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Financial Statement Presentation and Disclosures: A Realistic Approach

FSPD

Financial Statement Presentation and Disclosure

A Realistic Approach

By Gary A. Hotchkiss

Note - A great deal of care has gone into the preparation of these materials, however, errors of omission

and/or commission can and occasionally do occur. As such, prior to making any significant decisions based

upon the contents of this manual, it is strongly suggested that such guidance be confirmed through

reference to the original professional statement(s) underlying the subject matter referred to in this

particular session.

Copyright © 2014 by RealisticApproach Seminars, Inc.

Financial Statement Presentation and Disclosure (2014)

A RealisticApproach Seminar

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CHAPTER 1 – OVERVIEW – WHY SPEND A DAY GOING OVER FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE .................................................................................................... 7

PEER REVIEW FEEDBACK .......................................................................................................................... 7

USER FEEDBACK ....................................................................................................................................... 7

WHAT IS A FINANCIAL STATEMENT? ...................................................................................................... 12

WHAT ISN’T A FINANCIAL STATEMENT? ................................................................................................. 14

COMPARATIVE OR SINGLE-PERIOD PRESENTATIONS?............................................................................ 15

GAAP OR Special Purpose Framework (OCBOA)? ................................................................................... 16

FINANCIAL STATEMENT PREPARATION CONSIDERATIONS FOR OCBOA FINANCIAL STATEMENTS ......... 19

DISCLOSURES – HOW MUCH IS ENOUGH? .............................................................................................. 19 DISCLOSURES MADE ON THE FACE OF THE FINANCIAL STATEMENT ...................................................... 20 FOOTNOTES TO FINANCIAL STATEMENTS ............................................................................................... 22

CHAPTER 2 -- FORMATTING BASICS — GENERAL PURPOSE FINANCIAL STATEMENTS

FOR COMMERCIAL ENTITIES ............................................................................................................ 23

Formatting elements – Common Elements ............................................................................................ 23

Position Statement (Balance Sheet, Statement of Financial Position) .................................................... 23 General Balance Sheet Points to Consider .............................................................................................. 24

Flow Statement Number I — Income Statement Required Presentation Elements ................................ 27 GENERAL INCOME STATEMENT POINTS TO CONSIDER ........................................................................... 27

Flow Statement Number 2 — Statement of Cash Flows ......................................................................... 34 GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER .............................................................. 34 CASH FLOW STATEMENT DISCLOSURE FOR NON-CASH TRANSACTIONS ................................................ 37

RETAINED EARNINGS/SHAREHOLDER EQUITY STATEMENT ................................................................... 39

GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER .............................................................. 39

CHAPTER 3 -- FINANCIAL STATEMENT DISCLOSURES ............................................................ 41

Generally appearing on the face of the individual financial statement .................................................. 41



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Generally appearing in the body of the footnotes to the financial statements ...................................... 42 Summary of Significant Accounting Policies ............................................................................................ 42

Examples of Footnotes Commonly Occurring in Typical Financial Statements ....................................... 46 Cash and Cash Equivalents ...................................................................................................................... 46 Use of Estimates ...................................................................................................................................... 48 Income Taxes ........................................................................................................................................... 50 New Accounting Pronouncements .......................................................................................................... 55 Reclassification of amounts ..................................................................................................................... 59 Revenue Recognition ............................................................................................................................... 60 Property, Plant and Equipment ............................................................................................................... 63 Consolidation Policies .............................................................................................................................. 67 Inventories ............................................................................................................................................... 69 Nature of Operations ............................................................................................................................... 71 Accounts Receivable ................................................................................................................................ 73 Asset Impairment .................................................................................................................................... 75 Basis of Presentation ............................................................................................................................... 78 Fair Value Measurement ......................................................................................................................... 79 Financial Instruments .............................................................................................................................. 85 Goodwill ................................................................................................................................................... 90 Warranties ............................................................................................................................................... 94 Advertising ............................................................................................................................................... 96 Commitments and Contingencies ............................................................................................................ 97 Comprehensive Income ......................................................................................................................... 100 Research and Development ................................................................................................................... 101 Selling, General and Administrative Expense ........................................................................................ 102 Cash Flow Statement ............................................................................................................................. 103 Cost of Sales ........................................................................................................................................... 104 Equity and Cost investments ................................................................................................................. 105 Intangible assets .................................................................................................................................... 107 Leases .................................................................................................................................................... 109 Long-lived Assets ................................................................................................................................... 111 Marketable Securities ............................................................................................................................ 113 Pension Cost .......................................................................................................................................... 118 Related Party Transactions .................................................................................................................... 120 Subsequent Events ................................................................................................................................ 122

CHAPTER 4 -- SPECIALIZED INDUSTRIES ................................................................................... 123

CONSTRUCTION CONTRACTORS ........................................................................................................... 123

DISCLOSURES COMMONLY APPLICABLE TO CONSTRUCTION CONTRACTORS INCLUDE ........................ 123 REVENUE AND COST RECOGNITION ...................................................................................................... 123 CONTRACT RECEIVABLES ....................................................................................................................... 125 REVENUES, JOB COSTS, AND BILLINGS (WORK-IN-PROCESS) – BALANCE SHEET PRESENTATION......... 126



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NOTES PAYABLE (NOTHING REALLY UNIQUE TO CONTRACTORS – JUST A GOOD EXAMPLE) .......... 127 EXAMPLES OF TYPICAL CONTRACTOR FINANCIAL STATEMENTS........................................................... 128

NOT-FOR-PROFIT ORGANIZATIONS ...................................................................................................... 130 Nature of the Organization .................................................................................................................... 134 ACCOUNTING TREATMENT OF REVENUES AND EXPENSES ................................................................... 134 DONATED SERVICES, GOODS, AND USE OF FACILITIES .......................................................................... 135 Conditional promises to give ................................................................................................................. 135 Functional Allocation of Expenses ......................................................................................................... 135 Policies with respect to classification of net assets ............................................................................... 135

(Footnote disclosure as to further information with respect to ....................................................... 137 Organization policies regarding investments ........................................................................................ 137 EXAMPLES OF NOT-FOR-PROFIT FINANCIAL STATEMENTS ................................................................... 137

PERSONAL FINANCIAL STATEMENTS .................................................................................................... 145

EXAMPLES OF PERSONAL FINANCIAL STATEMENTS ............................................................................. 152

PROSPECTIVE FINANCIAL INFORMATION ............................................................................................. 155

POWER POINT HANDOUTS ............................................................................................................. 165

Today’s Topics...................................................................................................................................... 167

Why Spend a Day? ............................................................................................................................... 169

Protocol for Effective Presentation and Disclosure .............................................................................. 170

Characteristics of a Financial Statement .............................................................................................. 177

Special Purpose Framework (Other Comprehensive Bases of Accounting) ........................................... 180

Financial Statement Formatics ............................................................................................................. 182

Balance Sheet Formatics ...................................................................................................................... 190

Income Statement Formatics ............................................................................................................... 198

Comprehensive Income ....................................................................................................................... 207

Statement of Cash Flows Formatics ..................................................................................................... 215

Equity Statement Formatics ................................................................................................................. 228

What is Meant by “Disclosure” ............................................................................................................ 235



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Researching Presentation and Disclosure Matters ............................................................................... 240 Access the FASB ..................................................................................................................................... 241 Use the SEC – Access EDGAR ................................................................................................................. 259

Footnotes – Summary of Significant Accounting Policies ..................................................................... 274 Cash and Cash Equivalents .................................................................................................................... 278 Use of Estimates .................................................................................................................................... 279 Income Taxes ......................................................................................................................................... 280 New Accounting Pronouncements ........................................................................................................ 283 Reclassification of Amounts ................................................................................................................... 284 Revenue Recognition ............................................................................................................................. 285 Property, Plant and Equipment ............................................................................................................. 286 Consolidation Policies ............................................................................................................................ 288 Inventories ............................................................................................................................................. 290 Nature of Operations ............................................................................................................................. 291 Accounts Receivable .............................................................................................................................. 292 Asset Impairments ................................................................................................................................. 294 Basis of Presentation ............................................................................................................................. 296 Fair Value ............................................................................................................................................... 297 Financial Instruments ............................................................................................................................ 301 Goodwill ................................................................................................................................................. 305 Warranties ............................................................................................................................................. 306 Advertising ............................................................................................................................................. 307 Commitments and Contingencies .......................................................................................................... 308 Comprehensive Income ......................................................................................................................... 310 Research and Development ................................................................................................................... 311 Selling, General and Administrative Expenses ....................................................................................... 312 Cash Flow ............................................................................................................................................... 313 Cost of Sales ........................................................................................................................................... 314 Equity and Cost Investments ................................................................................................................. 315 Intangible Assets .................................................................................................................................... 316 Leases .................................................................................................................................................... 318 Other Long-lived Assets ......................................................................................................................... 319 Marketable Securities ............................................................................................................................ 320 Pension Cost .......................................................................................................................................... 325 Related Party Transactions .................................................................................................................... 327 Subsequent Events ................................................................................................................................ 328

REALISTICAPPROACH SEMINARS, INC. EMAIL INFORMATION .......................................... 329



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CHAPTER 1 – OVERVIEW – WHY SPEND A DAY GOING OVER

FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE?

FAMILIARITY BREEDS CONTEMPT (AND ALLOWS FOR ERROR)

PEER REVIEW FEEDBACK The number-one source of findings in off-site (report and engagement) peer reviews is financial

statement presentation (formatics) and disclosure (on both the face of the financial statement

and as separate footnotes). Failure of quality control systems to check for presentation and

disclosure errors and/or omissions or other defects in either presentation or disclosure is also a

major driving factor in findings noted in on-site (system) peer reviews. This problem is chronic in

public accounting practices, and since the financial statements are (technically) the product of

the client entity, it is a logical conclusion that this topic is a formidable issue for professional

accountants in industry as well.

USER FEEDBACK All too often financial statements, and related disclosures, are designed based upon user needs

as perceived by the preparing accountant. From the perspective of the major generic user

groups (management, investors, creditors), the preparing accountant is a tangential user, at

best. A central theme that will be presented today is that financial statements should be

designed to meet the needs of the user(s) of the financial statements. Professional standards,

and general usage, allow substantial leeway in financial statement formatics. There are really

very few requirements that professional standards places on how any given financial statement

should be laid out. There are certain totals and sub-totals that are required for a given class of

financial statement, and in some cases a minimum level of detail is prescribed by the standards.

However, even in those cases, there is significant latitude insofar as specific compliance with

requirements is concerned.

The need for a preparing accountant to survey and develop a user-needs list is generally

inversely proportional to the sophistication of the client and/or intended users of the financial

statements. In very sophisticated environments, such as in the public company realm, users

such as regulatory bodies and potential investors have very clearly defined expectations with

respect to the form and content of financial statements prepared for their use. Professional

judgment must still be exercised in the preparation of such financial statements regarding

adequacy of disclosure for the intended use of the financial statements, but many of the more



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routine sufficiency decisions have been made by the user(s), and compliance become a major

issue for the preparing accountant.

The less sophisticated user of financial statements, on the other hand, may present without the

slightest idea of the potential benefits provided by presenting the same data in alternate ways.

There are at least three reasons why professional accountants (with no malice intended) can

provide substandard services to the unsophisticated user:

1. The user has no frame of reference, or

2. The user does not use the financial statements provided by the accountant because

a. They are not familiar with the financial presentation, or

b. The information is presented in a format that is other than what the user is used

to.

3. The financial statements are not critically reviewed by a professional accountant, such

as

a. Technical review within the practice unit, and/or

b. Peer review.

These users have little or no idea of options available to them as it relates to financial reporting.

This lack of knowledge could run from what basis of accounting (financial reporting framework)

is most appropriate for the circumstances to whether or not any disclosures should accompany

the financial statement package. It is in these situations that the professional accountant should

step forward and provide the necessary inputs that will result in financial statements that meet

the various needs of the intended users of those financial statements. Very often, well-

intentioned accountants overlay formatic and disclosure decisions without consultation with

any user at all. Such an approach often results in the intended user relegating those financial

statements to a file or desk drawer with little or no review, let alone study. Lack of perceived

utility of financial statements is a major reason for fee resistance by clients, or criticism of the

accounting department (ever hear the term “bean-counters” used to refer to your department)

by other areas within your company.



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To summarize the preceding matters, there are three considerations that go into the effective

presentation and disclosure of financial statements:

1. Appearance,

a. Counts – even if your unsophisticated client or user doesn’t say anything, if it is

bad enough, they will notice,

b. Feedback as to appearance is limited with the unsophisticated user, but if they

get negative feedback, you will hear about it.

2. Approach, and

a. A compliance approach to financial statement presentation and disclosure is

predicated on “what’s the least I have to do” (to get this thing billed)? A

compliance approach is looking for the minimum, and affects both the provider

and consumer

i. The provider is looking for the least amount of effort that will be

acceptable, and

ii. The consumer (user) is focused on the least that he or she will have to

pay for a given service

b. A value added approach focuses on providing the best professional service that

is possible on a practicable basis in a manner that distinguishes the provider

from the competition. Value added presumes there is more to value than cost.

3. Acceptance is a user perception that relates directly to appearance and approach, and

manifests itself in the form of a

a. Commodity product – this view holds that there is no difference in who does the

work; cost is the central factor in client retention decisions.

b. Custom product – this view holds that the user is getting something that is

tailored to their special needs, something that is unique to this accountant.

Clients who believe that their “special” needs are being met by a particular

accounting firm have a much greater chance of staying with that accountant,

and they tend to be less fee resistant than users looking for a commodity

product.



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The process of getting up to speed with respect to user needs is really quite simple, but an

orderly approach to the task is advisable. One such protocol might include the following four

steps:

1. Identify the principal users of the financial statements. Inquiries of management of

the organization, and/or review of previously distributed financial statements are

the two most common techniques for meeting this goal.

2. Determine key points with each user. A couple of approaches to the discovery of

user “hot-buttons” include:

a. Identification of documentation that delineates user needs. This is most

often the case in the case of lenders. The loan documentation may actually

prescribe the applicable financial reporting framework (basis of accounting),

and sometimes the expected frequency and level of detail expected by the

user.

b. Alternatively, posing questions such as — ‘What do you look for when you

review this company’s financial statements”, or “What would you like to get

from these financial statements” will garner insight to level of detail, basis,

and materiality expectations of various users.

