22.6 Chapter Summary

LO 1: Discuss the rationale and methods of full disclosure in corporate reporting.

The practice of full disclosure is motivated by the need to create information useful to financial statement readers in helping them make decisions. Full disclosure of relevant information can improve the efficiency of financial markets by lessening the information asymmetry problem, thus creating more confidence for financial statement users. Financial information, however, is backward-looking in nature, so disclosures beyond the financial statements are required. Financial statement notes provide additional details and explanations of amounts included in the financial statements, as well as descriptions of significant accounting policies. Complete disclosures of accounting policies are necessary in order to allow readers to make comparisons between companies. Outside the financial statements, companies will also make other disclosures, including the management discussion and analysis (MD&A) section of the annual report. This section provides a narrative review of the year’s results from the perspective of management, as well as a discussion of risk factors, future plans, and other qualitative information that may be useful to readers. A well-written MD&A will help investors link past performance to predictions of future results.

LO 2: Identify the issues and disclosure requirements for related parties.

Related parties are either individuals or entities that are presumed to not deal with the reporting entity at an arm’s length basis. Because related parties are assumed to have some influence over the reporting entity, there is a possibility that transactions with these parties may not be conducted under the same terms as with other market participants. The existence of related parties needs to be disclosed, even if there are no transactions with those parties during the reporting period. When transactions with related parties do occur, the amount of the transactions and outstanding balances must be disclosed, along with a description of the terms and conditions of the transaction, any commitments, security, or guarantees with the related party, the nature of the consideration used to settle the transactions, and the amount of any provision or expense related to bad debts of the related party. Details of compensation paid to key management personnel must also be disclosed. In certain circumstances, ASPE also requires remeasurement of related party transactions.

LO 3: Describe the appropriate accounting and disclosure requirements for events occurring after the reporting period.

Events that occur after the reporting period, but before the financial statements are authorized for issue, may require additional disclosures. If the event does not provide evidence of a condition that existed at the reporting date, then note disclosure would generally be the only required action. If the event does provide evidence of a condition that existed at the reporting date, then adjustments of the reported amounts are required. However, in some cases it may not be clear if the condition existed at the reporting date. In rare circumstances, the subsequent event may result in a reassessment of the going concern assumption, which would cause a complete revision of the reporting basis of the financial statements.

LO 4: Describe the purpose of the audit opinion and the contents of the auditor’s report.

Audit opinions are prepared by independent, professional auditors in order to provide assurance to the readers of the financial statements that they have been prepared in accordance with the appropriate accounting standards and that those financial statements are not materially misstated. This assurance is intended to provide confidence to financial market participants that the information used to make decisions is relevant and reliable. A typical clean audit opinion would identify the auditor’s and management’s responsibilities, the financial statements being audited, and would provide an opinion that the financial statements are fairly presented. In cases where errors are identified, or audit evidence is unavailable, the auditor may issue a qualified opinion if the effects are not pervasive. Where the effects of errors or insufficient evidence are pervasive, the auditor will need to either deny an opinion or issue an adverse opinion.

LO 5: Explain the various financial statement analysis tools and techniques.

Techniques used to analyze financial statements include interim reporting, segmented reporting, and various other analysis techniques. The process usually starts with a high-level liquidity, activity, profitability, and coverage ratio analyses of the core financial statements and of the various supplementary financial reports, such as the interim and segmented financial reports. The analyses of these financial reports can also incorporate other types of ratio analysis such as common size analysis and trend analysis.

LO 6: Explain the similarities and differences between ASPE and IFRS regarding disclosures and analysis of financial statements.

Some differences exist between ASPE and IFRS regarding related parties’ disclosures and subsequent events. However, for interim and segmented reporting, ASPE is silent.