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Reading a Financial Statement National Press Foundation Paul Miller Washington Reporting Fellows April 12, 2010
Jay D. Hanson, CPA <ul><li>Chair of the Accounting Standards Executive Committee of the American Institute of Certified Pu...
 
 
Uses of Financial Statements: <ul><li>Running the business (budgets, etc.) </li></ul><ul><li>Financial reporting to outsid...
Preparers and Auditors <ul><li>Preparers: </li></ul><ul><ul><li>Responsible for the bookkeeping and preparation of the fin...
Who’s Who? <ul><li>SEC </li></ul><ul><li>FASB, EITF </li></ul><ul><li>AICPA--AcSEC, ASB </li></ul><ul><li>International--I...
SEC <ul><li>Securities and Exchange Commission  (www.sec.gov) </li></ul><ul><li>Investor protection, education, research, ...
FASB <ul><li>Financial Accounting Standards Board  (www.fasb.org) </li></ul><ul><li>Authoritative U.S. standard setter </l...
AICPA <ul><li>American Institute of CPAs  (www.aicpa.org) </li></ul><ul><li>Accounting Standards Executive Committee (AcSE...
INTERNATIONAL <ul><li>IASB--International Accounting Standards Board </li></ul><ul><li>IOSCO--International Organization o...
Public Company Accounting Oversight Board <ul><li>Created by Sarbanes Oxley law </li></ul><ul><li>Oversees the auditing pr...
FINANCIAL STATEMENTS <ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Statement of Cash Flows </...
BALANCE SHEET <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Shareholder’s Equity </li></ul><ul><li>Mixed ...
INCOME STATEMENT <ul><li>Revenues (Sales) </li></ul><ul><li>Expenses </li></ul><ul><li>Net income, continuing operations a...
CASH FLOWS <ul><li>Operations, bring net income to cash basis </li></ul><ul><li>Investing activities </li></ul><ul><li>Fin...
NOTES <ul><li>Notes or footnotes are required </li></ul><ul><li>Details of items in financial statements </li></ul><ul><li...
MD & A <ul><li>Management Discussion and Analysis--required summary </li></ul><ul><li>Good Descriptions </li></ul><ul><li>...
Sample Financial Statement <ul><li>Two examples to walk through: </li></ul><ul><ul><li>Very simplified example with explan...
Where Are We Headed?
 
SEC Work Plan for the Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers <ul><li>Six...
Work Plan for the Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers <ul><li>Plan wo...
Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System <ul><li>Will determine whether IFRS ...
Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System <ul><li>Staff will: </li></ul><ul><u...
Independent Standard Setting for the Benefit of Investors <ul><li>Will determine whether IASB is sufficiently independent,...
Investor Understanding and Education Regarding IFRS <ul><li>Research investors’ current knowledge of IFRS </li></ul><ul><l...
Regulatory Environment <ul><li>U.S. GAAP is a basis for regulatory reporting regimes </li></ul><ul><li>Accordingly, follow...
Impact on Issuers <ul><li>Explores magnitude and logistics of changes that issuers would need to undertake, specifically: ...
Human Capital Readiness <ul><ul><li>Investors </li></ul></ul><ul><ul><li>Issuers </li></ul></ul><ul><ul><li>Attorneys </li...
Questions or Comments <ul><li>Jay D. Hanson, Partner </li></ul><ul><li>National Director of Accounting </li></ul><ul><li>M...
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McGladrey

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  • Focus today is on financial reporting to outsiders, usually through a major public statement, like the annual report. Numbers gathered internally have many uses, including budgets, compensation, etc. May or may not be $$ or same as #s used for external reporting. Management may follow statistics like visitors to their website. Compensations incentives sometimes follow other goals, like market share or volumes of sales. Tax numbers (like taxable income) are not the same as those reported in an annual report. Think about your individual tax return (I know nothing about taxes, so don’t get worried here.) There are some deductions and some credits to get to the bottom line. Those are incentives by the government to encourage actions or help certain people (like child care credit).
