1. Chapter 23 Other Measurement and Disclosure Issues
Prepared by:
Patricia Zima, CA Mohawk College of Applied Arts and Technology

2. Other Measurement and Disclosure Issues
Other Measurement Issues
Related-party transactions
Differential reporting
Subsequent events
Reporting on financial forecasts and projections
Perspectives
International
Disclosure Issues
Full disclosure principle revisited
Increase in reporting requirements
Accounting policies
Illegal acts
Segmented reporting
Interim reporting
Internet financial reporting and continuous disclosures
Auditor’s Reports
Unqualified opinions
Qualified opinions
Adverse opinions
Unincorporated Businesses

3. The Full Disclosure Principle
The full disclosure principle calls for financial reporting of significant facts affecting the judgement of an informed reader
The problems of implementing this principle are costs of disclosure or information overload
The profession continues to develop guidelines:
should a given transaction be disclosed
what format this disclosure should take

4. Increase in Reporting Requirements
Reasons for increasing reporting requirements:
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)

5. Types of Financial Information
Financial Statements
Balance Sheet
Statement of Income
Statement of Cash Flows
Statement of Changes in Shareholders’ Equity/Retained Earnings
Notes to the Financial Statements
Examples:
Accounting Policies
Contingencies
Inventory Methods
Number of Shares Outstanding
Alternative Measures (market values of items carried at historical cost)

6. Types of Financial Information
Other Means of Financial Reporting
Examples:
Management Discussion and Analysis
Letters to Shareholders
Other Information
Examples:
Discussion of Competition and Industry
Analysts’ Report
Economic Statistics
News Articles about Company

7. Notes to Financial Statements
Notes amplify or explain items presented in the body of the financial statements
The accounting policies of the entity must be disclosed as the first note or in a separate section preceding the notes (called Summary of Significant Accounting Policies)
Notes to the financial statements include:
Inventory valuation method
Amortization policy followed
Changes in accounting policies

8. Notes to Financial Statements
Major disclosures
Inventory
Property, Plant and Equipment
Liabilities
Equity
Contingencies and Commitments
Taxes, Pensions and Leases
Changes in Accounting Policies
Special Transactions or Events
Subsequent events
Segment reporting
Interim reporting
Related party transactions
Accounting errors
Illegal acts

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 balance sheet or income statement
Note disclosure may be required

10. Segmented Business Reporting Requirements
Information on how the segment contributes to the total business operations
Investors want information from the income statement, balance sheet, and cash flow statement on individual segments
Reporting segmented information helps users:
Better understand the enterprise’s performance
Better assess future net cash flows prospects
Make more informed judgement about the company

11. Segmented Business Reporting Requirements
CICA Handbook 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

12. Segmented Business Reporting Requirements
What is an operating segment?
Any component of an enterprise that:
Engages in business activities from which it earns revenues and incurs expenses
Has senior management regularly review results
Assess performance
Review resource allocation decisions made
Has discrete financial information available

13. Aggregation of Operating Segments
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

14. Reportable Segments
An operating segment is 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
Two other factors are considered in addition to the above tests
Segment results are 75 percent or more of combined sales to unrelated customers
No more than 10 segments are required to be disclosed

15. Reportable Segments Criterion Thresholds
Revenue percent or more of the combined
revenue of all operating segments
Profit or loss 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
Identifiable assets percent or more of the combined
assets of all operating segments

16. 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
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

17. Required Segmented Information
General information about its reportable segments
Segment profit and loss, assets, and related information
Reconciliation of segment revenues, profits and losses, and segment assets
Products and services – amount of revenues from external customers
Information about geographical areas – if amounts are material, foreign information (e.g. revenue) must be disclosed by country
Major customers – if 10% or more of revenue from one customer, must disclose

18. Interim Reporting
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
At a minimum, the balance sheet, income statement, statement of retained earnings, statement of cash flows, and notes are required
Earnings per share (EPS) information is also required if the company must present this information in its annual information

19. Interim Reporting
The balance sheet should be presented as at the end of the current interim period with a comparative balance sheet 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 retained earnings should be presented cumulatively for the current fiscal year to date with comparatives, and
The statement of cash flows should be presented for the current interim period and cumulatively for the current fiscal year to date with comparatives

20. Interim Reporting Minimum disclosure requirements include:
Any noncompliance with GAAP
Accounting policies and methods
Any seasonal or cyclical period considerations
Estimate changes
Reportable segment information
Events subsequent to interim reporting period
Notable events (combinations, reorganization)
Contingencies
Any other information for fair presentation

