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Question:

Discuss financial statement disclosure notes required by US GAAP. Include in your writing the purpose of disclosure notes, and discuss disclosures required for a summary of significant accounting policies, subsequent events, related party transactions, and other disclosures you may wish to address. Please do not include any discussion of IFRS disclosure requirements, and do not discuss the report of independent auditors?
 
 

Answer:

Summary:

In this report we are going to discuss the financial statement disclosures required by US GAAP. It contains discussions on the disclosures relating to some significant accounting policies and the purpose they serve for the users of financial statements.

Introduction:

The Securities and Exchange Commission has adopted a set of accounting principles that are known as “Generally Accepted Accounting Principles” or US GAAP. When financial statements are prepared in compliance with US GAAP, certain mandatory disclosures have to be made while the management might want to include other disclosures voluntarily. GAAP has four basic assumptions, four basic principles and four basic constraints.

Disclosures – Helping the end users of financial statements

Accounting employs a lot of assumptions and management decisions on accounting policies in the preparation of financial statements. Disclosure notes give the users of the financial statement clarity on the management’s decision to employ a particular accounting policy and brings their attention to any deviation from the fundamental accounting assumptions or other facts that can influence the decisions of the users of financial statements which helps them in informed decision making.

 

Significant accounting policies and their disclosure requirements

1. Accounting changes and error correction(1) –

a. When any change in accounting principle is made the reason for the change along with the retrospective adjustment of any prior period information has to be disclosed in that fiscal year.

b. If retrospective adjustment is not practical then the reasons for the same along with alternate method of reporting the change has to be disclosed.

c. On restatement of financial statements of prior period to correct an error, the same has to be disclosed along with the effect of correction on at line item level.

d. Purpose: Users of financial statement will take decisions based on principles or amounts which no longer exist and thus it would mislead them into making incorrect decisions if proper disclosure is not made.

2. Related party disclosures(2) –

a. Related party transactions of material amounts have to be disclosed indicating the nature of relationship, description and the value of such transactions.

b. Any amount due to/from related parties as on the balance sheet date have to be disclosed.

 

c. Purpose: Related party transactions have a significant influence on the decisions of the users of financial statements as it shows the value and nature of transactions between related parties and the proportion of the same to the total activities of the organization.

3. Subsequent events(3) –

a. In case of recognized subsequent events the date through which subsequent events have been evaluated has to be disclosed.

b. In case of non recognized subsequent events that need to be disclosed to avoid misleading the user, the disclosure shall include the nature of the event and an estimate of the financial effect.

c. Purpose: The user will consider subsequent events that have changed the existing circumstances and take decisions accordingly.

4. Segment reporting(4)-

a. The criteria for a reportable segment is:

• Reported revenue is 10% or more of the combined revenue

• Reported profit or loss is 10% or more in absolute terms of combined profit or loss

• Assets are 10% or more of the combined assets

 

b. Factors for determining reportable segment based on geography, products and services or regulatory requirements need to be disclosed

c. All public entities need to provide details about major customers. Major customers are those who contribute more than 10% of the entity’s revenue.

d. Purpose: It helps users of financial statements identify the major drivers of an organization’s growth, identify those segments which are the most profitable or the ones which are lagging in performance.

5. Fair value disclosures(5) –

a. The fair value of financial instruments needs to be disclosed which includes:

• Fair value along with carrying amounts of required items

• Disclosure of reason why fair value cannot be estimated

 

b. Credit risk, market risk and how such risks are managed

c. Purpose: The disclosure gives the user information whether valuation has been done based on historical cost or fair value.

6. Non monetary transactions(6) –

a. If the entity has engaged in any non monetary transactions during the year, the same shall be disclosed in the financial statements stating:

• Nature of the transaction

• Basis of accounting

• Profit or loss recognized on the transaction

b. The amount of gross operating revenue recognized due to such transaction needs to be disclosed

c. Purpose: Non monetary transactions impact the cash flow of the organization and if the user is concerned with cash flows, this disclosure can impact his decision.

 

References:

1. FASB (2005), “Statement of Financial Accounting Standards No. 154”, Accessed on 19th March, 2015 <https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220125351&acceptedDisclaimer=true>

2. Public Resource Org, 850 Related Party Disclosures, Accessed on 19th March, 2015 < https://law.resource.org/pub/us/code/bean/fasb.html/fasb.850.2011.html>

3. FASB (2013), ”FASB US GAAP – Implementation Guide Series”, Accessed on 19th March, 2015 URL: <https://www.fasb.org/cs/BlobServer?blobkey=id&
blobwhere=1175826391002&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs>

4. Ernst & Young (2014), “Segment Reporting”, Accessed on 19th March, 2015 <https://www.ey.com/publication/vwluassetsdld/financialreportingdevelopments_bb0698_segmentreporting_19june2014/$file/financialreportingdevelopments_bb0698_segmentreporting_19june2014.pdf?OpenElement>

5. Readyratios (2012), “US GAAP Disclosure List 2012”, Accessed on 19th March, 2015 <https://www.readyratios.com/usgaap/FinancialInstrumentsFairValueDisclosures>

6. Public Resource Org, “845 Non monetary transactions”, Accessed on 19th March, 2015 < https://law.resource.org/pub/us/code/bean/fasb.html/fasb.845.2011.html>
OR

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