  • What is the difference between accounting and auditing? Accounting is preparing the information. Auditors audit. They check the information. They write opinions on statements. It is a big deal if a non-standard opinion is issued. Usually very bad press--some recent ones on internet companies said they were not “going concerns,” meaning the company might go out of business very soon. Auditors also are engaged to help out in other areas (check the Oscar votes), like consulting on computer systems or other processes. Confirm what accountants say: count inventories, confirm receivables. Test basis; can’t check all.
  • Other--GASB, not-for-profit accounting model
  • Around 16,000 registrants, including 1200 foreign cos. Has authority to write acctg standards, but since the ‘30s, has looked to accounting profession, with oversight. Occasionally write Staff Accounting Bulletins, recent ones on materiality and revenue recognition. Not supposed to be new accounting guidance (but sometimes are).
  • FACTS about FASB Status report Action Alert Private independent full time Board, nfp; funded by contributions from firms, industry and AICPA. About 150 people in CT. GASB? EITF does standards on short fuse
  • AcSEC--Accounting Standards Executive Committee FACTS about AcSEC Industry specialization, but some narrow topics. Uses expert panels and task forces to accomplish work ASB--Auditing Standards Board. Only 1 in US.
  • IASC recently restructured. Around since 1973; used to just compile all country’s standards and leave alternatives. Past 5 years, significant push to get recognition. All countries except US, Japan, and Canada, accept IAS for filings. IOSCO endorsed current standards European Union said everyone must use IAS by 2005.
  • Basic statements are mandated. Specifics within them generally not--subtotals, line item descriptions
  • Current v. noncurrent Market value or market cap is very different from equity value.
  • Other company statements look different; start out with revenue or interest income (for banks). All have to strike a total net income and show basic and diluted EPS.
  • Pepsi noncash items deducted to get to cash on hand.
  • Transcript of "McGladrey "

    1. 1. Reading a Financial Statement National Press Foundation Paul Miller Washington Reporting Fellows April 12, 2010
    2. 2. Jay D. Hanson, CPA <ul><li>Chair of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) </li></ul><ul><li>National Director of Accounting for McGladrey & Pullen, LLP, with overall responsibility for the Firm’s accounting guidance, training on all accounting topics, and leadership of McGladrey’s Accounting Standards Group. </li></ul><ul><li>Member of the Emerging Issues Task Force of the Financial Accounting Standards Board (FASB) </li></ul>
    3. 4.
    4. 6.
    5. 7. Uses of Financial Statements: <ul><li>Running the business (budgets, etc.) </li></ul><ul><li>Financial reporting to outsiders </li></ul><ul><li>Regulators (taxes, banking, etc.) </li></ul>
    6. 8. Preparers and Auditors <ul><li>Preparers: </li></ul><ul><ul><li>Responsible for the bookkeeping and preparation of the financial statements </li></ul></ul><ul><li>Auditors: </li></ul><ul><ul><li>Check what accountants (and others) prepare </li></ul></ul><ul><ul><li>Give opinions, usually “clean” ones </li></ul></ul>
    7. 9. Who’s Who? <ul><li>SEC </li></ul><ul><li>FASB, EITF </li></ul><ul><li>AICPA--AcSEC, ASB </li></ul><ul><li>International--IASB, IOSCO </li></ul><ul><li>PCAOB </li></ul>
    8. 10. SEC <ul><li>Securities and Exchange Commission (www.sec.gov) </li></ul><ul><li>Investor protection, education, research, rules--all public companies must file annual (10K) and quarterly (10Q) financial statements, subject to enforcement. </li></ul><ul><li>Issues guidance for public company accounting </li></ul>
