ACCT 403 Notes
Carter Slyker
Chapter 12: Financial Reporting and the Securities and Exchange Commission
(SEC)
The Financing of the U.S. Industry
-Financing of US industry depends on billions of dollars of stocks, bonds and other
securities sold to thousands of individuals, corporations, trust funds, pension
plans, and mutual funds daily.
-Investors must be able to assess the risks involved
Mission of the SEC
-The SEC, an independent agency of the federal government, was established by
the Securities Exchange Act of 1934
-Guidelines and requirements have a major influence in the US on the
development of all GAAP
-Mission of the US SEC is to:
1. Protect investors
2. Maintain fair, orderly, and efficient markets
3. Facilitate capital formation
-Mandate is to ensure that complete and reliable information is available to
investors
The Work of the SEC
-The SEC is headed by five commissioners appointed bu the president (with Senate
consent)
-Only 3 of 5 can belong to the same political party
-Commissioners serve 5-year staggered terms
Composition of the SEC
-The SEC is composed of 5 divisions and 23 offices, including the following (most
important):
oDivision of corporation finance
oDivision of investment management (chief accountant division
Goals of the SEC
-Ensuring that full and fair information is disclosed to all investors before the
securities of a company are allowed to be bought and sold
-Prohibiting the dissemination of materially misstated information
-Preventing misuse of information by inside parties
-Regulating the operating of securities markets such as the NYSE and the various
over the counter exchanges
SEC Requirements
1. Regulation S-K- established requirements for all nonfinancial information
contained in filings with SEC. E.g. description of registrant’s business and its
securities, officers, etc.
2. Regulation S-X- prescribed the form and content of the financial statements (and
the accompanying notes and related schedules) included in the various reports
filed with SEC
Sec Required Filings
-The most vital responsibility for the SEC is ensuring that a company discloses
sufficient, reliable information before its stocks, bonds, or other securities are
publicly traded
-Reporting problems that became the scandals at companies such as Enron,
WorldCom, Adelphia, and Tyco still draw increased attention to this role
The SEC’s Impact on Financial Reporting
-In addition to audited financial statements, Rule 14c-3 of the 1934 Act requires
the following to be included in proxy statements sent to shareholders:
1. 5-year summary of operations
2. Description of the business activities
3. 3-year summary of industry segments
4. List of company directors and executive officers
5. Market price of the common stock for each quarter of the last two years
6. Restrictions on the company’s ability to pay dividends
7. Management’s discussion and analysis (MD&A) of financial condition
SEC’s authority over GAAP
-Primary focus of the Sarbanes-Oxley Act is on the regulation of independent
auditor and auditing standards. It had little impact on accounting standards and
the registration of securities
Common SEC Registration Statement Forms
-S-1 usually used by new registrants or by companies that have been filing
reports with the SEC for less than 36 months
-S-3 used by companies that are large and already have a significant following
in the stock market
-S-4 used for securities issued in connection with business combination
transactions
-S-8 used as a registration statement for employee stock plans
-S-11 used for the registration of securities by certain real estate companies
Registration process
-When the registration statements are delivered to the SEC:
1. Analyst determines whether nonfinancial information complies with the SEC’s
disclosure requirements in Regulation S-K
2. Division of Corporation Finance regularly requests clarifications, changes or
additional information especially for initial registration
3. A letter of comments (deficiency letter) is issued to the company to
communicate these findings
4. A registration statement is made effective when the division is satisfied the
company has fulfilled all SEC regulations and securities can be sold
Periodic Filings with the SEC
-Form 10-K
oAnnual report filed within 90 days of fiscal year-end
oIncludes audited financial statements
-Form 10-Q
oQuarterly report filed within 45 days of end of quarter
oFinancial statements unaudited
-Form 8-K
oDiscloses a unique or significant happening within 15 days of happening
-Proxy statements
oMust be filed with the SEC at least 10 days before being distributed
oIndicates on whose behalf the solicitation is being made
oDiscloses fully all matters that are to be voted on at the meeting
oIs accompanied by an annual report to the shareholders