3. Provide options in formatics to the user. These options might include such items as;

differing levels of line-item detail, rounding amounts, comparative vs. single-period

presentations, supporting schedules (supplementary information), or optional

approaches to presentation such as use of the direct or indirect method of

presenting cash from operations in the cash flow statement. Some options that

may be presented to the lesser sophisticated client include matters related to:

a. An effective cash flow presentation,

b. Cost-Volume-Profit analysis,

c. Variance analysis,

d. Different levels of detail,

e. Use of charts and/or graphic presentations.

4. Obtain consensus from the financial statement users. However, remain open to

changing user expectations. One of the hallmarks of good financial statements is

that users actually use the financial statements in their day-to-day decision making

process. When financial statements are actually used, users will become aware of

refinements that could improve the effectiveness of the information from their

perspective. The refinements might manifest themselves as requests for more



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timely presentation, recasting of formats (provision of a cost-volume-profit

approach to income presentation vs. traditional full-absorption income statements),

or modification of disclosure within the financial statement package.



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WHAT IS A FINANCIAL STATEMENT?

A basic issue in financial statement presentation concerns the determination of what constitutes

a financial statement in the first place. Presentations that do not meet the definition of financial

statements are supporting schedules or possibly supplementary information. This distinction

becomes important when an external accountant is involved in preparation and/or attestation

with respect to the financial presentation.

Statement on Standards for Accounting and Review Services (SSARS) No. 1, Compilation and

Review of Financial Statements, provides probably the best definition of what constitutes a

financial statement when it states that a financial statement is a:

1. Presentation of (principally) financial data, including accompanying notes. This is a

disclosure requirement that encompasses all elements of disclosure as defined in

professional standards:

a. Level-of-detail,

b. Parenthetic

c. Footnote

i. Summary of Significant Accounting Policies

ii. Standard Required,

iii. Generic (such other disclosure as may be necessary to prevent the

financial statements from being misleading)

2. Derived from accounting records (regardless of their level of formality),

3. Intended to communicate an entity’s economic resources or obligations at a point in

time, or the changes therein for a period of time, and

4. In accordance with” a financial reporting framework (basis of accounting).”

a. Generally Accepted Accounting Principles, or

b. An acceptable “other-comprehensive-basis-of-accounting” (now referred to as a

Special Purpose Framework - SPF)



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This definition, while brief, has some very interesting attributes:

Financial statements include notes as an integral part of the document. Therefore, the

default situation is that footnotes will always be an integral part of a set of financial

statements.

Development of financial statements begins with accounting records. General practice

has been very liberal in its definition of what constitutes “accounting records”. A check

register, shoe-box of receipts, and notes on the back of envelopes may be sufficient to

meet this definitional requirement. The implication in this aspect of the definition is that

(independent) support exists, at some undefined level of detail, for what appears in the

financial statement. An abstraction of this aspect of the definition provides a

justification for the summarization and rounding that transpires during the financial

statement development process.

Financial statements are produced with the intent to communicate the resources and

obligations of a given business entity either at a point in time or changes in those

resources and/or obligations over a period of time. This aspect of the definition speaks

to the issue of comprehensiveness of a given financial statement. The definition tells us

that financial statements:

o Are geared to an entity-wide perspective, and that

o The purpose is either

A snapshot (balance sheet) at a particular point in time or

A flow-summary of changes for the entity for a given period of time

(retained earnings statement, income statement and cash flow

statement).

The last aspect of the definition addresses the idea that a financial statement is produced in

accordance with a recognized financial reporting framework (basis of accounting). Financial

statements have utility to users only if users understand the assumptions that underpin the

financial statements.

This is the whole justification for generally accepted accounting principles (GAAP). GAAP is the

default basis for general purpose financial statements. GAAP is a set of “standard” rules that a

user can access when that user has no special entrée into a company’s unique operating

characteristics. GAAP provides a standard “benchmark” for financial statement readers.



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Other Comprehensive Bases of Accounting (OCBOA) are other bases of accounting that have

wide general acceptance, and many users have a working knowledge of such bases. Professional

standards note that if a user has

1. Access to decision makers in the company, and

2. Reasonable expectation of obtaining a response to questions regarding the financial

statements,

The financial statements need not be prepared in accordance with GAAP.

Later on in the session OCBOA will be a topic of discussion.

WHAT ISN’T A FINANCIAL STATEMENT? It is highly suspect that any financial presentation that does not meet the definition of a

financial statement as presented in the preceding section is a financial statement in fact. As

stated earlier, whether or not a financial presentation is a financial statement is significant when

external accountants are involved. This significance diminishes significantly for internally

produced financial statements. However, the distinction and treatment of financial

presentations other than financial statements is significant to all professional accountants

involved in the preparation of financial statements.

Just because a financial presentation does not meet the criteria of a financial statement, that

presentation is not, by definition, inferior to a financial statement. In fact, many users focus

more on presentations that are not financial statements.

Generally, information that does not meet the definition of a financial statement is referred to

as a “schedule”. Schedules may provide additional detail of line items reflected in a financial

statement. An example of a “supporting schedule” might be a detail of the components of cost-

of-goods-sold. While this summarized amount is appropriately reflected in an income statement

as a single line item, many users have an interest in the components (beginning and ending

inventories, purchases, labor, overhead) that are reflected in the line item. Notice, that this

schedule “fails” the test of being a financial statement in that it does not describe flows (costs

accumulated over the reporting period) for the entity as a whole, but merely for one of many

types of costs incurred by the entity. This type of schedule is commonly referred to as

supplementary information. Supplementary information is used very often in the presentation

of financial information because its distribution is discretionary on the part of the financial

statement producer. Bases of accounting prescribe what constitutes “basic financial

statements”. Users of financial statements (generally) expect that they will receive a complete

set of basic financial statements (and any additional disclosures thereto), or be told that certain

elements of what constitutes a complete set of basic financial statements has not been provided

by the organization. Supplementary information is not defined as part of a basic set of financial



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statements, and as such any given user might not be provided with supplementary information

without violating any basic financial statement conventions. In actual practice some users will

get (certain) supplementary information and others will not, as the situation dictates. Recall the

discussion on user needs and expectations. There is one complicating factor regarding

supplementary information, namely, if reference is made to a supporting schedule

(supplementary information) in the body of the financial statements (“see supporting schedule

A” on a particular line, for instance) then that supporting schedule becomes an integral part of

the basic financial statements. Remember, users believe that they are getting a complete set of

the basic financial statements unless they have been told otherwise. Also, the direct reference

in the financial statements (or notes thereto) alerts the user to the existence of the additional

information.

COMPARATIVE OR SINGLE-PERIOD PRESENTATIONS?

Professional standards, contrary to a popular misconception, do not require the presentation of

comparative financial statements. Accounting Research Bulletin No. 43 states that it is

“ordinarily desirable” to present comparative basic financial statements, because such a

presentation “enhances the usefulness” of such information to users. Certain regulatory bodies

require that any submission destined for distribution to their agency be presented in a

comparative format. This is just another permutation of the user-expectation discussion noted

on page 10 of this manual.

When presenting comparative financial statements, disclosures in the financial statements and

notes thereto must be comparative as well. The chapter in this session that addresses the topic

of disclosure notes that disclosures appear on both on the face of the financial statement, as

well as in the notes thereto. Comparative financial statement presentations must reflect all

disclosures, regardless of where they appear, in comparative form. This means, for example,

that the line-item parenthetic disclosure of the balance of the allowance for doubtful accounts

(an example of a disclosure made on the face of a financial statement) must include all periods

presented for comparative purposes. This requirement also means that the five-year maturity

schedule provided for debt must encompass five year maturities for all of the years presented

for comparative purposes, not just the most recent year presented.



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GAAP OR Special Purpose Framework (OCBOA)?

General Aspects of GAAP and Special Purpose Frameworks (OCBOAs)

The basis of accounting, as stated earlier, is the “benchmark” that a user references when he or

she reads financial statements. When GAAP is the basis of accounting used, the user can make

certain assumptions based on the “rules” promulgated by that basis. Such rules or standards

enable a user to make (standards based) presumptions such as; Fixed assets are stated at cost,

or If any long-term assets were impaired there would be impairment valuation allowances

reflected/disclosed in the financial statements, or The financial statements have been updated

for any significant subsequent events that might have occurred after the financial statement

date, but prior to the financial statement issuance date. GAAP is the default basis of accounting.

GAAP is generally the appropriate basis for financial statements that are going to be distributed

to the general public. GAAP has some definite drawbacks arising principally because of its

generic-audience attribute. GAAP disclosures are quite extensive, understandably, because of

the breadth of interests of potential users comprehended in general distribution. Many of the

disclosures, and accounting treatments required in GAAP have limited significance to more

specifically targeted financial statement users.

While efficiencies in accounting issues and disclosures are not as great as some would like to

believe, there are certain circumstances where a financial reporting framework (basis of

accounting) other than GAAP, referred to as a Special Purpose Framework (SPF), offers potential

efficiencies in financial statement preparation without sacrificing (and sometimes enhancing)

utility to identified users. Professional literature (Statement on Auditing Standards No. 62,

Special Reports) recognizes that there are comprehensive bases of accounting other than GAAP

that enjoy a wide following in the financial statement user community. These other bases are

referred to as “other comprehensive bases of accounting”, and the acronym associated with the

defined bases is “OCBOA”. Currently there are only four defined OCBOAs — Three of the

defined OCBOAs are basis-specific, and the forth is a generic definition that has given rise to

only one, rarely seen, candidate. The three defined bases are:

1. Regulatory or Statutory basis,

2. Income Tax basis, and

3. Cash basis.

The generic definition suggests that price-level (inflation accounting — not to be confused with

fair-value accounting) accounting might meet the test for being an OCBOA. In practice, and

covered in this session, most non-GAAP financial statements are either income tax or cash basis

presentations.



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Cash basis financial statements are generally a viable option to an entity that does not have

inventory, receivables, or payables. This is a very limiting requirement, but many service entities

may qualify for use of this basis. A lot of professional entities use the cash basis for financial

statement purposes even though they have receivables and payables. Memo records are

maintained for receivables and payables, but the balances and changes in those balances are

not reflected in the financial statements. If these balances are not significant, and changes in

these balances are not significant, then the use of the cash basis would not be prohibited by

professional standards. Very rarely would any entity, except for some very basic not-for-profit

organizations, qualify as a true cash basis candidate. Even if an organization did qualify, the true

cash basis financial statements would have limited utility in that the position statement would

be made up solely of cash and equity (net assets in the not-for-profit scenario). The flow

statement (income statement) would summarize cash receipts for revenues (all cash receipts

presumed to be revenues or owner contributions) and cash disbursements (all cash

disbursements presumed to be either operational or distributions to owners). In practice, most

cash basis entities are actually using a basis referred to as the “modified cash basis”. The

modified cash basis allows entities to reflect transactions that might not be considered to be

cash-basis in a strict sense of the term. Cash basis financial statements that are actually

modified cash basis financial statements might include line items such as:

Fixed assets and attendant debt.

Payroll taxes accrued and payable.

Certain limited prepaid items.

Professional literature that discusses the cash basis of accounting stresses that less-is-best when

it comes to non-cash transactions. In fact, the literature notes that inclusion of too many

(undefined term) non-cash transactions results in incomplete GAAP financial statements. The

point where this line is crossed is a matter of professional judgment. While there is a theoretical

difference between cash basis and modified cash basis financial statements, professional

standards does not state that inclusion of non-cash transactions results in another OCBOA –

“modified cash basis”. The resulting financial statements are still cash basis. Financial

statement preparers may prefer to refer to such financial statements as “modified cash basis”

(nothing in professional literature proscribes this language), but professional literature does not

require the usage of such terminology.

Income tax basis financial statements are financial statements that are prepared on the same

basis as that used by the entity in the filing of its actual (Federal) income tax return. The income



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tax basis of accounting is especially attractive to entities that have relatively restricted

distribution of financial statements and no users have expressed a need for data or disclosures

that only GAAP provides. In fact, many users are more informed concerning federal income tax

conventions than they are GAAP requirements, making the use of the income tax basis an

attractive option in such cases. Adoption of the income tax basis eliminates the need in many

organizations to maintain two sets of records — one to be compliant with tax regulations and

one to comply with GAAP. Income tax basis financial statements must be developed using the

same assumptions as actually used in the preparation of the entity’s federal income tax return.

If the entity uses an approach allowed for tax return purposes, but different from what the

entity actually took on the applicable tax return, this constitutes a departure from the income

tax basis. For example, if the entity is a cash basis taxpayer for federal income tax basis, it

cannot presume that it is an accrual basis taxpayer for financial statement preparation purposes

(without disclosing this departure from the income tax basis of accounting). Generally speaking,

the level of detail in income tax basis financial statements should be no more summarized than

that required on the face of the appropriate federal form. Level of detail can always be greater

than minimum levels, but caution should be exercised when considering summarization below

that of minimum guidelines.



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FINANCIAL STATEMENT PREPARATION CONSIDERATIONS FOR OCBOA

FINANCIAL STATEMENTS

Titling of financial statements prepared using an OCBOA has been an issue with accountants for

some time. Professional standards requires that financial statements prepared in accordance

with an OCBOA must be clearly titled so that a user would not be misled into believing that the

financial statements were GAAP financial statements. The literature goes on to state that

unmodified titles such as balance sheet or income statement should be restricted to GAAP

financial statements only. However, the same interpretation goes on to state that modification

of those “protected” titles was acceptable. Therefore, financial statement titles such as; balance

sheet -- Income Tax Basis, or Income Statement — Cash Basis are perfectly acceptable in

accordance with current professional literature.

Some professional accountants are of the opinion that if financial statements are prepared on a

basis other than GAAP, then disclosure requirements are vastly reduced. This is an untrue

belief. Professional standards puts forth a concept referred to as the “contemporaneous

counterpart” concept that quite simply states that if an OCBOA financial statement shares a

disclosure concern with a financial statement prepared in accordance with GAAP, then the

OCBOA financial statement has (essentially) the same disclosure requirement.

There are some disclosure efficiencies that inure to OCBOA financial statements. For example,

only GAAP requires that a cash flow statement be presented as a basic financial statement.

Another example of disclosure efficiency relates to disclosures surrounding income taxes.

Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,

requires significant disclosures relative to deferred income taxes. Financial statements prepared

using the income tax or cash bases do not have a deferred counterpart, and SFAS 109 disclosure

requirements regarding deferred income taxes are not applicable. However, the SFAS contains

other disclosure requirements that include disclosures related to income tax liabilities, and

carry-forwards. These disclosure requirements are applicable to cash and income tax basis


DISCLOSURES – HOW MUCH IS ENOUGH?

