judgment, a qualified opinion is not justified
The financial statement as a whole are not presented according to GAAP
LO8

43. Other Measurement and Disclosure Issues
The importance of disclosure from a business perspective
Full disclosure principle
Accounting policies
Segmented reporting
Interim reporting
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

44. Financial Statement Analysis
Understanding a company’s accounting policies and methods is important for financial statement analysis
Accounting choices can affect recognition, measurement, presentation and trends
LO9

45. Financial Statement Analysis
Financial statements have several limitations:
Report past information
Ratio and trend analysis do not provide details about “why” things are as they are
A ratio is not useful on its own
There are limitations to the accounting information due to accounting policy choices
LO9

46. Ratio Analysis
Ratio analysis is an expression of the relationship between two numbers
LO9

47. Ratio Analysis
LO9

48. Ratio Analysis
LO9

49. Percentage Analysis
Percentage (common-size) analysis converts a series of related amounts to a series of percentages of a given base
There are two types:
Horizontal analysis: proportionate change over a period of time
For example, year over year fluctuations
Vertical analysis: proportional expression of each item in a given period to a base figure
For example, items in the income statement as a percentage of sales
LO9

50. Financial Statement Analysis
Financial statement analysis also has limitations due to the many sources of uncertainty such as:
Nature and role of the financial statements
Nature of business operations portrayed
Limitations of measurement and disclosures
Management’s motives and intentions
LO9

51. Other Measurement and Disclosure Issues
The importance of disclosure from a business perspective
Full disclosure principle
Accounting policies
Segmented reporting
Interim reporting
Other Measurement Issues
Related-party transactions
Subsequent events
Auditor’s Reports
Unqualified opinions
Qualified opinions an disclaimers of opinion
Adverse opinions
Financial Statement Analysis
An overview of financial statement analysis
Financial statement analysis techniques
Limitations of financial statement analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

52. Looking Ahead
The profession must continue to develop a sound conceptual framework
This will help minimize the different presentations of the same or similar transactions
LO10

53. COPYRIGHT
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