Far - The Financial Reporting Environment: Cash Flow Information And Present Value

A liability has three essential characteristics: (1) It represents an obligation that requires settlement by a probable future transfer or use of assets, (2) the entity has little or no discretion to avoid the obligation, and (3) the transaction or other event giving rise to the obligation has already occurred.

The reporting model for financial accounting and reporting by nongovernmental not-for-profit entities (NFPs) recognizes that the information needs of resource providers of NFPs differ from those of resource providers of business entities. The latter are primarily concerned about financial return, whereas the former are primarily concerned about the services rendered by the NFP and its continuing ability to render those services.

Form 10-K is the annual report to the SEC. It must be filed within 90 days (75 days for accelerated filers) after the corporation’s year end. It must contain audited financial statements and be signed by the principal executive, financial, and accounting officers and by a majority of the board.

Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm’s-length transaction between independent interests suggests that the transaction is verifiable.

The monetary-unit assumption provides that all transactions and events can be measured in terms of a common denominator, for instance, a monetary unit. Accounting records are kept in terms of money. Using money as the unit of measure is the best way of providing economic information to users of financial statements. Also, the changing purchasing power of the monetary unit is assumed not to be significant.

To comply with the 1933 act, an issuer of securities must prepare a registration statement and a prospectus. A preliminary prospectus is called a red-herring prospectus because of the required red legend identifying it as preliminary. It contains most of the information to be included in the final prospectus. It can be distributed to potential purchasers during the 20-day waiting period.

Both materiality and relevance are characteristics defined by their ability to influence or make a difference to a decision maker. Materiality is an entity-specific aspect of relevance based on the nature, magnitude, or both of the items to which the information relates in the context of an individual entity’s financial report.

The present value of future cash flows is not an acceptable measure of inventory. Present value is typically used for long-term receivables and payables.

Resource providers of not-for-profit entities have as their primary concerns the services rendered by the entity and the continuing ability of the entity to render those services. These needs differ from the needs of resource providers for business enterprises, whose primary concern is financial return.

The elements of financial statements directly related to measuring the performance and status of business enterprises and nonbusiness organizations are assets, liabilities, equity of a business or net assets of a nonbusiness organization, revenues, expenses, gains, and losses. The elements of investments by owners, distributions to owners, and comprehensive income relate only to business enterprises. Information disclosed in notes or parenthetically on the face of financial statements amplifies or explains information recognized in the financial statements.

Under IFRS, for a sale of goods, revenue is recognized when all five of the following conditions are met: (1) The entity has transferred the significant risks and rewards of ownership, (2) the entity has neither continuing managerial involvement to an extent associated with ownership nor effective control over the goods, (3) the amount of the transaction can be reliably measured, (4) it is probable that the economic benefits will flow to the entity, and (5) transaction costs can be reliably measured.

The objective of general-purpose financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

Present value is in theory the most relevant method of measurement because it incorporates time value of money concepts. In practice, it is used only for noncurrent receivables and payables. Determination of the present value of an asset or liability requires discounting at an appropriate interest rate the related future cash flows expected to occur in the due course of business.

According to the FASB’s conceptual framework, comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.

Comparability is a qualitative characteristic that enhances the usefulness of relevant and faithfully represented information. It enables users to identify similarities in and differences among items.

The traditional approach to calculating present value employs one set of estimated cash flows and one interest rate. This approach is expected to continue to be used in many cases, for example, when contractual cash flows are involved. However, according to the FASB’s conceptual framework, the ECF approach is applicable in more complex circumstances, such as when no market or no comparable item exists for an asset or liability. The ECF results from multiplying each possible estimated amount by its probability and adding the products. The ECF approach emphasizes explicit assumptions about the possible estimated cash flows and their probabilities. The traditional method merely includes those uncertainties in the choice of interest rate. Moreover, by allowing for a range of possibilities, the ECF approach permits the use of present value when the timing of cash flows is uncertain.

Form 10-Q is the quarterly report to the SEC. It must be filed within 40 days after the end of the period for large accelerated filers.

The financial capital maintenance concept is the traditional basis of financial statements as well as the full set of financial statements, including comprehensive income, discussed in the conceptual framework. Under this concept, a return on investment (defined in terms of financial capital) results only if the financial amount of net assets at the end of the period exceeds the amount at the beginning after excluding the effects of transactions with owners. Under a physical capital concept, a return on investment (in terms of physical capital) results only if the physical productive capacity (or the resources needed to achieve that capacity) at the end of the period exceeds the capacity at the beginning after excluding the effects of transactions with owners. The latter concept requires many assets to be measured at current (replacement) cost.

The objective of present value measurements is to estimate fair value by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty. A present value measurement includes five elements: estimates of cash flows, expectations about their variability, the time value of money, the price of uncertainty inherent in an asset or liability, and other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.

Business-type activities often perform only a single function and are thus more easily compared between governments than are governmental-type activities.