Intermediate Accounting

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19 Derivatives, Contingencies, Business Segments, and Interim Reports Overview This chapter contains a potpourri of topics which are either combined here because they don’t fit in well elsewhere or because they are relatively new to intermediate accounting (and, hence, curriculum developers are still deciding whether they really belong in intermediate accounting courses as opposed to advanced accounting courses). Most advanced accounting textbooks and courses cover some, or all, of these topics as well. Therefore, your professor may skip portions, or all, of this chapter. Derivatives are items that derive their value from the movement in prices, interest rates, or exchange rates. They are purchased for a variety of investment reasons. Some derivatives cost money up front, but many do not. The accounting for them depends on the type of derivative. Usually there is no entry at the outset, unless the derivative costs money to obtain at the outset. Whether changes in value are reflected on the income statement or not depend on the type of derivative. Sometimes the gain or loss is shown as the value changes, and in other situations, the movement in value is deferred until a date passes or the derivative contract is completed. Contingencies are events that may happen in the future. For accounting purposes, events must usually have already happened in order to be recognized. For some contingencies, the accounting for them takes place because an event has already happened even if the final amount is not known with 100 percent certainty. Others need to be disclosed, while others are completely omitted from the financial statements and disclosure notes until additional facts come to light, or they are never mentioned if the additional facts indicate that there actually is no accounting issue related to the previous situation. Segment reporting requires large, publicly traded companies with numerous operations to break down their results into details by product line and geographic area so that users of the financial statements have better information. The data is still somewhat summarized so competitors aren’t really able to see extreme levels of detail.
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19-2 Chapter 19 Finally, interim reporting is required of publicly traded companies so that investors can see results on a more frequent basis than just annually. Interim reporting includes some modified accounting rules so that each quarter is not viewed entirely as a separate period. Another major difference between interim reports and annual financial statements of publicly traded companies is that interim reports are not required to be audited. Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered.
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032459237X_177437 - 19 Derivatives Contingencies Business...

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