Electronic Data Gathering, Analysis, and Retrieval System (EDGAR)
-Was designed to reduce overwhelming paper flow into the SEC
-Allows for public access to SEC filings and information through the internet
-Virtually all publicly held companies are required to file their SEC reports
electronically
-Paper filings, when permitted, are also converted to electronic files and available
to the public
-Extensive data base moved financial reporting to a significantly higher level of
transparency
Letter of Comments = deficiency letter
Prospectus- the first part of a registration statement that a company must furnish to all
potential buyers of a new security
Chapter 8
Segment Reporting
-To better understand the enterprise’s performance
-To better assess the entity’s prospects for future net cash flows
-To make more informed judgments about the enterprise as a whole
An operating segment is a component of an enterprise:
-That engages in business activities from which it earns revenues and incurs
expenses in conjunction with its business activities
-Whose operating results are regularly reviews by the chief operating decision
maker (CODM)
-For which discrete financial information for the component is available
Determining segments
-Management must consider these aggregation criteria to determine whether to
combine operating segments
oThe nature of the products or services provided by each operating segment
oThe nature of the production process
oThe type or class of customer
oThe distribution methods
oThe nature of the regulatory environment
Quantitative Thresholds
-A segment is considered reportable if it satisfies only one of these tests:
1. Revenue test- its revenues are 10% or more of combined revenue of all
reported operating segments
2. Profit or loss test- its profit or loss is 10% or more of the combined profit (or
combined loss if larger) of all segments reporting a profit
3. Asset test- its assets are 10% or more of the combined assets of all operating
segments’
Required Segment Disclosures- General Information
-Significant company information is required to be disclosed for each operating
segment:
oGeneral information about each operating segment:
Factors used to identify reportable operating segments
Types of products and services from which each operating segment
reported derives its revenues
Required Segment Disclosures- Profit or Loss
-Segment profit or loss must be disclosed if it is regularly
provided to or included in the measure of segment profit or
loss reviewed by the chief operating decision maker:
oRevenues from external customers.
oTransaction revenues from other operating segments.
oInterest revenue and expense (reported separately).
oDepreciation, depletion, and amortization expense.
oEquity in the net income of investees (equity method).
oSignificant noncash and unusual items.
oIncome tax expense or benefit.
3 Required Segment Disclosures- Total Segment Assets and Related Items
-Total segment assets and the following related assets
oInvestment in equity method affiliates
oExpenditures for additions to long-lived assets
Information about Geographic Area
-For companies with international activities, two items must be reported:
oRevenues from external customers
oLong-lived assets for:
The domestic country
All foreign countries in total in which the enterprose derives revenues
or holds assets
-If the company has only one operating segment and does not provide segment
information, it must report geographic area information
-Materiality: 10% of revenues
Major Customers
-FASB ASC 280-10-50-42 requires one final but important disclosure
-A reporting entity must indicate its reliance on any major external customer:
oWhenever 10% or more of a company’s consolidate revenues is derived from
a single external customer
-The existence of all major customers must be disclosed along with the related
amount of revenues and the identity of the operating segment generating the
revenues
Interim Reporting
-The SEC requires publicly traded companies in the United States to provide
unaudited financial statements on a quarterly basis
-FASB ASC Topic 270, “Interim Reporting,” provides guidance on how to prepare
interim statements
-There are two possible approaches
oDiscrete- the accounting period stands on its own
oIntegral- treat the accounting period as a portion of a longer period
-FASB ASC 270 requires companies to use the integral approach
Interim Reporting- Revenues
-Revenues should be recognized in interim periods the same way revenues are
recognized on an annual basis
-Revenues from long–term contracts should be recognized
using the same methodology as used on an annual basis.
-A company should recognize projected losses on long–
term contracts to their full extent in the interim period in
which it becomes apparent that a loss will arise.
