Professional research: FASB Codification As part of the year-end audit, you are

Question

Professional research: FASB Codification

As part of the year-end audit, you are discussing the disclosure checklist with your client. The checklist identifies the items that must be disclosed in a set of GAAP financial statements. The client is surprised by the disclosure item related to accounting policies. Specially, since the audit report will attest to the statements being prepared in accordance with GAAP, the client questions the accounting policy checklist item. The client has asked you to conduct some research to verify the accounting policy disclosures.

Instructions

If you school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

In general, what should disclosures of accounting policies encompass?

List some examples of the most commonly required disclosures.

Additional resources, see book’s companion website at www.wiley.com/college/kieso

Explanation / Answer

Companies that are privately owned are not required by law to disclose detailed financial and operating information in most instances. They enjoy wide latitude in deciding what types of information to make available to the public. Small businesses and other enterprises that are privately owned may shield information from public knowledge and determine for themselves who needs to know specific types of information. Companies that are publicly owned, on the other hand, are subject to detailed disclosure laws about their financial condition, operating results, management compensation, and other areas of their business. While these disclosure obligations are primarily linked with large publicly traded companies, many smaller companies choose to raise capital by making shares in the company available to investors. In such instances, the small business is subject to many of the same disclosure laws that apply to large corporations. Disclosure laws and regulations are monitored and enforced by the U.S. Securities and Exchange Commission (SEC).

All of the SEC's disclosure requirements have statutory authority, and these rules and regulations are subject to changes and amendments over time. Some changes are made as the result of new accounting rules adopted by the principal rule-making bodies of the accounting profession. In other cases, changes in accounting rules follow changes in SEC guidelines. For example, in 2000 the SEC imposed new regulations to eliminate the practice of "selective disclosure," in which business leaders provided earnings estimates and other vital information to analysts and large institutional shareholders before informing smaller investors and the rest of the general public. The regulation forces companies to make market-sensitive information available to all parties at the same time. Dramatic and sweeping amendments were made to the SEC's disclosure rules in the summer of 2002 with the passage of the Sarbanes-Oxley Act, often referred to simply as Sarbanes-Oxley, Sarbanes, or SOX.

Generally accepted accounting principles (GAAP) and specific rules of the accounting profession require that certain types of information be disclosed in a business's audited financial statements. As noted above, these rules and principles do not have the same force of law as SEC rules and regulations. Once adopted, however, they are widely accepted and followed by the accounting profession. Indeed, in some instances, disclosures required by the rules and regulations of the accounting profession may exceed those required by the SEC.

It is a generally accepted accounting principle that financial statements must disclose all significant information that would be of interest to a concerned investor, creditor, or buyer. Among the types of information that must be disclosed are financial records, accounting policies employed, litigation in progress, lease information, and details of pension plan funding. Generally, full disclosure is required when alternative accounting policies are available, as with inventory valuation, depreciation, and long-term contract accounting. In addition, accounting practices applicable to a particular industry and other unusual applications of accounting principles are usually disclosed.

Certified financial statements contain a statement of opinion from an auditor, in which the auditor states that it is his or her opinion that the financial statements were prepared in accordance with GAAP and that no material information was left undisclosed. If the auditor has any doubts, then a qualified or adverse opinion statement is written.

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