The usual discussion of disclosure issues generally entails at least two areas:



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1. Disclosures are made on the face of each financial statement, and

2. Additional disclosures are (usually) made in the form of footnotes to the financial

statements.

As discussed earlier in this chapter, the default supposition (regardless of the financial reporting

framework (basis of accounting) employed) is that all disclosures appropriate to a particular set

of financial statements are included within those financial statements. Omission of any

disclosure in a financial statement (intended for internal and/or external distribution) should

only be considered if there is a high level of certainty that known users are already adequately

informed with respect to the omitted disclosure(s). This is a high threshold to overcome.

DISCLOSURES MADE ON THE FACE OF THE FINANCIAL STATEMENT

Many accountants do not associate the face of any given financial statement with the topic of

disclosure. Actually, two types of disclosure occur on the face of the financial statement:

1. Individual line item descriptions (Level-of-Detail) and

2. Parenthetic additional disclosures that appear on the face of the financial statement.

Actually the topic of level-of-detail in the development of the form that a financial statement

will take is actually a disclosure issue. The level of detail reflected in a financial statement should

be a function of user expectations. A common myth in financial statement development is that

“one size fits all”. The level of detail embodied within a financial statement should speak directly

to a defined user need. Financial statements provided to an operating unit within an

organization might need to be presented at the general ledger level of detail to be useful for

purposes of comparison with budgeted inputs and outputs. The results of operations of that

same unit might be presented at a highly summarized level for review by senior-level

management. The level of detail presented is a disclosure issue. Closely related to this is the

line-item description, itself. The line-item descriptions should clearly describe the particular

financial statement element in unambiguous terms. For example, the term “Fixed Assets, Net”

might be an adequate description and level of summarization at a high level within an

organization. Other users, such as a lender to who has a lien on certain of those fixed assets,

providing security for loans it has made to the company, will want to see more descriptive, less

summarized, line-item titles that allow them to identify areas of particular interest.



Page 21 of 329

Another aspect of disclosure made on the face of a financial statement entails “parenthetic”

addenda to line-item descriptions. This is an important source of information in a financial

statement, and attention should be paid to what is disclosed parenthetically such that it

efficiently conveys information to a user without unduly cluttering the face of the financial

statement. Disclosure in the notes to the financial statements is an option to parenthetic

disclosure. Parenthetic disclosures are commonly used when net amounts are extended to

amount columns in a financial statement. An example of this type of disclosure is the allowance

for un-collectible accounts provided for trade accounts receivable. Other parenthetic disclosures

are made to supplement information pertinent to a given line-item. An example of this type of

parenthetic disclosure would be the additional disclosures customarily made on the common

stock line item.



Page 22 of 329

FOOTNOTES TO FINANCIAL STATEMENTS

The issue of whether or not footnotes should accompany financial statements has been a

question that has vexed professional accountants for some time — at least as long as SSARS has

been around (1978). The answer to this particular question is an unequivocal “it depends”. Like

so many issues encountered in the profession of accounting, answers to questions surrounding

footnote disclosures (as well as other disclosures) depend on situational facts and

circumstances. Professional standards define three broad categories of circumstances and/or

events that require footnote disclosure:

1. Summary of Significant Accounting Policies,

2. Professional standards prescribe certain financial statement disclosures that are

required by specific standard(s). Because the standards specifically discuss these

required disclosures, compliance with those disclosure requirements is not particularly

difficult. Disclosures in this category include areas such as;

a. Use of Estimates, Financial dependencies, and

b. Related Party Transactions.

3. The more difficult type of footnote disclosure to identify occurs in the category of “such

other disclosures as necessary to prevent the financial statements from being

misleading.” The use of professional judgment by the preparing professional

accountant is particularly important when he or she seeks to ascertain that the financial

statements and additional disclosures thereto meet this category of user expectation.



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CHAPTER 2 -- FORMATTING BASICS — GENERAL PURPOSE

FINANCIAL STATEMENTS FOR COMMERCIAL ENTITIES Formatting elements – Common Elements

1. Financial statements must be titled, and the titles must disclose the following (order is

not prescribed by professional standards)

a. Name of Entity

b. Title of Financial Statement

c. Date of, or period of time encompassed by, the financial statement

2. Comparative financial statements are encouraged by GAAP, but are not required.

However, if the financial statement preparer chooses to present comparative financial

statements, then all disclosures must be comparative as well. This requirement applies

to disclosures made on the face of the financial statement, as well as to the footnotes.

So, for instance, parenthetic disclosure of the allowance for doubtful accounts, or status

of capital stock elements, must address all dates presented for comparative purposes. If

the balance sheet is accompanied by footnotes, general practice indicates that there

should be a reference to the footnotes in the form of a “tombstone” at the bottom of

the financial statement page.

3. If the financial statement has been compiled or reviewed by an external public

accountant, professional standards require that the tombstone include a reference to

the accountant’s report. While not specifically required by professional standards per

Se, most audited financial statements also include a reference to the auditor’s report as

a tombstone, as well.

4. Financial statements prepared in accordance with GAAP need not refer to specific

footnotes at the line-item level. Certain regulatory agencies prefer that submissions to

their agencies have specific line-item references to the footnotes, but this is a user

imposed requirement. Some financial statement preparers think that such referencing

makes the financial statement easier to work with, and increases the probability that

certain disclosures will be read by users. Do note, however, that referencing to

supplementary information makes that supplementary information an integral part of

the basic financial statements. This can have significant reporting ramifications for

external accountants.

5. Beginning amounts, terminal amounts are generally in preceded by a dollar sign.

6. Terminal amounts and balancing totals are generally indicated with a double

underscore.

7. Subtotals are usually indicated with single underscores.

Position Statement (Balance Sheet, Statement of Financial Position)



Page 24 of 329

General Balance Sheet Points to Consider:

1. Appropriate titles include Balance Sheet, and Statement of Financial Position, provided

the financial statement is presented in accordance with generally accepted accounting

principles. If the basis is other than GAAP, those two titles should not be used.

However, provided the applicable financial reporting framework (basis of accounting) is

clearly disclosed (as part of the financial statement title, such as” Balance Sheet —

(state the name of the framework, such as Cash Basis)” the terms are acceptable forms

of titling this OCBOA financial statement.

2. There is no requirement in GAAP that a classified balance sheet be presented.

a. If an unclassified balance sheet is presented, then assets must be listed in order

of liquidity, and liabilities must be presented in order of their maturities. This is

not an easier approach to presenting a statement of financial position — just

one for-instance -- if long term debt exists in an organization, it may have to

appear several times within a given statement if there are other liabilities that

have maturities that occur within the amortization period of the debt.

b. When a classified balance sheet is presented, it must include two subtotals:

Total Current

i. Assets, and

ii. Liabilities

3. Format can be over-and-under, also known as “portrait” (assets over liabilities and

equity), or side-by-side, “landscape” (assets on the left-hand side of the sheet, liabilities

and equity on the right-hand side of the sheet). If the financial statement takes up more

than one page, the pages should be assembled so that they are facing each other in the

presentation. When this is the case, one financial statement title can be “shared” by

each page, as well as one tombstone. However, if the pages do not face each other,

then there should be some continuity reference that alerts a reader that the financial

statement consists of multiple pages. This might be accomplished with a reference at

the bottom of the first page such as “continued on page XX”, and the title of the second

page including a disclosure such as “Balance Sheet — Continued). If the financial

statements do not face each other (and comprise a complete presentation), generally

speaking there should be separate tombstones on each page.



Page 25 of 329

BALANCE SHEET

As of December 31,

2008 2007

ASSETS

5,096$ -$

2,429,185 2,750,801

1,439,218 1,226,258

170,478 167,500

4,043,977 4,144,559

1,435,506 1,048,717

(470,204) (330,804)

965,302 717,913

56,622 45,677

56,622 45,677

5,065,901$ 4,908,149$

-$ 253,070$

832,518 1,000,005

110,332 189,443

484,826 6,836

21,873 832,944

1,574,075 282,086

3,023,624 2,564,384

714,546 713,873

3,738,170 3,278,257

490,000 490,000

837,731 1,139,892

1,327,731 1,629,892

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 5,065,901$ 4,908,149$

See Accompanying Notes and Accountants' Compilation Report

shares outstanding

Retained Earnings

LONG TERM DEBT, LESS CURRENT PORTION

TOTAL LIABILITIES

STOCKHOLDERS EQUITY

Common Stock, no par value, 100,000,000 shares

authorized and 500,000 shares issued and 500,000

TOTAL ASSETS

Current Liabilities

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Bank Overdraft

Trade Accounts Payable

Sales Tax Payable

Accrued Expenses

Other Liabilities

Current Portion of Long Term Debt

Fixed Assets

Accumulated Depreciation

Cash

Trade Accounts Receivable

Inventories

Prepaid Expenses

Current Assets:

Deposits

OTHER ASSETS

CURRENT ASSETS

FIXED ASSETS



Page 27 of 329

Flow Statement Number I — Income Statement Required Presentation

Elements

GENERAL INCOME STATEMENT POINTS TO CONSIDER:

1. Income statement preparers should not present revenue net any significant amounts,

such as discounts, on the face of the income statement without disclosure. It is not

correct to net sales with sales returns and not disclose the amount by which (gross)

sales has been reduced. Normally this is a parenthetic disclosure.

2. The income statement should reflect expenses at a level of detail appropriate for the

intended user. Line items, such as, cost of sales, or selling, general and administrative

expenses many times appear as line items without any further detail. This is not an

incorrect presentation provided that the intended user is not be misled by omission the

detail of the significant components of these elements. Supplementary information may

be used to provide necessary details (remember that if an external accountant is going

to report on the financial statements the report must address any accompanying

supplementary information), but if the information is referred in the body of the

financial statements or notes thereto, the information then becomes an integral part of

the basic financial statements.

3. Unusual or Infrequently Occurring items must be given line item status on the face of

the financial statement. The FASB has purposefully tried to make extraordinary items a

thing of the past. However, they do recognize that quite often one, but not both, of the

criteria for determining an item to be extraordinary are situationally met. In such

situations, subject to materiality considerations, professional standards clearly requires

line-item status for disclosure of such items. Some examples of events that might qualify

include floods, fire damage, theft losses, and business interruptions.

4. Gains and/or Losses are different from revenues and expenses. Gains and/or losses are

ancillary to the operations of the organization. Another potential plus to something

being deemed a gain or loss is that GAAP allows such transactions to be netted, as

opposed to the general rule of never netting elements of revenue and expense.

Circumstances vary, and financial statement preparers should thoroughly research each

situation, according to its unique facts and circumstances, before netting elements that

go into the reported gain or loss.

5. Income from Continuing Operations before Income Taxes — this is one of the “required”

subtotals that should be present on the face of an income statement. This subtotal is



Page 28 of 329

the difference between revenues, cost-of-sales, selling general and administrative

expenses, as well as any gains and or losses.

6. Income Tax Expense appears directly below income from continuing operations before

income taxes, and reflects all components of income tax applicable to the entity in light

of the financial reporting framework (basis of accounting) used for preparing the

financial statements. It is not correct to presume that there is no requirement to reflect

income taxes and disclosures thereto if the framework (basis of accounting) is other

than GAAP. GAAP does require the use of deferred tax accounting, and the other bases

do not, but there are other elements of income taxes that are common to all of the

bases (carry forwards, payable/receivable amounts) that must be reflected in each.

7. Income from Continuing Operations is the difference between income from continuing

operations before income taxes and income tax expense. This amount should not be

confused with net income. Net income and income from continuing operations may be

the same when there are no below-the-line items included in the financial statements.

8. Currently, professional standards allows for three types of “below-the-line” items

a. Discontinued operations/Disposal of a Segment

b. Extraordinary items

c. Changes in Accounting Principle

9. Net Income appears once in the body of an income statement. It (used to be) is the

“bottom line” at the end of the day. However, there is now a line below the bottom line

that is entitled “Comprehensive Income” that is discussed in more detail later in the

session.

10. Six elements (to the extent they exist) must be disclosed regarding income statement

matters:

a. Revenues or,

b. Cost of Sales, and

c. Gross margin, and

d. Income from Continuing Operations, and

e. Income tax Expense, and

f. Net Income (if there are no below-the-line items)

g. Below-the-line-items

i. Discontinued Operations/Disposal of a Segment

ii. Extraordinary Items, and

iii. Changes in Accounting Principle



Page 29 of 329

Typical Company, Inc.

STATEMENTS OF INCOME AND CHANGES IN RETAINED EARNINGS

For the Years Ended December 31,

2008 2007

16,333,643$ 12,916,911$

(87,139) (47,774)

16,246,504 12,869,137

(9,460,815) (6,373,896)

6,785,689 6,495,241

(6,493,219) (5,332,033)

292,470 1,163,208

23,680 733

(151,809) (113,307)

- 513,307

- (304,168)

164,341 1,259,773

(21,118) (250,437)

143,223 1,009,336

1,139,893 530,102

- (117,830)

(445,385) (281,715)

837,731$ 1,139,893$


Beginning Retained Earnings

Net Income

Sales

Returns & Allowances

Net Sales:

Cost of Goods Sold

Gross Income:

Abandonment of assets

Proceeds from lawsuit

Income taxes

Selling and G&A Expenses

Income From Continuing Operations

Interest Income

Interest Expense


Loss on Sale of Treasury Stock

Dividends Paid

Ending Retained Earnings



Page 30 of 329

Flow Statement Number 1A — Comprehensive Income

GENERAL COMPREHENSIVE INCOME STATEMENT INFORMATION

When an entity enters into certain types of transactions, current GAAP now requires the

application of a new concept called “comprehensive income”. Basically, comprehensive income

(as of today) folds in certain transactions that have previously not been considered to be

income-statement-type transactions, which are now to be reflected as separate elements in this

particular financial statement.

At this point in time, the FASB has defined four elements of comprehensive income. Currently

comprehensive income occurs when any of the following transactions occur:

1. Unrealized gains/losses on available-for-sale securities

2. Certain hedging gains/losses

3. Foreign exchange translation adjustments

4. Gains and losses associated with pension or other postretirement benefit costs to

include:

a. Adjustment of the “additional minimum liability” balance in accounting for

defined benefit pension costs by an employer,

b. Transition assets and/or liabilities, and,

c. Prior service costs.

A very significant point to note is that certain of the elements of comprehensive income “turn

around” and are actually recognized in net income in periods after being recognized as an

element of Other Comprehensive Income (available-for-sale securities may actually be sold).

When this occurs, reclassification out of accumulated comprehensive income into retained

earnings is required.