30
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Interim Reporitng- Inventory and COGS
-Interim period accounting for inventory and COGS requires several modifications
to proceduresused on an annual basis. The modifications relate to:
oLIFO liquidation
If units of beginning inventory sold are expected to be replaced by
year-end then no LIFO liquidation is needed
oLower of cost or net realizable value rule
oStandard costing
Property tax expense 150,000
Prepaid property tax 450,000
Cash 600,000
Interim Reporting- Change in Accounting Principles
-FASB ASC 250-10-45-5- requires:
1. The cumulative effect of the change on prior periods reflected in the carrying
amounts of assets and liabilities as of the beginning of the first period
presented
2. Any offsetting adjustment is made to the opening balance of retained earnings
3. Financial statements for each prior period are adjusted to reflect the period-
specific effects
Minimum disclosures in Interim Reports
-Authoritative accounting literature requires companies to provide minimum
information in their interim reports for:
oSales or gross revenues
oEarnings per share (basic and diluted)
oSeasonal revenues and expenses
oSignificant changes in estimates or provisions for income taxes
oDisposal of a component of the business and unusual or infrequently
occurring items
oContingent items
oChanges in accounting principles or estimates
oSignificant changes in financial position
-GAAP requires the following interim disclosure for each reportable operating
segment:
oRevenues from external customers
oIntersegment revenues
oSegment profit or loss
oTotal assets (if there has been a material change from the last annual
report)
IFRS- Interim Reports
-IAS 34 required minimum components in an interim report:
oCondensed balance sheet
oCondensed statement of comprehensive income
A condensed single statement of net income and comprehensive
income, or
Separate condensed statements of net income and comprehensive
income
oCondensed statement of changes in equity
oCondensed statement of cash flows
oSelected explanatory notes
Chapter 11: Worldwide Accounting Diversity and International Standards
International Accounting Diversity- Historically
-Many differences in preparation and presentation of financial reports across
countries
-Many European companies present intangible assets first and cash last in the
balance sheet
-LIFO is not acceptable in most countries outside the U.S.
-IASC- International Accounting Standards Committee replaced by:
-IASB- International Standards Board, which develops:
-IFRS- International Financial Reporting Standards
-More than 140 countries around the world use IFRS to prepare consolidated
financial statements
Foreign Companies
-Foreign companies that are on the US stock exchange must register and file FS
with the SEC with form 20-F
Reason for Accounting Diversity
1. Legal system
2. Taxation
3. Financing system
4. Inflation
5. Political and economic ties
Problems caused by diverse accounting standards
1. The preparation of consolidated financial statements by companies with foreign
operations usually requires companies to keep books in the local currency and
follow local accounting principles
2. Companies that want to gain access to foreign capital markets and obtain capital
by selling stock or borrowing money in a foreign country might be required to
present financial statements prepared in accordance with that company’s
accounting standards
3. Lack of comparability of financial statements between companies
The IOSCO Agreement
-The International Organization of Securities Commissions (IOSCO), a member of
the IASC’s Consultive Group, is composed of the stock exchange regulators in
more than 100 countries, including the US SEC
-IOSCO works to facilitate cross border standards
-The IASC issued or revised 16 standards
-Many stock exchanges around the world implemented the recommendation
International Accounting Standards (IAS)
-IASB succeeded IASC in 2001
International Financial Reporting Standards (IFRS)
-Issued by the IASB
IAS or IFRS
-The IASC issued 41 IASs from 1975 to 2001
-IASB had issued 19 IFRSs as of 2024
-Several IASs have been withdrawn or superseded by subsequent standards
-IASB issued the first IFRS in 2003
International financial reporting standards issued by the IASB and international
accounting standards issued by the IASC
International Financial Reporting Standards (IFRS) Adoption
-Countries can use IFRS by:
1. Adopting IFRS as their national GAAP
2. Requiring domestic listed companies to use IFRS
3. Allowing domestic listed companies to use IFRS
4.
Opening IFRS Balance Sheet
1. Determine the applicable IFRS
2. Recognize assets and liabilities required under IFRS
3. Measure assets and liabilities
4. Reclassify items
5. Comply with all presentation and disclosure requirements
After Opening IFRS Balance Sheet
-IFRS 1 requires a company to provide reconciliations and disclosure notes in its
first set of IFRS financial statements
oReconciliation of equity
oReconciliation of net income
IFRS Accounting Policy Hierarchy
-IAS 8, “Accounting policies, changes in accounting estimates and errors,”
establishes the hierarchy that firms must follow when dealing with an accounting
issue:
1. Apply specific relevant standards
2. Refer to other IASB standards
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3. Reger to definitions, recognition criteria, and measurement concepts in the
IASB Conceptual Framework
4. Consider most recent pronouncements of other standard setting bodies