21. 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
Problem related to matching principle
Continuing Controversy
Auditor’s involvement in the interim reporting process
Timeliness of information

22. Internet Financial Reporting
Companies are increasingly disclosing financial information through websites
Corporations can reach more users by 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
There is concern about security on the Internet (i.e. hackers), equality of access to electronic reports, and reliability of information distributed via the Internet

23. 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
Company management
Members of immediate family

24. 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
Some related-party transactions must be remeasured to the carrying amount of assets or services exchanged (see following decision tree)

25. Related Party Transactions – Decision Tree
Related party transaction occurs
Is transaction in the
normal course of
operations?
Yes
Is the
transaction
non-monetary? No
Is the amount of the
exchange supported
by independent
evidence?
Yes
Is there a substantive
change in the owner-
ship interests of the
item transferred?
Yes
Yes No
Commercial substance and value supported No No
Yes No
Measure at carrying amount
Measure at exchange amount

26. Related Party Transactions
Example: Assume Hudson Limited sells land worth $20,000 (with a carrying value of $15,000) to a Bay Limited (a related party)
In exchange, Bay Limited transfers a building that has a NBV of $12,000
This transaction is not in normal operations and does not change ownership interests
Therefore, must be measured at carrying value; journal entry required by Hudson:
Building 12,000
Retained Earnings 3,000
Land 15,000

27. 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 balance sheet date, and terms and conditions
Contractual obligations with related parties
Contingencies involving related parties

28. Differential Reporting
Cost of increased disclosure and reporting requirements often outweighs the benefits for smaller organizations
Differential reporting applies to:
Non-publicly accountable organizations (where no financial instruments are traded in public markets)
Unanimously agreed to by the owners

29. Differential Reporting
Differential reporting relates to the following financial reporting areas:
Subsidiaries
Cost or equity method may be used instead of consolidation
Long-term Investments
Cost or equity method may be used where there is significant influence
Joint Venture Interests
Cost or equity method election

30. Differential Reporting
Goodwill and other intangibles
Impairment measurement options available
Share Capital
Disclosure requirements reduced
Income Taxes
Taxes payment method option
Financial Instruments
Election to treat certain preferred shares as equity rather than debt
Also elect to measure at cost or amortized cost for certain available for sale financial assets

31. Subsequent Events
Notes to the financial statements must explain any significant financial events that occurred after the balance sheet date, but before the date approved for issue
Financial statement period
Post balance sheet events
Balance
sheet date
Issue date

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

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

34. Financial Forecasts and Projections
The investing public needs a greater quantity and quality of information about corporate expectations
The disclosures take one of two forms:
Financial forecast of an entity’s expected financial position
Financial projection based on hypothetical assumptions
The difference is one of likelihood of happening

35. Forecast Arguments Arguments For Arguments Against
Information about the future may be misleading and unreliable
Corporations may strive to meet published projections regardless of shareholders’ interests
Incorrect projections may lead to legal actions
Forecasts may provide information to competitors that may be detrimental to corporate interests
Information about the future facilitates better decisions
Corporate disclosures limit the speculation about forecasts that are informally circulated
Historical information may not be adequate in a world of frequently changing circumstances

36. Procedural and Reporting CICA Standards
Appropriate assumptions are used
Time period used is not beyond that which can be reasonably estimated
Accounting policies used are the same as for year end reports
At least one income statement is included
Cautionary note is attached
Reports are clearly labeled as forecast/projection
Disclosure of assumptions and policies used

37. 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 GAAP
The auditor’s report reflects the auditor’s conclusions
In most cases, the auditor issues a standard unqualified or clean opinion

38. Auditor’s Reporting Standards
CICA Handbook, Section
Identify the financial statements
Distinguish management and auditor’s responsibilities
Describe scope of the auditor’s examination
The report should contain either an expression of opinion on the financial statements or an assertion that an opinion cannot be expressed
If an opinion is provided, it should state whether the statement fairly presents the financial position, operating results, and cash flows in accordance with GAAP

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)

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
An adverse opinion is required if a qualified opinion is not justified – i.e. in any report in which the exceptions to fair presentation are so material, in the independent auditor’s judgement

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

42. Unincorporated Businesses
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

43. International
Canadian and International standards are largely converged, with some differences
The major differences relate to auditing standards and GAAP for private enterprises

44. COPYRIGHT
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