Currently, the FASB allows three formatic options (Financial Statement Format) — examples of

each are included in the materials:



Page 31 of 329

1. “One Statement Approach” (Combined Statement)

2. Separate (stand-alone) Statement

3. Statement-of-Changes-in-Equity Approach



Page 32 of 329

Revenues 470,000$

Expenses (135,000)

Other gains and losses 10,500

Gain on sale of securities 2,000

Income from operations before tax 347,500

Income tax expense (83,400)

Income before extraordinary item and cumulative effect of accounting change 264,100

Extraordinary item, net of tax (198,350)

Cumulative effect of accounting change, net of tax (1,250)

Net income 64,500

Other comprehensive income, net of tax:

Foreign currency translation adjustments 8,000

Unrealized gains on securities

Unrealized holding gains arising during period 13,000$

Less: reclassification adjustment for gains included in net income (1,500) 11,500

Minimum pension liability adjustment (2,500)

Other comprehensive income 17,000

Comprehensive income 81,500$

See Accompanying Accountants' Compilation (Review) Report (And Notes to Financial Statements)

Net income 64,500$










Statement of Comprehensive Income (Separate Statement Approach)

Year Ended December 31, 2008

Enterprise

Statement of Income and Comprehensive Income (Combined Approach)


Enterprise



Page 33 of 329

Enterprise

Statement of Changes in Equity


Accumulated

Other

Comprehensive Retained Comprehensive Common Paid-in

Total Income Earnings Income Stock Capital

Beginning balance 438,500$ 88,500$ 25,000$ 100,000$ 225,000$

Comprehensive income

Net income 64,500 64,500 64,500

Other comprehensive income, net of tax

Unrealized gains on securities, net of

reclassification adjustment 11,500 11,500

Foreign currency translation adjustments 8,000 8,000

Minimum pension liability adjustment (2,500) (2,500)

Other comprehensive income - 17,000 17,000 17,000

Comprehensive income 81,500

Common stock issued 150,000 50,000 100,000

Dividends declared on common stock (10,000) - (10,000) - - -

Ending balance 660,000$ 81,500$ 143,000$ 42,000$ 150,000$ 325,000$




Page 34 of 329

Flow Statement Number 2 — Statement of Cash Flows

GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER The Statement of Cash Flows is a required basic financial statement when the financial

statements purport to present in accordance with GAAP. It is not a required basic financial

statement for OCBOAS. However, if an entity elects to present a statement of cash flows when

using an OCBOA, then (because of the contemporaneous counterpart requirement) the cash

flow statement must comply with (GAAP) professional standards.

The cash-provided/used-in-operations category is the default area for cash flow statement

decisions. That is to say, if a transaction or item does not clearly classify into either investing or

financing, then it defaults to operating cash transactions.

There are three types of reconciling items that are necessary to go from net income to cash

provided or used in operations:

1. Non-cash (depreciation),

2. Discretionary (current assets and/or liabilities, and

3. Reclassifications (gains/losses on sale of fixed assets.

A cash flow statement is required for each income statement presented when the presentation

is in accordance with GAAP.

The direct method of presenting cash-provided/used-in-operations is generally more

informative to financial statement users than the indirect method. The first step to presenting

the direct method is the construction of the indirect method of presenting cash-provided/used-

in-operations. Then the body of the income statement replaces the first line of the indirect

method (net income). Revenues and/or gains on the income statement are sources of cash, and

expenses and/or losses are uses of cash. These elements are combined with their balance sheet

counterparts to generate the line items as seen in the direct method. For example, to arrive at

cash received from customers’ sales is combined with the change (already computed in getting

the indirect method out of the way) in accounts receivable. In computing the amount disbursed

to suppliers and employees, cost-of-sales is combined with the changes in accounts payable and

inventory. The bulk of the work is done when the indirect method is done. This is an ideal



Page 35 of 329

electronic spreadsheet application — develop the spreadsheet once and it will thereafter

“automatically” convert from the indirect to the direct method.

If you use the direct method of reflecting operating cash, you must also include a reconciliation

of net income to cash provided/used in operations.

The cash flow statement has certain “articulation” requirements, which means that the

following presentation matters are required by definition and variance from the approach is not

permitted:

1. The cash flow statement must be prepared by activities (order is not required)

a. Operating,

b. Investing, and

c. Financing.

2. The indirect method of presenting cash from operations must begin with net income.

3. There is a required subtotal for cash provided or used from all sources.

4. Cash from all sources must be follow by a line item that states – Cash and cash

equivalents, beginning of the year (or equivalent language),

5. The combination of cash provided/used from all sources and beginning cash must foot

to – Cash and cash equivalents, end of year (or equivalent language). And,

6. The balances and line item titles for the cash balances must agree exactly with the

corresponding cash line of the balance sheet (having to combine amounts on the

balance sheet to equal the balance reflected on the cash flow statement is not

acceptable).



Page 36 of 329

Typical Company, Inc. Typical Company, Inc.

STATEMENTS OF CASH FLOW Operating Cash - Direct Method

For the Years Ended December 31, For the Years Ended December 31,

2008 2007

CASH FLOWS FROM OPERATING ACTIVITIES

143,223$ 1,009,336$

139,401 86,801

304,168

321,616 (1,556,384)

(212,960) (230,113)

(170,478) 33,139

(145,614) 13,872

(79,111) 128,864

477,990 (83,296)

474,067 (293,613)

(10,945) (45,677)

15,000 (15,000) (386,789) (428,572)

(382,734) (489,249)

(832,944) 275,639

- (240,221)

1,292,662 800,000

- 82,500

(445,385) (281,716)

(253,070) 118,554

152,500 28,106

(86,237) 782,862

5,096 -

- -

5,096$ -$

131,809$ 78,307$

366,229$ 591,573$


Taxes Paid

SUPPLEMENTAL DISCLOSURES

Interest Paid

CASH AND CASH EQUIVALENTS AT END OF YEAR

NET CHANGE IN CASH

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

Loss on Abandonment of Assets

NET CASH USED BY INVESTING ACTIVITIES

Accrued Expenses

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES

CASH FLOWS (USED BY) INVESTING ACTIVITIES

Deposits

BondsAcquisition of Equipment


Inventory

Prepaid Expenses


Dividends Paid

Decrease in Bank Overdraft

Due From Shareholder

NET CASH PROVIDED BY FINANCING ACTIVITIES

Net Income

Depreciation

Adjustments to Reconcile Net Income to Net Cash Provided

(Increase) Decrease In:

CASH FLOWS FROM & (USED BY) FINANCING ACTIVITIES

Increase (Decrease) In:

Sales Tax Payable

Decrease in Lines of Credit

Payment of Notes Payable

New Proceeds of Notes Payable

Sale of Treasury Stock



Page 37 of 329

CASH FLOW STATEMENT DISCLOSURE FOR NON-CASH TRANSACTIONS Professional standards clearly state that transactions that do not involve, literally, either a debit

or credit to an account that meets the definition of cash and cash equivalents should not be

included in amounts appearing in the cash flow statement. However, those standards do

require that any and all significant non-cash transactions be disclosed in the presentation.

There appears to be several acceptable approaches to compliance with this requirement;

1. Parenthetic disclosure such as; Capital Expenditures (net of $49, $5 and $16 of non-cash

capital expenditures in fiscal 2007, 2006 and 2005, respectively,)

2. Preparation of a schedule that appears on the face of the cash flow statement beneath

the statement, or

3. Footnote disclosure.

Most of the significant non-cash expenditures disclosed to meet this requirement involve

financed purchases of assets.

DIRECT METHOD OF PRESENTATION OF CASH PROVIDED OR USED IN OPERATIONS.

Many financial statement users prefer this method looking at cash provided and used in

operations. If the financial statements are presented in accordance with GAAP, the

presentation must ALSO include a reconciliation of net income and cash provided from

operations (i.e. the indirect method). Following is a presentation of cash from operations using

the same data as was used in the presentation of cash from operations under the direct

method:



Page 38 of 329

Typical Company, Inc.

Operating Cash - Direct Method

For the Years Ended December 31,

2008 2007

Cash Received From Customers 16,568,120$ 11,312,753$

Cash Proceeds from Lawsuit - 513,307

Cash Received From Interest 23,680 733

Cash Paid Out to Suppliers and Employees (15,619,695) (11,450,526)

Cash Paid Out for Interest (131,809) (78,307)

Cash Paid Out for Taxes (366,229) (591,573)

Net Cash Provided (Used) by Operating Activities 474,067$ (293,613)$

Generally speaking, the direct method of presenting cash from operations is more easily

understood by financial statement users than is the indirect method of presentation of the same

information. The indirect method is useful for analysis of cash management activities of an

organization.



Page 39 of 329

RETAINED EARNINGS/SHAREHOLDER EQUITY STATEMENT

GENERAL STATEMENT OF CASH FLOWS POINTS TO CONSIDER

1. A retained earnings statement, when presented, represents another “basic” financial

statement for purposes of GAAP.

2. Generally speaking, if the only change in equity is net income/loss the statement is

combined with the income statement and the combined statements are titled

something like “Statement of Income and Retained Earnings”.

3. If there are other elements of the capital section that have changed over the reporting

period, then presentation of a separate statement is generally appropriate. (See

example of statements incorporated elsewhere in the session.

4. An aggressive school of thought believes that if the only reconciling element in equity is

net income/loss, then no statement is necessary because the change can be computed

using existing information — this is risky, and leaves the preparer open to criticism.

An example of a comprehensive shareholder equity statement appears on page 33.



Page 41 of 329

CHAPTER 3 -- FINANCIAL STATEMENT DISCLOSURES

SPECIFIC FINANCIAL STATEMENT DISCLOSURES -- REQUIRED FOR ALL GAAP FINANCIAL

STATEMENTS THAT ARE “FULL DISCLOSURE” FINANCIAL STATEMENTS (AND MOST OCBOA

FULL DISCLOSURE PRESENTATIONS)

Generally appearing on the face of the individual financial statement:

1. Appropriate line-item descriptions,

2. Financial statement totals and sub-totals,

3. Valuation allowances (Allowance for doubtful accounts, asset impairment, etc.), and

4. Capital stock (par value, authorized, issued, outstanding, other rights & or preferences)



Page 42 of 329

Generally appearing in the body of the footnotes to the financial statements

Summary of Significant Accounting Policies (AREA – Presentation, TOPIC – 235, Notes to

Financial Statements, SUB-TOPIC – 10, Overall, SECTION – 50, Disclosure)

Footnote Disclosures

1. Summary of Significant

Accounting Policies

A. Alternative approaches allowed by

applicable reporting framework.

B. Policies and/or approaches that are

unique to a specialized industry.

C. Unusual and/or innovative applications

of the applicable reporting framework.

D. Other maters – usage.

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

________________________



Page 43 of 329

(Elements 1 through 3) This is the one footnote that is absolutely required whenever annual

financial statements include footnote disclosure (This disclosure is required for interim financial

statements when, and if, accounting policies change with respect to the previous annual

financial statement disclosure.) -- -- Criteria for what goes into this footnote:

1. Basis of presentation allows for alternative approaches — this is probably the most

frequent source of information appearing in the summary of significant accounting

policy footnote. This situation is applicable when, for instance, GAAP allows for different

methods of depreciating fixed assets. Each method is acceptable to the financial

reporting framework (basis of accounting), but the reader must be filled in as to which

option is being made use of in the financial statements.

2. Unique to a specialized industry — this is a requirement to inform the financial

statement user of approaches that are unique applications to an industry, even if every

reporting entity in that industry uses that convention. Most commonly an example of

this type of disclosure is found in the disclosure regarding the method of revenue

recognition by construction contractors. As we know, most every contractor uses the

percentage of completion method, but failure to disclose this would result in a reporting

deficiency. Caution must be exercised whenever financial statements are developed for

entities in specialized industries.

3. Innovative applications of financial reporting framework (basis of accounting) — this is

a catch-all category for those bits of information that do not classify in other areas. This

is also an area where organizations tend to disclose “aggressive” approaches to a

particular type (class) of transaction. However, merely disclosing that an organization is

using an approach that is contrary to the correct method prescribed by the financial

reporting framework (basis of accounting) does not mitigate the departure from the

basis.

4. Other Matters – Recently, although not required by existing professional standards,

reporting entities have added other matters to the summary of significant accounting

policies that are not (explicitly) required to be presented in this footnote. Review of

published financial statements of public entities reveals that other matters, beyond

those explicitly identified by existing standards (items 1 through 3 of this listing), appear

routinely in this note. These items are generally a recitation of matters for which GAAP

does not provide options in presentation and/or disclosure, but the presentation and/or

disclosure is regarded by the provider as significant. Examples of such matters include

subsequent events and use of estimates.

Generally speaking, this footnote should minimize the use of numbers. The Summary of

Significant Accounting Policies footnote should be used to orient users to the financial



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statements, and not to fill in specifics regarding the application of accounting policies. However,

there are times when organizations (knowingly) violate this convention. Generally, numbers

(and other application specific information) would be included in this footnote when efficiency

dictates. (We are told in professional standards that repetition is, generally, not a good thing in

financial statements.) So, for example, if an organization discloses its policy regarding

advertising, and the amounts incurred for advertising do not appear elsewhere (as broken-out

line items) in the financial statements, the amounts incurred for advertising might be disclosed

in this note to complete the disclosure requirement in lieu of creating another footnote that

merely states the amount of advertising incurred. Such a treatment would, in most cases, not be

an appropriate course of action with respect to disclosure of fixed asset/depreciation matters

because of the amount of additional disclosure required by professional standards.

(-5) The standard expressly notes that this set of disclosures should not duplicate disclosure(s)

made elsewhere in the financial statements. The standard also notes that a cross-reference to

another footnote is an acceptable method of fulfilling the disclosure requirement.

(-6) Unlike previous professional guidance, while it is still the preferred method of presentation,

the summary of significant accounting policies no longer must be the first footnote, and these

disclosures no longer (absolutely) must appear within one footnote.

This footnote is also used to disclose how the organization would approach a situation in one of

the three categories above if such a circumstance presented itself. This is a relatively subjective

aspect of this disclosure requirement. There are times when it is appropriate to disclose how an

organization would address a situation even though as of the financial statement date the

company has not encountered the subject area of the disclosure requirement. A classic example

of this is the entity’s disclosure of the definition of cash and cash equivalents. SFAS 95 (Area –

Presentation, 230-10-50-1) requires that an organization disclose its policy regarding

classification of certain short-term investments (the choice is between investment or cash

equivalent) because it is an option. Professional standards and general application seem to

require that an organization make this decision prior to presenting a statement of cash flows,

whether or not the organization has investments that might qualify as cash equivalents.



