 Hello and welcome to this session. This is Professor Farhat in which we would look at the full disclosure principle and specifically we're going to be focusing on the notes, but the full disclosure principle is the mean of how the company communicate all information to the users who are the users remember investors and creditors. So we will need to report to them any financial fact significant slash important or material enough to influence the judgment of an informed reader simply put anything that we think it makes a difference to the users. We have to report this information. This is what the full disclosure principle. Now how do we disclose this information? There are many ways which we look at now why do we have to disclose this well it's basically common sense in a sense that more transparency it's better for the user. So we need to increase the transparency and provide valuable information. Yes we do give them the financial statements the income statement the balance sheet the statement of cash flows all the financial statements comprehensive income but we're going to see in this session that we can provide additional information that's going to be helpful and this is when we discuss the full disclosure principle. We need to explain the numbers help make more sense of them. For example if you have a store and I'm evaluating your sales your store will have a physical presence and an online presence. As an investor as a user of the financial statements well you told me your store is a made a million dollar in sales that's good you gave me the sales number give me the online portion and the physical portion that's relevant for me. So this is what full disclosure is give me additional information that's going to help me make a better decision for example Amazon Amazon they do sell items but they also have cloud services. With Amazon generated a million dollar in sales I want to know how much of that is sales of product and how much of that is from their cloud services and I want to see how their cloud service versus their sale is performing from period to period same thing with Google I don't want to see the total revenue tell me a little bit more about ads revenue tell me a little bit more about the YouTube revenue because that's relevant for me as a decision makers and this is all of this fall under the full disclosure principle. How is your sale growing I need to know this because it's going to tell me more information about the company sales is good break it down a little bit more for me. Now we're going to learn later about segmented segmented now we're going to learn later about segmented reporting basically we're going to break the company into different segments and we'll talk about that later as well but the question is how do companies do that how do the companies communicate this full disclosure principle what are the means and this is what we're going to be discussing what are the means now before we do that I would like to remind you whether you are a student or a CPA candidate and most likely that's who you are if you're listening to me to take a look at my website farhatlectures.com I can be your supplemental resource to your accounting courses as well as your CPA exam the fact that you are watching on YouTube it means you found me it means you are looking for something and you found me that's a great cost up further I can help you further connect with me on social media linked in YouTube Twitter Facebook Instagram and Reddit so how do companies communicate the information well there are many many ways let's take a look at them the most obvious one which we already should know about financial statements income statement balance sheet statements of stockholders equity statement of cash flows comprehensive income of course you need financial statements you need to show the numbers well is that good enough well in addition to the numbers you have to have notes and we're gonna talk about the notes a little bit more in this session this is just an overview under the notes we're gonna be look we're gonna we're gonna give the users accounting policies which inventory method you are using how you are computing fair value how you are treating property plant and equipment contingencies as well as other things the financial statements plus the note those two together they are called basic financial statements so these are the basic financial statements the notes are integral part of the financial statements they are part of it so you cannot have the financial statements without the note it does not make any sense also you could provide supplement information for example if you are in a specific industry for example oil and gas you will need to show more about your reserves now those three supplement information basic financial statements and the notes usually they are governed by gap generally accepted accounting principle is this all what you can do absolutely not you can have you have other venues of financial reporting you have letters to shareholders the president's letters sustainability report MDNA other schedules now usually those four all of them together that's what the 10k that's what you will find in the 10k are these the only ways that you can disclose information absolutely not you can have press releases a news article analyst report share it with the investors economic statistics about the company and about the industry etc. so all of those together all of those which is kind of that's one two three four five all of them together they illustrate the concept of full disclosure principle give as much information as possible to the users the information also has to be understandable useful so on and so forth specifically what we need to do is focus on the notes because here's what's gonna happen when you go to the real world believe it or not whether you work for a small company small CPA review a small CPA firm or a large CPA firm you're gonna have at some point prepare financial statements or audit financial statements you need to be familiar with the notes because okay you know how to prepare an income statement but you also need to know how to connect the notes to the financial statement let's dive a little bit deeper into the notes as I mentioned their integral part of the financial statement they explain the numbers they explained the numbers presented in the body of the statements they explain in qualitative terms which method are we using for these numbers this they disclose any restriction involved by third parties or contractual obligation and usually not usually the first thing is they show you their accounting policies the company's accounting policies and you can tell from their policies whether they are conservative or not which depending on the accounting method that they are using and the company should identify their accounting policies the accounting policies that they are using and usually they present this as the first note or as a separate summary of significant accounting policies preceding the notes so it's always the case now disclosure of accounting policies not required for interim financial statements now if you don't know what interim financial statements they are the financial statement less than a year usually it's for a quarterly financial statement as long as the company did not change their policies as of the prior period so of the year end or the physical year end did not you did not change the policies since then you don't have to disclose your accounting policies in the quarterly usually that's the quarterly thank you now what I'm gonna do I'm gonna show you Amazon you know basically description of business and accounting policies this is what we are discussing note one but what I encourage you to do choose the company that you like take a look at their 10k annual report take a look at the numbers then they take a look at their notes I'm gonna show you what should be in the notes but what you should do you should go ahead and take a look at actual company I cannot show you all the companies here because it takes time for the interest of time you may not like Amazon you may want to look at Apple you want to you may want to look at Walmart you want to you want to take a look at Nike choose the company that you like and go over their notes let's look at some common notes the company will need to disclose notes about their inventory what basis they are reporting their inventory under FIFO LIFO average cost if it's a manufacturing company they have to show you raw material work in process and finished goods either on the balance sheet or in the notes of the financial statements any related parties and we're gonna have a whole session about related parties and why is that important any pledged inventory any consigned inventory as well as other things that relevant to the users that's inventory another common note is property plant and equipment usually in the US we mentioned that we are using historical cost there's any liens any pledges against those against those assets we have to disclose them we have to show the depreciation method whether it's the straight line or something else we have to show the expense the number amount from year to year balance of major classes like building versus equipment versus warehouses for the creditors claim which is the liabilities major type of liabilities again for the liabilities themselves we could have three four five different notes future cost of that the next five years if there's any sinking fund for the debt we need to mention this other common notes would involve the equity claims the equity shareholders here we could have again many notes one is you know number of shares outstanding numbers of shares issued issued outstanding authorized par value senior or preferred securities stock options for example we could have one note about stock options itself a convertible debt if we have a lot of convertible debt one note about convertible debt one note about redeemable preferred if there's any restriction on paying dividend we have to disclose all of this in the notes commitment and contingencies under this category you could have litigation guarantees tax assessment sales of receivable we could have we could have purchase agreement as well as other issues for example you could have one whole note about the litigation and could two could be two three pages just about litigation who's so new why they're so new if they're guaranteeing the loan if you are guaranteeing the loan of others so on and so forth fair values that's important how did you compute your fair value disclose fair value computation what input did you use did you use level one level two or level three revenue recognition how do you recognize your revenue are you using a percentage of completion are you using the completed contract method investments how are you accounting for your debt investments how are you accounting for your equity investments what are the criterias that you are using any information about the third taxes pension leases changes in accounting principle basically anything related parties disclosure that's important it's important to a point where I'm gonna have a separate recording for related party disclosure what should you do now go to farhat lectures comm subscribe if you're not a subscriber work MCQs true false use the notes to learn the material this information is important in your accounting courses as well as the CPA exam 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