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Chapter 17 - Solution Manual

These new disclosures would enhance investors

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transparency of companies’ financial disclosure. These new disclosures would enhance investors’ understanding of the application of companies’ critical accounting policies. The proposals encompass disclosure in two areas: accounting estimates a company makes in applying its accounting policies and the initial adoption by a company of an accounting policy that has a material impact on its financial presentation. Under the first part of the proposal, a company would identify the accounting estimates reflected in its financial statements that required it to make assumptions about matters that were highly uncertain at the time of estimation. Disclosure about those estimates would then be required if different estimates that the company reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of the company’s financial condition, changes in financial
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384 condition or results of operations. A company’s disclosure about these critical accounting estimates would include a discussion of the methodology and assumptions underlying them; the effect the accounting estimates have on the company’s financial presentation; and the effect of changes in the estimates. Under the second part of the proposal, a company that has initially adopted an accounting policy with a material impact would be required to disclose information that indicates what gave rise to the initial adoption; the impact of the adoption; the accounting principle adopted and method of applying it; and the choices it had among accounting principles. Companies would place all of the new disclosure in the MD&A section of their annual reports, registration statements, and proxy and information statements. In addition, companies would be required to update the information regarding their critical accounting estimates to disclose material changes. Current accounting practice requires full disclosure of accounting changes and their impact on the company’s financial statements. If the accounting procedures and policies are clearly disclosed in the notes, management should continue to be able to choose that method that is most appropriate for the company. Also, disclosure of the accounting procedures and policies should enable financial analysts to make adjustments that allow him/her to compare a company over time and to compare one company with another. Some have argued that full disclosure of risk, various debt instruments, and lease obligations provides more meaningful information than does the way these items are accounted for on the balance sheet. Finally, one shoe does not fit all. Straight-line depreciation may provide a better way to allocate cost for some companies while an accelerated method may be appropriate for another. Doing away with management’s ability to pick and choose among the various accounting alternatives that are currently available to choose from it likely to narrow the scope for individual thought and judgment. It is wrong to assume that all accounting choices are made to manage earnings or to manipulate what is reported in financial statements.
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These new disclosures would enhance investors understanding...

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