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1.Summary of

Significant Accounting

Policies

2.Standard Required

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

____________



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Examples of Footnotes Commonly Occurring in Typical Financial Statements

Cash and Cash Equivalents

Professional Standards Regarding Cash and Cash Equivalents (ASC 230-10-50-1)

When a reporting entity presents a cash flow statement, it is required to state its policy

regarding cash equivalents

A. This is required, whether or not the entity currently has cash equivalents, because it is an

election,

B. A change in policy regarding cash equivalents is defined/disclosed

1. As a change in accounting policy, that is to be reflected

2. Through restatement of all periods presented for comparative purposes.

Examples

1 The Company considers all highly liquid investments with a maturity of three months or

less when purchased to be cash equivalents.

2 The Company considers all highly liquid instruments with a maturity of three months or

less at the time of issuance to be cash equivalents.

3 The Company considers as cash equivalents all highly liquid investments with an original

maturity of three months or less.

4 Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with

banks, and investments with banks and financial institutions that have original maturities of

three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash

equivalents totaled $195,449 and $190,007 as of January 28, 2012 and January 29, 2011,

respectively, primarily consisting of money market funds, demand deposits, and time deposits.

Income earned on cash equivalents was $1,252, $551, and $36 for 2011, 2010, and 2009,

respectively, and was reflected in other income on the accompanying Consolidated Statements

of Income. There were no compensating balance arrangements as of January 28, 2012. The

Company had a compensating balance of $10,000 as of January 29, 2011, related to the

Company's purchasing card program.

5 Cash and cash equivalents include investments in money market funds and all highly

liquid debt instruments with an original maturity of three months or less when acquired.



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6 For the purpose of the cash flow statements, the Company considers all highly liquid

investments with original maturities of three months or less at the time of purchase to be cash

equivalents.

7 The Company considers all highly liquid investments, which include money market funds

and short-term bank deposits (up to three months from date of deposit or with maturity of

three months from date of purchase) that are not restricted as to withdrawal or use, to be cash

equivalents.

8 Cash and cash equivalents generally consist of cash and money market accounts. The

fair value approximates the carrying value due to the short duration of the securities. These

securities have original maturity dates not exceeding three months. The Corporation has short-

term investments with maturities of less than one year and also has investments with maturities

greater than one year included in Other Assets on the Consolidated Balance

Sheets. Management classifies investments in marketable securities at the time of purchase

and reevaluates such classification at each balance sheet date. Debt securities including

government and corporate bonds are classified as available-for-sale and stated at current

market value with unrealized gains and losses included as a separate component of equity, net

of any related tax effect. The specific identification method is used to determine realized gains

and losses on the trade date. The Corporation has invested in an investment fund which is

valued at fair market value with changes recorded through the income statement.

9 We consider all highly liquid instruments with a maturity of three months or less when

purchased to be cash equivalents.



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Use of Estimates

Professional Standards Regarding Use of Estimates (ASC 275-10-50-4, 275-10-55-6 (example

language))

When a reporting entity presents financial statements that include footnotes is should

include a footnote disclosure that notes that the preparation of financial statements requires

that management make estimates.

The example language, provided in the Codification, suggests that the footnote should conclude

by stating that certain estimates may not be achieved.

Examples

1 The preparation of financial statements in conformity with US GAAP requires

management to make estimates and assumptions that affect the reported amounts of assets

and liabilities and disclosure of contingent assets and liabilities at the date of the financial

statements and the reported amounts of revenues and expenses during the reporting period.

The Company regularly evaluates estimates and assumptions related to the deferred income tax

asset valuation allowances. The Company bases its estimates and assumptions on current facts,

historical experience and various other factors that it believes to be reasonable under the

circumstances, the results of which form the basis for making judgments about the carrying

values of assets and liabilities and the accrual of costs and expenses that are not readily

apparent from other sources. The actual results experienced by the Company may differ

materially and adversely from the Company’s estimates. To the extent there are material

differences between the estimates and the actual results, future results of operations will be

affected.

2 The preparation of financial statements in conformity with U.S. generally accepted

accounting principles requires management to make estimates and assumptions that affect the

amounts reported in the financial statements and accompanying notes. Actual results could

differ from those estimates.

3 The preparation of financial statements in conformity with generally accepted

accounting principles (GAAP) requires management to make estimates and assumptions that

affect the reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the financial statements and the reported amounts of revenues and

expenses during the reporting period. Actual results could differ from these estimates.

4 In preparing financial statements in conformity with U.S. generally accepted accounting

principles, management makes estimates and assumptions that affect the reported amounts of

assets and liabilities and disclosures of contingent assets and liabilities at the date of the

financial statements, as well as the reported amounts of revenue and expenses during the

reporting period. Actual results could differ from those estimates. The real estate industry has



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historically been cyclical and sensitive to changes in economic conditions such as interest rates,

credit availability, and unemployment levels. Changes in these economic conditions could affect

the assumptions used by management in preparing the accompanying financial statements.

5 Use of estimates - In preparing financial statements, management is required to make

estimates and assumptions that effect the reported amounts of assets and liabilities and

disclosure of contingent assets and liabilities at the date of the consolidated financial

statements and revenues and expenses during the periods presented. Actual results may differ

from these estimates.


accounting principles requires us to make estimates and assumptions that affect the reported

amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and

liabilities. Actual results could differ from the estimates and assumptions used.

7 The preparation of financial statements requires us to make estimates and assumptions

that affect our results during the periods reported. Estimates are used to account for certain

items such as marketing accruals, warranty costs, employee benefit programs, etc. Estimates

are based on assumptions that we believe are reasonable under the circumstances. Due to the

inherent uncertainty involved with estimates, actual results may differ.

8 The preparation of financial statements in conformity with accounting principles

generally accepted in the United States requires management to make estimates and

assumptions that affect the amounts reported in the financial statements and accompanying

notes. The more significant areas requiring use of management estimates relate to allowance

for doubtful accounts, inventory reserves, marketing program accruals, warranty accruals,

accruals for self-insured medical claims, workers’ compensation, legal contingencies, general

liability and auto insurance claims, valuation of long-lived assets, and useful lives for

depreciation and amortization. Actual results could differ from those estimates.


accounting principles requires management to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at

the date of the financial statements and the reported amounts of revenues and expenses during

the reporting period.



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Income Taxes

Professional Standards Regarding Income Taxes (ASC740-10-50-2 - 21)

1. 50-2 -- Balance sheet disclosures

A. Total deferred tax

1) Liabilities, and/or

2) Assets

B. Total valuation allowance recognized, re. deferred tax assets, as well as change in valuation

allowance during reporting period.

2. 50-3 Amounts and expiration dates of

A. Loss carryforwards, and/or

B. Tax credit carryforwards

C. Valuation allowance amounts that will be credited directly to contributed capital.

3. 50-4 When a reporting entity's tax status changes with respect to the following reporting

period, but prior to the issuance of financial statements, this matter should be disclosed in the

notes.

4. 50-8 For nonpublic reporting entities, disclosure of the types of significant temporary

differences is required -- numeric reconciliation is permitted, but not required.

5. 50-9 Significant components of income tax need to be disclosed, either on the face of the

financial statement or within the footnotes, elements that commonly comprise such items

include

A. Current expense,

B. Deferred expense,

C. Benefit of loss carryforwards, and/or

D. Adjustments to deferred tax liability and/or asset resulting from changes in tax laws and/or

rates.

6. 50-10 When applicable, amount of income tax expense allocated to continuing operations

and other separately reported elements (intraperiod tax allocation).

7. 50-13 Nonpublic reporting entities are required to disclose the nature of significant matters

that cause a difference between expected and reflected income tax expense (effect of the

surtax exemption).



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8. 50-14 Any matters that may affect comparability of financial statements included in a

particular presentation.

9. 50-15 Non Public entities are required to disclose the following matters regarding

unrecognized income tax benefits

A. Total interest and/or penalties recognized in the balance sheet and/or income statement,

B. For positions for which it is reasonable possible there will be a significant change within the

following 12 months

1) Nature of the uncertainty,

2) The type of event that could give rise to the change,

3) An estimate of the range of the effect of the change, or a statement that such a range

cannot be reasonable estimated

C. Tax years open -- subject to examination, by jurisdiction.

10. 50-18 Choice(s) between alternative acceptable tax options.

11. 50-19 Interest and/or penalty recognition policy(ies).

12. 50-20 Policy regarding recognition of investment tax credits, and

13. 50-21 Generic disclosure requirement -- to prevent the financial statements from being

misleading (for their intended usage).

Examples

1 The Company uses the asset and liability method of accounting for income taxes. Under

this method, deferred tax assets and liabilities are determined based on differences between

the financial reporting and tax bases of assets and liabilities and are measured using the enacted

tax rates and laws that will be in effect when the differences are expected to reverse.

2 The Company is organized as a limited liability Company and is taxed as a partnership

for income tax purposes. Accordingly, the Company is not subject to federal and state income

taxes and makes no provision for income taxes in its financial statements. the Company's

taxable income or loss is reportable by its members. the Company has determined that there

are no material uncertain tax positions that require recognition or disclosure in its financial

statements. Taxable years ended December 31, 2009 through 2012 are subject to IRS and other

jurisdictions tax examinations. At December 31, 2012, the reported amounts of the Company’

aggregate tax bases exceeded their net assets by approximately $XXXXXX. At December 31,



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2011, the reported amounts of the Company’ aggregate tax bases exceeded their net assets by

approximately $XXXXXX.

3 The Company accounts for income taxes under ASC 740, Accounting for Income Taxes.

Under ASC 740, deferred tax assets and liabilities are recognized for the future tax

consequences attributable to differences between the financial statement carrying amounts of

existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are

measured using enacted tax rates expected to apply to taxable income in the years in which

those temporary differences are expected to be recovered or settled. The effect on deferred tax

assets and liabilities of a change in tax rates is recognized in income in the period, which

includes the enactment date.

ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an entity's

financial statements This Interpretation prescribed a recognition threshold and measurement

attribute for the financial statement recognition and measurement of a tax position taken or

expected to be taken in a tax return. In addition, ASC 740 provides guidance on de-recognition,

classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company adopted the provisions of FIN-48 and they had no impact on its financial position,

results of operations, and cash flows.

Based on its evaluation, the Company has concluded that there are no significant uncertain tax

positions requiring recognition in its consolidated financial statements. The Company's

evaluation was performed for the tax years ended December 31, 2004 through December 31,

2011 for U.S. Federal Income Tax, for the tax years ended December 31, 2004 through

December 31, 2011 for the State of Florida Corporate Income Tax, the years which remain

subject to examination by major tax jurisdictions as of December 31, 2011.

4 Deferred income taxes reflects the net tax effects of temporary differences between the

carrying amounts of assets and liabilities for financial reporting purposes and the amounts used

for income tax purposes, as well as operating loss, capital loss and tax credit

carryforwards. Deferred tax assets and liabilities are classified as current or non-current based

on the classification of the related assets or liabilities for financial reporting, or according to the

expected reversal dates of the specific temporary differences, if not related to an asset or

liability for financial reporting. Valuation allowances are established against deferred tax assets

if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities

are measured using enacted tax rates expected to apply to taxable income in the years in which

those temporary differences are expected to be recovered or settled. The effect on deferred tax

assets and liabilities of a change in tax rates or laws is recognized in operations in the period

that includes the enactment date.

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the

application of complex tax regulations. The Company recognizes liabilities for uncertain tax

positions based on the two-step process prescribed by applicable accounting principles. The first



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step is to evaluate the tax position for recognition by determining if the weight of available

evidence indicates that it is more likely than not that the position will be sustained on audit,

including resolution of related appeals or litigation processes, if any. The second step requires

the Company to estimate and measure the tax benefit as the largest amount that is more likely

than not being realized upon ultimate settlement. It is inherently difficult and subjective to

estimate such amounts, as this requires the Company to determine the probability of various

possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis.

This evaluation is based on factors including, but not limited to, changes in facts or

circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.

Such a change in recognition or measurement would result in the recognition of a tax benefit or

an additional charge to the tax provision in the period. The Company recognizes interest and

penalties as incurred in finance income (expense), net in the Consolidated Statements of

Operations.

Our effective tax rate is based on income, statutory tax rates and tax planning

opportunities available to us in the various jurisdictions in which we operate. Significant

judgment is required in evaluating our tax positions, which has an impact on our effective tax

rate. We establish reserves when, despite our belief that our tax return positions are fully

supportable, we believe that certain positions are likely to be challenged based on technical

merits. A tax benefit from an uncertain tax position is recognized when it is more likely than not

that the position will be sustained upon examination, including the resolution of any related

appeals or litigation, based on the technical merits. The amount recognized is measured as the

largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement.

5 The Corporation uses an asset and liability approach that requires the recognition of

deferred tax assets and liabilities for the expected future tax consequences of events that have

been recognized in the Corporation’s financial statements or tax returns. Deferred income taxes

are provided to reflect differences between the tax bases of assets and liabilities and their

reported amounts in the financial statements. The Corporation provides for taxes that may be

payable if undistributed earnings of overseas subsidiaries were to be remitted to the United

States, except for those earnings it considers to be permanently reinvested. There were

approximately $XXXXX million of accumulated earnings considered permanently reinvested in

China, Hong Kong and India as of December 29, 2012. See the Income Tax footnote for further

information.

6 The Company accounts for income taxes under Section 740-10-30 of the FASB

Accounting Standards Codification, which requires recognition of deferred tax assets and

liabilities for the expected future tax consequences of events that have been included in the

financial statements or tax returns. Under this method, deferred tax assets and liabilities are

based on the differences between the financial statement and tax bases of assets and liabilities

using enacted tax rates in effect for the fiscal year in which the differences are expected to

reverse. Deferred tax assets are reduced by a valuation allowance to the extent management



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concludes it is more likely than not that the assets will not be realized. Deferred tax assets and

liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal

years in which those temporary differences are expected to be recovered or settled. The effect

on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of

Income and Comprehensive Income in the period that includes the enactment date.



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New Accounting Pronouncements -- While the Codification does not provide any

specific guidance/requirement regarding disclosure of a reporting entity's treatment of new

accounting pronouncements, 70 percent of the financial statements reviewed in compiling data

for this session included this category of disclosure within the Summary of Significant

Accounting Policies.

Examples

1 During May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820):

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.