    9. 11. FASB <ul><li>Financial Accounting Standards Board (www.fasb.org) </li></ul><ul><li>Authoritative U.S. standard setter </li></ul><ul><li>Overseen by SEC </li></ul><ul><li>EITF--Emerging Issues Task Force </li></ul>
    10. 12. AICPA <ul><li>American Institute of CPAs (www.aicpa.org) </li></ul><ul><li>Accounting Standards Executive Committee (AcSEC) </li></ul><ul><ul><li>Prior to 2003, issued authoritative accounting standards </li></ul></ul><ul><ul><li>Primary role now is supporting members with Industry guides, practice aides and comment letters </li></ul></ul><ul><li>Auditing Standards Board (ASB), is responsible for setting private company auditing standards in the U.S. </li></ul>
    11. 13. INTERNATIONAL <ul><li>IASB--International Accounting Standards Board </li></ul><ul><li>IOSCO--International Organization of Securities Commissions (SECs of the world) </li></ul>
    12. 14. Public Company Accounting Oversight Board <ul><li>Created by Sarbanes Oxley law </li></ul><ul><li>Oversees the auditing profession for companies that file with the SEC </li></ul><ul><ul><li>Issue audit standards </li></ul></ul><ul><ul><li>Inspect accounting firms </li></ul></ul><ul><li>Issued guidance for testing internal controls </li></ul>
    13. 15. FINANCIAL STATEMENTS <ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Statement of Shareholders’ Equity </li></ul><ul><li>Statement of Comprehensive Income </li></ul><ul><li>Notes to financial statements </li></ul>
    14. 16. BALANCE SHEET <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Shareholder’s Equity </li></ul><ul><li>Mixed model of historical cost basis and fair value </li></ul>
    15. 17. INCOME STATEMENT <ul><li>Revenues (Sales) </li></ul><ul><li>Expenses </li></ul><ul><li>Net income, continuing operations and total </li></ul><ul><li>Earnings per Share </li></ul>
    16. 18. CASH FLOWS <ul><li>Operations, bring net income to cash basis </li></ul><ul><li>Investing activities </li></ul><ul><li>Financing activities </li></ul>
    17. 19. NOTES <ul><li>Notes or footnotes are required </li></ul><ul><li>Details of items in financial statements </li></ul><ul><li>Additional disclosures--segment reporting, lease commitments, etc. </li></ul>
    18. 20. MD & A <ul><li>Management Discussion and Analysis--required summary </li></ul><ul><li>Good Descriptions </li></ul><ul><li>Unusual changes </li></ul><ul><li>Relationships </li></ul><ul><li>Required by SEC </li></ul><ul><li>Not audited </li></ul>
    19. 21. Sample Financial Statement <ul><li>Two examples to walk through: </li></ul><ul><ul><li>Very simplified example with explanations (booklet) </li></ul></ul><ul><ul><li>Target Corporation </li></ul></ul>
    20. 22. Where Are We Headed?
    21. 24.
    22. 25. SEC Work Plan for the Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers <ul><li>Six major areas of concern: </li></ul><ul><ul><li>Sufficient development and application of IFRS for the U.S. domestic reporting system </li></ul></ul><ul><ul><li>The independence of standard setting for the benefit of investors </li></ul></ul><ul><ul><li>Investor understanding and education regarding IFRS </li></ul></ul><ul><ul><li>Examination of the U.S. regulatory environment </li></ul></ul><ul><ul><li>The impact on issuers </li></ul></ul><ul><ul><li>Human capital readiness </li></ul></ul>
    23. 26. Work Plan for the Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers <ul><li>Plan would allow for 4-5 years for issuers to incorporate IFRS </li></ul><ul><ul><li>U.S. issuers would most likely report under IFRS for the first time in 2015 or 2016 or later </li></ul></ul><ul><li>Continual re-assessment of Work Plan, adjust it as new information is obtained or developments occur </li></ul><ul><li>Public progress reports provided beginning no later than October 2010 and frequently thereafter </li></ul>