GAAP. This ASU provides guidance setting forth additional requirements relating to disclosures

about fair value. The guidance was effective for Associates beginning with the first interim

period in 2012. In accordance with the guidance, Associates was required to disclose the level in

the fair value hierarchy in which each fair value lies that is disclosed but not used to measure an

asset or liability on the balance sheet. The guidance also clarifies that the fair value of a non-

financial asset is based on its highest and best use and requires disclosure if a non-financial asset

is being used in a manner that is not its highest and best use. The adoption of ASU 2011-04 on

January 1, 2012 did not have a material impact on Associates financial condition or results of

operations.

2 Other accounting standards that have been issued or proposed by the FASB or other

standards-setting bodies that do not require adoption until a future date are not expected to

have a material impact on the consolidated financial statements upon adoption.

3 There have been no recent accounting pronouncements or changes in accounting

pronouncements during the year ended December 31, 2012, that are of material significance, or

have potential material significance, to the Company.

4 In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting

Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and

Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic

820) - Fair Value Measurement (ASU 2011-04). The amendments in this update changed the

wording used in the existing guidance to better align U.S. generally accepted accounting

principles with International Financial Reporting Standards and to clarify the FASB's intent on

various aspects of the fair value guidance. The update also required increased disclosure of

quantitative information about unobservable inputs used in a fair value measurement that is

categorized within Level 3 of the fair value hierarchy. This update was effective for our fourth

quarter of fiscal 2012. Since We did not have any investments with unobservable market inputs,

thus this update did not impact our consolidated financial statements. The effect of this

guidance on future periods will depends on the nature and significance of any fair value

measurements we subsequently make that are subject to this guidance.



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In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting

Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350), Testing Goodwill

for Impairment, (ASU 2011-08), which permits an entity to make a qualitative assessment of

whether it is more likely than not that a reporting unit's fair value is less than its carrying value

before applying the two-step goodwill impairment model that is currently in place. If it is

determined through the qualitative assessment that a reporting unit's fair value is more likely

than not greater than its carrying value, the remaining impairment steps would be unnecessary.

The qualitative assessment is optional, allowing companies to go directly to the quantitative

assessment. This update was effective for our fourth quarter of fiscal 2012. We elected to

perform the Our qualitative assessment which indicated that our goodwill of $1,567 was not

impaired.

In June 2011, the FASB issued accounting guidance updating the presentation format of

comprehensive income. The guidance provided two options for presenting net income and

other comprehensive income. The total of comprehensive income, the components of net

income and the components of other comprehensive income may be presented in either a

single continuous statement of comprehensive income or in two separate but consecutive

statements. The Corporation adopted the new guidance beginning January 1, 2012. The

guidance did not have a material impact on the Corporation's financial statements.

In July 2012, the FASB issued accounting guidance intended to reduce the cost and complexity of

the annual impairment test for indefinite-lived intangible assets other than goodwill by

providing the option of performing a qualitative assessment to for indefinite-lived intangible

assets other than goodwill by providing the option of performing a qualitative assessment to

determine whether future impairment testing is necessary. This guidance became effective

December 30, 2012, the beginning of the Corporation's 2013 fiscal year. The Corporation does

not anticipate this guidance to have any impact on the Corporation's financial statements.

In June 2011, the FASB issued the FASB Accounting Standards Update No. 2011-05

Comprehensive Income (ASU 2011-05), which was the result of a joint project with the IASB and

amends the guidance in ASC 220, Comprehensive Income, by eliminating the option to present

components of other comprehensive income (OCI) in the statement of stockholders’ equity.

Instead, the new guidance now gives entities the option to present all non-owner changes in

stockholders’ equity either as a single continuous statement of comprehensive income or as two

separate but consecutive statements. Regardless of whether an entity chooses to present

comprehensive income in a single continuous statement or in two separate but consecutive

statements, the amendments require entities to present all reclassification adjustments from

OCI to net income on the face of the statement of comprehensive income. The amendments in

this Update should be applied retrospectively and are effective for public entity for fiscal years,

and interim periods within those years, beginning after December 15, 2011.



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In September 2011, the FASB issued the FASB Accounting Standards Update No. 2011-08

Intangibles—Goodwill and Other: Testing Goodwill for Impairment (ASU 2011-08). This Update

is to simplify how public and nonpublic entities test goodwill for impairment. The amendments

permit an entity to first assess qualitative factors to determine whether it is more likely than not

that the fair value of a reporting unit is less than its carrying amount as a basis for determining

whether it is necessary to perform the two-step goodwill impairment test described in Topic

350. Under the amendments in this Update, an entity is not required to calculate the fair value

of a reporting unit unless the entity determines that it is more likely than not that its fair value is

less than its carrying amount. The guidance is effective for interim and annual periods

beginning on or after December 15, 2011. Early adoption is permitted.

In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-10

Property, Plant and Equipment: De-recognition of in Substance Real Estate-a Scope Clarification

(ASU 2011-09). This Update is to resolve the diversity in practice as to how financial statements

have been reflecting circumstances when parent company reporting entities cease to have

controlling financial interests in subsidiaries that are in substance real estate, where the

situation arises as a result of default on nonrecourse debt of the subsidiaries. The amended

guidance is effective for annual reporting periods ending after June 15, 2012 for public entities.

Early adoption is permitted.

In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-11 Balance

Sheet: Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). This Update requires an

entity to disclose information about offsetting and related arrangements to enable users of its

financial statements to understand the effect of those arrangements on its financial position.

The objective of this disclosure is to facilitate comparison between those entities that prepare

their financial statements on the basis of U.S. GAAP and those entities that prepare their

financial statements on the basis of IFRS. The amended guidance is effective for annual

reporting periods beginning on or after January 1, 2013, and interim periods within those annual

periods.

In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-12

Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of

Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting

Standards Update No. 2011-05 (ASU 2011-12). This Update is a deferral of the effective date

pertaining to reclassification adjustments out of accumulated other comprehensive income in

ASU 2011-05. FASB is to going to reassess the costs and benefits of those provisions in ASU

2011-05 related to reclassifications out of accumulated other comprehensive income. Due to

the time required to properly make such a reassessment and to evaluate alternative

presentation formats, the FASB decided that it is necessary to reinstate the requirements for the

presentation of reclassifications out of accumulated other comprehensive income that were in



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place before the issuance of Update 2011-05. All other requirements in Update 2011-05 are not

affected by this Update, including the requirement to report comprehensive income either in a

single continuous financial statement or in two separate but consecutive financial statements.

Public entities should apply these requirements for fiscal years, and interim periods within those

years, beginning after December 15, 2011.

Management does not believe that any other recently issued, but not yet effective accounting

pronouncements, if adopted, would have a material effect on the accompanying financial

statements.



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Reclassification of amounts

Professional Standards Reclassification of amounts appearing in financial statements (ASC 250-

10-50 -1) -- When significant reclassifications have been made within financial statements,

presented for comparative purposes, with the current period, information should be included

that will explain the reason for and nature of the change.

Examples

1 Certain prior year numbers have been reclassified to conform with current year

reporting presentation.

2 For purposes of comparison, certain items shown in the 2011 consolidated financial

statements have been reclassified to conform with the presentation used for 2012.

3 Certain reclassifications have been made to prior year amounts to conform to the

current year presentation.

4 Certain reclassifications have been made to the Company’s prior year's consolidated

financial statements to conform to the current year’s consolidated financial statement

presentation of line items in revenues and cost of sales.

5 Certain prior-year amounts have been reclassified to conform to the fiscal 2012

classification. Such reclassifications had no impact on reported net income.

6 Certain reclassifications have been made within the footnotes to conform to the current

year presentation.

7 Certain amounts in the prior period financial statements have been reclassified to

conform to the current period presentation. These reclassifications had no effect on reported

losses.



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Revenue Recognition

Professional Standards Regarding Revenue Recognition -- Currently, there is no specific

requirement for an entity to disclose revenue recognition policies, unless that reporting entity is

a member of an industry where the revenue recognition approach is unique to that industry

(construction contractor, or franchise operations). However, because of a stated preference by

the SEC (for its registrants) for such disclosure, non-registrants are including disclosure regarding

revenue recognition policies, even when such approaches are not unique to the industry.

Examples

1 Basic rental income, as defined in a long-term lease, is a fixed amount that the Company

records ratably over the year. Commencing January 1, 2013, basic rent paid by Sub-lessee is

$XXXXX per annum plus debt service. Additional rent is based on 50% of the net operating

profit of the Sub-lessee, as defined, in excess of $XXXXX for each lease year ending

December 31st and is recorded by the Company when such amount becomes realizable and

earned, at the end of each calendar year.

2 The Company intends to recognize revenues in accordance with ASC 605-10. Revenue

will be recognized when persuasive evidence of an arrangement exists, as services are provided

or when product is delivered, and when collection of the fixed or determinable selling price is

reasonably assured.

3 The Company's revenue recognition policy is consistent with applicable revenue

recognition guidance and interpretations. The Company recognizes revenue when persuasive

evidence of an arrangement exists, services have been rendered, the price is fixed or

determinable, and collectability is reasonably assured. The Company assesses whether payment

terms are customary or extended in accordance with normal practice relative to the market in

which the sale is occurring. The Company's sales arrangements generally include standard

payment terms. These terms effectively relate to all customers, products, and arrangements

regardless of customer type, product mix or arrangement size. If revenue recognition criteria are

not satisfied, amounts received from customers are classified as deferred revenue on the

balance sheet until such time as the revenue recognition criteria are met. Revenues from fixed-

price contracts which require significant production, modification and/or customization to

customer specifications are recognized using the percentage-of-completion method.

Percentage-of-completion estimates are in man-months of labor and are reviewed periodically,

and any adjustments required are reflected in the period when such estimates are

revised. Losses on contracts, if any, are recognized in the period in which the loss is determined.

Such revenues are recorded by the Company in the Consolidated Statement of Operations in

revenues from Projects. Revenue from sales of sensor products is recognized at the time title to

the products and significant risks of ownership pass to the customer, which is generally upon

shipment, when all significant contractual obligations have been satisfied and collection is

reasonably assured. Milestone payments are recognized as revenue when milestones are



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deemed to be substantive and are achieved. A substantive milestone is one that is based on

successful performance by the Company and not solely contingent upon the passage of time or

performance by another party. Such revenues are recorded by SS in the Consolidated Statement

of Operations in revenues from Projects. Revenue from sales of monitoring equipment is

recognized at the time title to the equipment and significant risks of ownership pass to the

customer (which is generally upon shipment), when all significant contractual obligations have

been satisfied and collection is reasonably assured. Equipment and customer support services

revenue is recognized upon delivery of the systems when persuasive evidence of an

arrangement exists that includes obtaining a written agreement in the form of a sales order with

the customer, collection is probable, and the fee is fixed and determinable. Such revenues are

recorded by GS in the Consolidated Statement of Operations in revenues from Products.

4 Sales of OM monitoring systems may have multiple elements, including equipment,

installation and monitoring services. OM equipment and related installations do not qualify as a

separate unit of accounting. As a result, revenues (and related costs) associated with sale of

equipment and related installations are recorded to deferred revenue (and deferred charges)

once delivery, installation and customer acceptance is completed. Revenue and related costs

with respect to the sale of equipment and related installations are recognized over the

estimated life of the customer relationship. Such revenues are recorded by OM in the

Consolidated Statement of Operations as Product revenues. Revenues from the prepayment of

monitoring fees (generally paid 12 months in advance) are initially recorded as deferred revenue

upon receipt of payment from the customer and then amortized to revenue over the monitoring

service period. Such revenues are recorded by OM in the Consolidated Statement of Operations

as Service revenues. Revenues from management and consulting, time-and-materials service

contracts, maintenance agreements and other services are recognized as services are provided.

Such revenues are recorded by the Company in the Consolidated Statement of Operations as

Service revenues.

5 Revenue is recognized for Restaurants at the point of sale, other than revenue from the

sale of gift cards, which is deferred and recognized upon redemption. Revenue in the Foods

segment is generally recognized when products are received by our customers. All revenue is

presented net of sales tax collections. We issue gift cards which contain no expiration dates or

inactivity fees. We recognize revenue from gift cards when they are redeemed by the customer.

In addition, we recognize income on unredeemed gift cards (gift card breakage) based on

historical redemption patterns. Gift card breakage is included in net sales in the Consolidated

Statements of Income, and the liability for unredeemed gift cards is included in deferred

revenue on the Consolidated Balance Sheets.

6 Automotive revenue is generated primarily by sales of vehicles, parts and

accessories. Revenue is recorded when all risks and rewards of ownership are transferred to our

customers (generally dealers and distributors). For the majority of our sales, this occurs when

products are shipped from our manufacturing facilities. When vehicles are shipped to customers



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or vehicle modifiers on consignment, revenue is recognized when the vehicle is sold to the

ultimate customer. When we give our dealers the right to return eligible parts for credit, we

reduce the related revenue for expected returns.

We sell vehicles to daily rental car companies subject to guaranteed repurchase options. These

vehicles are accounted for as operating leases. At the time of sale, the proceeds are recorded as

deferred revenue in Accrued liabilities and deferred revenue. The difference between the

proceeds and the guaranteed repurchase amount is recognized in Automotive revenues over an

average term of eight months, using a straight-line method. The cost of the vehicles is recorded

in Net investment in operating leases and the difference between the cost of the vehicle and the

estimated auction value is depreciated in Automotive cost of sales over the term of the

lease. Proceeds from the sale of the vehicle at auction are recognized in Automotive revenues

at the time of sale. At December 31, 2012 and 2011, we recorded $1.5 billion and $1.5 billion as

deferred revenue, respectively.

7 Sales of office furniture and hearth products are generally recognized when title

transfers and the risks and rewards of ownership have passed to customers. Typically title and

risk of ownership transfer when the product is shipped. In certain circumstances, title and risk

of ownership do not transfer until the goods are received by the customer or upon installation

and customer acceptance. Revenue includes freight charged to customers; related costs are

recorded in selling and administrative expense. Rebates, discounts and other marketing

program expenses directly related to the sale are recorded as a reduction to net

sales. Marketing program accruals require the use of management estimates and the

consideration of contractual arrangements subject to interpretation. Customer sales that

achieve or do not achieve certain award levels can affect the amount of such estimates and

actual results could differ from these estimates.

8 The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards

Codification for revenue recognition. The Company will recognize revenue when it is realized or

realizable and earned. The Company considers revenue realized or realizable and earned when

all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the

product has been shipped or the services have been rendered to the customer, (iii) the sales

price is fixed or determinable, and (iv) collectability is reasonably assured.