    24. 27. Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System <ul><li>Will determine whether IFRS is “of high quality and sufficiently comprehensive” </li></ul><ul><li>Focus on “Convergence Projects” to be completed in 2010-2011: </li></ul><ul><ul><li>Financial Statement Presentation </li></ul></ul><ul><ul><li>Revenue Recognition </li></ul></ul><ul><ul><li>Financial Instruments (and more fair value changes) </li></ul></ul><ul><ul><li>Leases </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Consolidation </li></ul></ul><ul><ul><li>More with not as broad of an impact </li></ul></ul>
    25. 28. Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System <ul><li>Staff will: </li></ul><ul><ul><li>Assess areas where IFRS does not provide guidance or provides less guidance than U.S. GAAP </li></ul></ul><ul><ul><li>Assess how issuers, auditors and investors manage these situations, and </li></ul></ul><ul><ul><li>Indentify areas were more guidance would be beneficial </li></ul></ul><ul><ul><li>Assess auditability and enforcement </li></ul></ul><ul><ul><li>Analyze comparability within and across jurisdictions </li></ul></ul>
    26. 29. Independent Standard Setting for the Benefit of Investors <ul><li>Will determine whether IASB is sufficiently independent, analyzing four areas in particular: </li></ul><ul><ul><li>Oversight of IFRS Foundation (formerly called the “International Accounting Standards Committee (IASC) Foundation”) </li></ul></ul><ul><ul><li>Composition of the IFRS Foundation and the IASB </li></ul></ul><ul><ul><li>Funding of the IFRS Foundation, and </li></ul></ul><ul><ul><li>IASB standard-setting process </li></ul></ul>
    27. 30. Investor Understanding and Education Regarding IFRS <ul><li>Research investors’ current knowledge of IFRS </li></ul><ul><li>Understand how investors educate themselves on changes in accounting standards and the timeliness of such education </li></ul><ul><li>Undertake efforts to improve investors’ understanding of IFRS </li></ul><ul><li>Ensure investors have a sufficient understanding of IFRS prior to potential incorporation </li></ul>
    28. 31. Regulatory Environment <ul><li>U.S. GAAP is a basis for regulatory reporting regimes </li></ul><ul><li>Accordingly, following considerations are necessary: </li></ul><ul><ul><li>Industry regulators </li></ul></ul><ul><ul><li>Federal and state tax impacts </li></ul></ul><ul><ul><li>Statutory dividend and stock repurchase restrictions </li></ul></ul><ul><ul><li>Audit regulation and standard setting </li></ul></ul><ul><ul><li>Broker dealer and investment company reporting, and </li></ul></ul><ul><ul><li>Public vs. private companies </li></ul></ul>
    29. 32. Impact on Issuers <ul><li>Explores magnitude and logistics of changes that issuers would need to undertake, specifically: </li></ul><ul><ul><li>Accounting systems, controls, and procedures </li></ul></ul><ul><ul><li>Contractual arrangements, and </li></ul></ul><ul><ul><li>Corporate governance </li></ul></ul><ul><li>Work Plan also considers: </li></ul><ul><ul><li>Accounting for litigation contingencies, and </li></ul></ul><ul><ul><li>Smaller vs. larger issuers </li></ul></ul>
    30. 33. Human Capital Readiness <ul><ul><li>Investors </li></ul></ul><ul><ul><li>Issuers </li></ul></ul><ul><ul><li>Attorneys </li></ul></ul><ul><ul><li>Auditors </li></ul></ul><ul><ul><li>Regulators </li></ul></ul><ul><ul><li>Educators </li></ul></ul><ul><li>Explores transitional considerations related to readiness of all parties involved in financial reporting process including: </li></ul><ul><li>Explores considerations related to education and training; and auditor capacity </li></ul>
    31. 34. Questions or Comments <ul><li>Jay D. Hanson, Partner </li></ul><ul><li>National Director of Accounting </li></ul><ul><li>McGladrey & Pullen, LLP </li></ul><ul><li>3600 American Blvd. West, 3rd Floor </li></ul><ul><li>Bloomington, MN  55431 </li></ul><ul><li>Direct: (952) 921-7785  Fax: (952) 921-7702 </li></ul><ul><li>[email_address] </li></ul>
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