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Property, Plant and Equipment

Professional Standards Regarding Property, Plant and Equipment (ASC 360-10-50-1 through 3)

1. 50-1 Each of the following matters should be disclosed either on the face of the financial

statement or notes thereto:

A. Depreciation expense for each period presented,

B. Disaggregated balance information for PP&E by the following categories (for each balance

sheet presented)

1) Major class,

2) Nature and/or function

C. Accumulated depreciation -- by either -- major class or total -- for each balance sheet

presented.

D. General description of method(s) used to depreciate -- by major class of assets subject to

depreciation

2. 50-2 Impairment of long-lived assets (to include those assets that are currently held and used

within the reporting entity)

A. A description of the impaired long-lived asset(s)

B. Reason(s) for impaired status,

C. If given other than line-item status -- the amount of the impairment loss, and where the

amount appears within the income statement,

D. When applicable, disclosure of which segment of the reporting entity in which the

impairment appears.

Examples

1 The Company continuously evaluates its real estate portfolio and closes

underproductive stores in the normal course of business as leases expire or as other

circumstances dictate. During 2011, the Company closed one SFA store and two OFF 5TH stores.

The Company incurred $5,065 of store closing costs primarily related to a lease termination fee

and employee severance. Also included in impairment and disposition costs for 2011 is $5,041

of asset impairment charges related to held and used assets. During 2010, the Company

incurred costs associated with the closing of seven SFA stores and one OFF 5TH store. The

Company incurred $12,045 of store closing-related costs associated with these locations. Also

included in impairment and disposition costs for 2010 are $785 of asset impairment charges



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related to held and used assets and $255 of losses on the disposal of assets during the normal

course of business.

2 Property and equipment are stated at historical cost less accumulated depreciation.

Depreciation is computed using the straight-line method over the estimated useful lives of the

assets. Buildings and building improvements are depreciated over 20 to 40 years while fixtures

and equipment are depreciated over 3 to 10 years. Leasehold improvements are amortized over

the shorter of their estimated useful lives or their related lease terms, generally ranging from 10

to 20 years. Lease terms may include renewal periods at the Company's option if exercise of the

option is determined to be reasonably assured at the inception of the lease. Costs incurred for

the development of internal-use computer software are capitalized and amortized using the

straight-line method over 3 to 10 years. Costs incurred during the discovery and post-

implementation stages of internally-developed computer software are expensed as incurred.

Costs incurred when constructing stores, including interest expense, are capitalized. The

Company may receive allowances from landlords related to the construction. If the landlord is

determined to be the primary beneficiary of the property, then the portion of those allowances

attributable to the property owned by the landlord is considered to be a deferred rent liability,

whereas the corresponding capital expenditures related to that store are considered to be

prepaid rent. Allowances in excess of the amounts attributable to the property owned by the

landlord are considered leasehold improvement allowances and are recorded as deferred rent

liabilities that are amortized over the life of the lease. Capital expenditures are reduced when

the Company receives cash and allowances from merchandise vendors to fund the construction

of vendor shops.

Long-lived assets are evaluated for impairment whenever events or changes in circumstances

indicate that the carrying value of such assets may not be recoverable. If the estimated future

undiscounted cash flows resulting from the use and eventual disposition of the store assets are

less than the carrying value of such assets, an impairment loss is recognized for the difference

between the estimated fair value and the carrying value. The evaluation is performed at the

lowest level of identifiable cash flows, which is primarily at the individual store level. Long-lived

asset impairment charges are included in impairments and dispositions on the Consolidated

Statements of Income. Impairment and disposition costs include costs associated with store

closures, including employee severance and lease termination fees, asset impairment and

disposal charges, and other store closure activities. Additionally, impairment and disposition

costs include long-lived asset impairment charges related to assets held and used and losses

related to asset dispositions made during the normal course of business. During 2009, the

Company incurred $28,176 of asset impairment charges related to held and used assets and

$1,172 of losses on the disposal of assets during the normal course of business.

3 Property and equipment are stated at historical cost, which consists of the net book

value of the assets carried on the prior company's books. Depreciation is computed over the



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estimated useful lives of the assets using the straight-line method generally over a 3 to 5-year

period. Leasehold improvements will be amortized on the straight-line method over the life of

the related lease. Expenditures for ordinary maintenance and repairs are charged to expense as

incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are

eliminated from the account and any gain or loss is reflected in the statement of operations.

Depreciation expense for property and equipment is recorded as either cost of goods sold or

general and administrative expense, depending on the use of the assets.

The Company evaluates its long-lived assets for impairment, in accordance with FASB ASC 360-

10, when events or changes in circumstances indicate that the related carrying amount may not

be recoverable. Impairment is considered to exist if the total estimated future cash flow on an

undiscounted basis is less than the carrying amount of the related assets. An impairment loss is

measured and recorded based on the discounted estimated future cash flows. Changes in

significant assumptions underlying future cash flow estimates or fair values of assets may have a

material effect on the Company's financial position and results of operations. No such

impairment to the carrying amount of long-lived assets was indicated at December 31, 2011.

4 Property and equipment are presented at cost at the date of acquisition. Depreciation

and amortization is calculated based on the straight-line method over the estimated useful lives

of the depreciable assets, or in the case of leasehold improvements, the shorter of the lease

term or the estimated useful life of the asset, a portion of which is allocated to cost of

sales. Improvements are capitalized while repairs and maintenance are charged to operations

as incurred.

5 Property, plant and equipment are recorded at cost less accumulated depreciation. The

straight-line depreciation method is used for nearly all capitalized assets, although some assets

purchased prior to fiscal 1995 continue to be depreciated using accelerated methods.

Depreciation is calculated at rates adequate to amortize costs over the estimated useful lives of

buildings and improvements (15 to 25 years) and machinery and equipment (3 to 10 years).

Improvements to leased properties are depreciated over the shorter of their useful lives or the

lease terms. Total depreciation expense was $ 81,301; $ 82,323; and $ 83,095 in fiscal 2012,

fiscal 2011 and fiscal 2010, respectively. We sell real property via like-kind exchanges under

Internal Revenue Code Section 1031 whereby gains are not recognized for federal income tax

purposes. We recognize all such gains for financial reporting purposes in the period the property

is sold. Consolidated results for fiscal 2012, fiscal 2011 and fiscal 2010 include net pretax gains

of $ 365; $ 128 and $ 1,362, respectively, on sale of assets. The gains are classified as a

reduction of selling, general and administrative (S,G&A) expenses in the Consolidated

Statements of Income. We evaluate property, plant and equipment held and used in the

business for impairment whenever events or changes in circumstances indicate that the carrying

amount of a long-lived asset may not be recoverable. Impairment is determined by comparing

the estimated undiscounted future operating cash flows for the asset group to the carrying

amount of its assets. If impairment exists, the amount of impairment is measured as the excess



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of the carrying amount over the estimated discounted future operating cash flows of the asset

and the expected proceeds upon sale of the asset. During fiscal 2012, fiscal 2011 and fiscal

2010, we identified certain operating and closed locations with negative cash flows, declining

net sales performance or other potential indicators of impairment. In fiscal 2012, pretax fixed

asset impairment charges were recorded in the Restaurants $3,199 and $2,327, respectively,

for three underperforming operating locations and five other properties and eight

underperforming operating locations. The impairments in fiscal year 2012 were predominately

locations that had been previously partially impaired. In fiscal 2011, pretax fixed asset

impairment charges were recorded in Restaurants of $1,896 and $13,070 respectively, for three

underperforming Restaurants and eight underperforming locations. In fiscal 2012, a pretax fixed

asset impairment of $87 was recorded in the Foods segment. Also in fiscal 2011, a $1,239 pretax

fixed asset impairment charge was recorded in the Foods segment for the closure of a fresh

sausage operation and a food production facility. In fiscal 2010, a $6,195 pretax fixed asset

impairment charge was recorded for four underperforming Restaurant operating locations and

22 other properties. We did not record any fixed asset impairment charges for other than

Restaurants in fiscal 2010. The fixed asset impairment charges are reflected in S,G&A expenses

in the Consolidated Statements of Income. In accordance with the Property, Plant and

Equipment Topic of the FASB ASC, we wrote down the carrying value of the underlying assets to

their estimated fair value, which resulted in the above impairment charges. The estimated fair

value was determined based on independent appraisals, which we deemed to be Level 3 inputs

under the Fair Value Measurements and Disclosures Topic of the FASB ASC.

6 Property, plant and equipment are carried at cost. Depreciation has been computed

using the straight-line method over estimated useful lives: land improvements, 10 – 20 years;

buildings, 10 – 40 years; and machinery and equipment, 3 – 12 years.

Long-lived assets are reviewed for impairment as events or changes in circumstances occur

indicating the amount of the asset reflected in the Corporation’s balance sheet may not be

recoverable. An estimate of undiscounted cash flows produced by the asset, or the appropriate

group of assets, is compared to the carrying value to determine whether impairment exists. The

estimates of future cash flows involve considerable management judgment and are based upon

assumptions about expected future operating performance. The actual cash flows could differ

from management’s estimates due to changes in business conditions, operating performance

and economic conditions. Asset impairment charges recorded in connection with the

Corporation’s restructuring activities are discussed in Restructuring Related Charges. These

assets included real estate, manufacturing equipment and certain other fixed assets. The

Corporation’s continuous focus on improving the manufacturing process tends to increase the

likelihood of assets being replaced; therefore, the Corporation is regularly evaluating the

expected lives of its equipment and accelerating depreciation where appropriate.



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Consolidation Policies

Professional Standards Regarding Consolidation Policies (ASC 810-10-50-1 through 2)

1. 50-1 Consolidation policies should be disclosed -- either communicated on the face of the

financial statement or a note to the financial statements

2. 50-1A When the consolidated financial statements reflect consolidation of less-than-wholly-

owned subsidiaries, the following additional information should be disclosed for such

subsidiaries

A. Consolidated net income, and when applicable, comprehensive income (appears on the face

of the financial statement -- not to be a footnote disclosure)

B. Net income and comprehensive income attributable to the parent and non-controlling

interest (minority) -- (appears on the face of the financial statement -- not to be a footnote

disclosure)

C. The following subtotals, with respect to the Parent organization, should be disclosed either

on the face of the financial statement or as a footnote disclosure

1) Income from continuing operations,

2) Discontinued operations, and/or

3) Extraordinary items.

D. Reporting entities are to report, either within the equity statement or notes to the financial

statements

1) Reconciliation of the equity accounts of the following, from the beginning to the end of the

reporting period,

a. Total equity -- at the consolidated level,

b. Parent,

c. Non-controlling (minority) interests

2) The level of detail of the reconciliations should disclose the following elements

a. Net income,

b. Transactions with owners -- acting as owners, and

c. Each component, as applicable, of other comprehensive income.

E. Any changes in parent ownership of a consolidated subsidiary should be disclosed in a

footnote.



Page 68 of 329

Examples

1 These consolidated financial statements include the accounts of the Company and its

global subsidiaries; all significant intercompany accounts and transactions have been eliminated.

Our Mexican subsidiary closes one month early to facilitate consolidated reporting.

2 The consolidated financial statements include the accounts of the Parent Company as of

the date the Share Exchange Agreement closed, October 3, 2011, and its wholly-owned

subsidiary, Subsidiary 1. All material intercompany balances and transactions have been

eliminated in consolidation. All financial and related data has been retroactively adjusted in the

accompanying consolidated financial statements and footnotes to reflect the effect of the

recapitalization of Young Aviation and the presentation of consolidated historical financial data.

3 The consolidated financial statements include the accounts of the Company and its

subsidiaries. In these consolidated financial statements, subsidiaries are companies that are

over 50% controlled, the accounts of which are consolidated with those of the Company.

Significant intercompany transactions and balances are eliminated in consolidation; profits from

intercompany sales, are also eliminated; non-controlling interests are included in equity.

4 The consolidated financial statements include the accounts of the Parent Company and

its subsidiaries. Intercompany accounts and transactions have been eliminated. Dollars are in

thousands, except per share amounts.

5 The consolidated financial statements include the accounts and transactions of the

Corporation and its subsidiaries. Intercompany accounts and transactions have been eliminated

in consolidation.



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Inventories

Professional Standards Regarding Inventories (ASC 330-10-50-1 through 6)

1. 50-1 Requires

A. Consistency in application (statement if not followed), and

B. Disclosure of the basis of stating inventories

C. If there has been a change that affects consistency, the nature of the change and effect

(subject to materiality considerations) on income should be provided

2. 50-2 Significant losses arising from the application of lower-of-cost-or-market should be

disclosed -- potentially as a separate line item.

3. 50-3 Inventory stated above cost should be disclosed.

4. Inventory stated as sales price should be disclosed.

5. 50-5 Any losses resulting from firm purchase (inventory) commitments should be disclosed,

and separately presented in the income statement.

6. 50-6 Significant estimates made in development of amounts for inventory should be

disclosed.

Examples

1 Inventories are valued at the lower of cost or market. Cost of approximately 44% of

inventories at March 31, 2012 (46% at March 31, 2011) has been determined using the LIFO

(last-in, first-out) method. Costs of other inventories have been determined using the FIFO (first-

in, first-out) or average cost method. FIFO cost approximates replacement cost. Costs in

inventory include components for direct labor and overhead costs.

2 Merchandise inventories are stated at the lower of cost or market. Cost is determined

using the retail first-in, first-out (FIFO) method and includes freight, buying and distribution

costs. The Company takes markdowns related to slow moving inventory, ensuring the

appropriate inventory valuation.

The Company regularly records a provision for estimated shrinkage, thereby reducing the

carrying value of merchandise inventory. A complete physical inventory of all of the Company's

stores and distribution facilities is performed annually, with the recorded amount of

merchandise inventory being adjusted to coincide with this physical count. The differences

between the estimated amount of shrinkage and the actual amount realized have been

insignificant.



Page 70 of 329

The Company receives vendor-provided support in different forms. When the vendor provides

support for inventory markdowns, the Company records the support as a reduction to cost of

sales. Such support is recorded in the period that the corresponding markdowns are taken.

When the Company receives inventory-related support that is not designated for markdowns,

the Company includes this support as a reduction of the cost of purchases.

Consignment merchandise on hand of $93,897 and $109,877 as of January 28, 2012 and January

29, 2011, respectively, is not reflected on the Consolidated Balance Sheets.

3 Inventories are comprised of components (raw materials), work-in-process and finished

goods, which are measured at the lower of cost or market.

Raw materials inventory is generally comprised of: electrical components, circuit boards,

mechanical fasteners, and housings. Work-in-process inventory is primarily comprised of units

that have commenced with assembly as well as capitalized labor and overhead. Finished Goods

inventory consists of fully assembled units ready for final shipment to the customer. Costs are

determined at cost of acquisition on a weighted average basis and include all outside production

and shipping costs.

All inventories are periodically reviewed for impairment due for slow-moving and obsolete

inventory. No impairment was recorded in 2010 or 2011. In 2012 we recorded an inventory

impairment charge of $357 of which $349 was in our GS segment and is included in Cost of Sales

- Products. There was no reserve for inventory recorded as of December 31, 2011. At December

31, 2012, the Company's inventory reserve was $316.

4 We value inventories at the lower of first-in, first-out cost or market. Inventory includes

raw materials and supplies ($15,159 in fiscal 2012 and $ 16,545 in fiscal 2011) and finished

goods ($8,229 in fiscal 2012 and $ 6,981 in fiscal 2011).

5 The Corporation valued 70%, 67% and 77% of its inventory by the LIFO method at

December 29, 2012, December 31, 2011 and January 1, 2011, respectively. During 2012 and

2010, inventory quantities were reduced at certain reporting units. This reduction resulted in a

liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as

compared with the cost of current year purchases, the effect of which decreased cost of goods

sold by approximately $0.8 million and $1.5 million in 2012 and 2010, respectively. If the FIFO

method had been in use, inventories would have been $25.5 million, $25.9 million and $23.8

million higher than reported at December 29, 2012, December 31, 2011 and January 1, 2011,

respectively.



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Nature of Operations

Professional Standards Regarding Nature of Operations (ASC 275-10-50-2)

50-2 All reporting entities should disclose the following matters, as applicable, regarding the

nature of their operations;

1. Major products and/or services,

2. Principal markets,

3. Location(s) of markets,

4. Relative significance of operations/services in reporting entities that provide multiple

products/services,

5. Not-for-Profit reporting entities should disclose the services performed, and significant

revenue sources

6. Disclosures need not be quantified.

Examples

1 The Company was incorporated under the laws of the State of Nevada, U.S. on

September 25, 2008. The Company is in the development stage as defined under Financial

Accounting Standards Board Accounting Standards Codification (FASB ASC 915-205)

Development-Stage Entities and it was formerly set up to design and construct eco-friendly

self- assembly housing and storage structures. The Company intended to build

a product that will be well suited to a more environmentally conscious market looking for

affordable quality housing and storage that can be put together easily and quickly. Initially the

target market will be the resort and cabin markets of Europe and North America. On October 7,

2011, the Company acquired certain patents and intellectual property relating to dental health

and care, and changed its operating name to another name.

2 Through April 16, 2002, the Associates owned the tenant’s interest in a master

operating leasehold (the Master Lease) on the Building, located at XXXX Fifth Avenue, New York,

New York. On April 17, 2002 Associates acquired, through a wholly-owned limited liability

company, the fee title to the Building and to the land thereunder (the Land), (together, the Real

Estate). Associates subleases the property to the Building Company L.L.C. (Sub lessee).

3 The Company, founded in 2004, is currently a diversified broker and supplier of parts,

components and products to the general aviation and aerospace markets of the U.S., Europe

and Asia. General aviation is defined as all aviation other than military and scheduled

commercial airlines. Over 20% of our sales revenue has been derived from international sales

for the period from January 1, 2009 to date.



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The Company services a broad range of clients such as aircraft leasing companies, major airlines,

repair stations, fixed-base operators, leasing companies and after -market suppliers.

4 As of April 27, 2012, the Company and its subsidiaries owned and operated 710 full-

service restaurants in 24 states. The Company's Restaurants are primarily located in the

Midwest, mid-Atlantic and Southeast regions of the United States. Our subsidiary's properties

are primarily in California and other western states. We also produce and distribute pork

sausage products and a variety of complementary home-style convenience food items under the

Company's brand names. These food products are distributed primarily to warehouses that

distribute to grocery stores throughout the United States.

5 The Corporation is a provider of office furniture and hearth products. Both industries

are reportable segments; however, the Corporation’s office furniture business is its principal line

of business. Refer to Operating Segment Information for further information. Office furniture

products are sold through a national system of dealers, wholesalers and national office product

distributors and directly to end-user customers and federal and state governments. Dealers and

wholesalers are the major channels based on sales. Hearth products include a full array of gas,

electric, and wood burning fireplaces, inserts, stoves, facings and accessories. These products

are sold through a national system of dealers and distributors, as well as Corporation-owned

distribution and retail outlets. The Corporation’s products are marketed predominantly in the

United States and Canada. The Corporation exports select products to a limited number of

markets outside North America, principally Latin America and the Caribbean, through its export

subsidiary and manufactures and markets office furniture in Asia and India; however, based on

sales, these activities are not significant.



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Accounts Receivable

Professional Standards Regarding Accounts Receivable (ASC 310-10-50-1 through 14) Note:

Guidance provided is restricted, primarily, to trade and financing receivables -- this section is

much broader in coverage.

1. 50-3 The following matters, as applicable, must appear in the Summary of Significant

Accounting Policies;

A. Basis for accounting for loans, as well as, trade receivables,

B. How lower-of-cost-or-market considerations apply to non-mortgage loans that are held for

sale,

C. Classification and method of accounting for accounts receivable that can be settled in a

manner whereby the maker (reporting entity) would not recover substantially all of its recorded

investment in such receivable(s),

D. The method used to recognize interest income on receivables for which interest accrues.

2. 50-3 If there is more than one significant category of receivables, accounts receivable by

category -- either on the face of the balance sheet or notes thereto.

3. 50-4 The allowance for doubtful accounts should appear on the face of the financial

statements, and 50-14, the valuation allowance should be netted on the face of the balance

sheet

4. 50-4A -- For all trade receivables (other than credit card), reporting entities should disclose

their policy for writing off short-term receivables that arose from the sale of goods and/or

services (trade)

5. 50-5 The amount of any receivables that have been pledged as collateral, as well as the

amount of related debt

6. 50-6 (Partial) The entity's policy for determining that accounts receivable are past

due/delinquent

Examples

1 The Company's accounts receivable are unsecured and the Company is at risk to the

extent such amounts become uncollectible. Management continually monitors accounts

receivable balances and provides for an allowance for doubtful accounts at the time collection

becomes questionable based on payment history or age of the receivable. The Company sells



Page 74 of 329

products and services and generally factors the receivable amount on terms of immediately

receiving 80% of the invoice amount from the factor upon shipment and the remaining 20%

upon collection by the factor from the customer. The Company is charged financing fees on late

payments and a nominal factoring fee by the factor. Accounts receivable are charged to the

allowance for bad debts when the Company has exhausted all reasonable means of collection.

At December 31, 2011, management deemed that certain accounts receivable may not be fully

collectible and that a bad debt reserve in the amount of $2,050 was required.

2 Accounts receivable consists of trade receivables. Trade receivables are recorded at the

invoiced amount.

3 Trade receivables, recorded on our consolidated balance sheet in Other receivables, net,

consist primarily of Automotive sector receivables for vehicles, parts, and accessories. Trade

receivables initially are recorded at the transaction amount. We record an allowance for

doubtful accounts representing our estimate of the probable losses inherent in trade

receivables. At every reporting period, we assess the adequacy of our allowance for doubtful

accounts taking into consideration recoveries received during that period. Additions to the

allowance for doubtful accounts are made by recording charges to bad debt expense reported in

Automotive cost of sales. Receivables are charged to the allowance for doubtful accounts when

an account is deemed to be uncollectible.

4 Accounts receivable are presented net of allowance for doubtful accounts of $5.2

million, $4.8 million and $5.5 million, for 2012, 2011 and 2010, respectively. The allowance is

developed based on several factors including overall customer credit quality, historical write-off

experience, and specific account analyses projecting the ultimate collectability of the

account. As such, these factors may change over time causing the reserve level to adjust

accordingly.



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Asset Impairment

Professional Standards Regarding Asset Impairment -- As indicated, below

1. Long-lived assets -- ASC 360-10-50-1 through 3 -- The following items are the minimum

disclosure matters when an impairment of a long-lived asset that is currently held and used by a

reporting entity occurs

A. A description of the impaired asset,

B. Circumstances that led to the presumed impairment,

C. If the impairment loss is not a line item in the income statement, the amount of the loss and

the line item in which it appears,

D. How fair value was determined, and

E. When applicable, the segment in which the impaired asset appears.

2. Goodwill Impairment -- 350-20-50-2 -- Following are the minimum disclosures required when

it has been determined that there is an impairment related to goodwill

A. Facts and/or circumstances that indicate that an impairment has occurred,

B. Amount of the impairment loss,

C. The manner by which fair value was determined, and

D. When an estimate of the impairment loss has yet to be finalized, a statement that the

impairment loss has not been finalized, and the reasons for the delay

3. Intangible assets other than goodwill -- 320-30-50-3 -- When an impairment of an intangible

asset, other than goodwill, is identified the following disclosures are to be made by the

reporting entity

A. Description of the impaired asset,

B. Facts and/or circumstances resulting in the impairment,

C. Amount of the impairment loss,

D. Method of estimating fair value,

E. If the impairment loss does not appear as a line item in the income statement, the amount

and line where such loss appears in the income statement,

F. When applicable, the segment in which the impaired asset appears.



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Examples

1 Long-lived assets including certain intangible assets are reviewed for impairment

whenever events or changes in circumstances indicate that the carrying amount of an asset may

not be recoverable. Recoverability of assets to be held and used is measured by a comparison

of the carrying amount of an asset to the undiscounted future net cash flows expected to be

generated by the asset. If the carrying amount of an asset exceeds its estimated future

undiscounted cash flows, an impairment charge is recognized by the amount by which the

carrying amount of the asset exceeds the fair value of the asset. No such events occurred in any

of the years ending December 31, 2010, 2011 or 2012.

2 The Company evaluates its long-lived assets for impairment, in accordance with FASB

ASC 360-10, when events or changes in circumstances indicate that the related carrying amount

may not be recoverable. Impairment is considered to exist if the total estimated future cash

flow on an undiscounted basis is less than the carrying amount of the related assets. An

impairment loss is measured and recorded based on the discounted estimated future cash

flows. Changes in significant assumptions underlying future cash flow estimates or fair values of

assets may have a material effect on the Company's financial position and results of operations.

No such impairment to

3 Impairment and disposition costs include costs associated with store closures, including

employee severance and lease termination fees, asset impairment and disposal charges, and

other store closure activities. Additionally, impairment and disposition costs include long-lived

asset impairment charges related to assets held and used and losses related to asset

dispositions made during the normal course of business.

The Company continuously evaluates its real estate portfolio and closes underproductive stores

in the normal course of business as leases expire or as other circumstances dictate. During 2011,

the Company closed one ON store and two OFF stores. The Company incurred $5,065 of store

closing costs primarily related to a lease termination fee and employee severance. Also included

in impairment and disposition costs for 2011 is $5,041 of asset impairment charges related to

held and used assets.

During 2010, the Company incurred costs associated with the closing of seven ON stores and

one OFF store. The Company incurred $12,045 of store closing-related costs associated with

these locations. Also included in impairment and disposition costs for 2010 are $785 of asset

impairment charges related to held and used assets and $255 of losses on the disposal of assets

during the normal course of business.

During 2009, the Company incurred $28,176 of asset impairment charges related to held and

used assets and $1,172 of losses on the disposal of assets during the normal course of business.

4 The Company assesses impairment of its long-lived assets in accordance with the

provisions of ASC Topic 360 Property, Plant, and Equipment. This statement requires long-lived



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assets, such as property and equipment and purchased intangibles subject to amortization to be

reviewed for impairment whenever events or changes in circumstances indicate that the

carrying amount of an asset group may not be recoverable. Recoverability of assets to be held

and used is measured by a comparison of the carrying amount of an asset group to estimated

undiscounted future cash flows expected to be generated by the asset group. If the carrying

amount of an asset group exceeds its estimated future cash flows, an impairment charge is

recognized equal to the amount by which the carrying amount of the asset group exceeds the

fair value of the asset group.

In assessing long-lived assets for an impairment loss, assets are grouped with other assets and

liabilities at the lowest level for which identifiable cash flows are largely independent of the cash

flows of other assets and liabilities. Asset grouping requires a significant amount of judgment.

Accordingly, facts and circumstances will influence how asset groups are determined for

impairment testing. In assessing long-lived assets for impairment, management considered the

Company's product line portfolio, customers and related commercial agreements, labor

agreements and other factors in grouping assets and liabilities at the lowest level for which

identifiable cash flows are independent. The Company considers projected future undiscounted

cash flows, trends and other factors in its assessment of whether impairment conditions exist.

While the Company believes that its estimates of future cash flows are reasonable, different

assumptions regarding such factors as future production volumes, customer pricing, economics

and productivity and cost initiatives, could significantly affect its estimates. In determining fair

value of long-lived assets, management uses management estimates, discounted cash flow

calculations, and appraisals where necessary.



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Basis of Presentation

Professional Standards Regarding Basis of Presentation -- There does not appear to be any

specific professional standard requiring the disclosure of the basis of presentation. However,

this disclosure appears in approximately 40 to 50 percent of the reporting entities reviewed for

this session.

Examples

1 The financial statements of the Company have been prepared in accordance with

accounting principles generally accepted in the United States (US GAAP) and are expressed in

U.S. dollars. The Company’s fiscal year end is August 31.

2 The accompanying consolidated financial statements include the accounts of the

Company and its subsidiaries. All intercompany accounts and transactions have been eliminated

in consolidation.

3 The accompanying financial statements have been prepared in accordance with

accounting principles generally accepted in the United States of America for complete financial

statements.

4 The Company’s financial statements have been prepared in accordance with accounting

principles generally accepted in the United States of America (U.S. GAAP).



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Fair Value Measurement

Professional Standards Regarding Fair Value Measurement -- 820-10-50-1 through 10, 825-10-

50-2 through 19 (optional for non-public entities -- details of disclosures not included in this

discussion) -- Note: Examples do not include tabular required disclosure

1. 820-10-50 Fair Value Measurement -- General

A. 50-1 Reporting entities should disclose information regarding fair value in each of the

following two circumstances:

1) Assets and/or liabilities measured at fair value on a recurring basis -- Both the techniques

and inputs used in development of the estimate, and

2) For fair value estimates dealing with level 3 (unobservable) inputs -- the effect of the

measurement on earnings for the reporting period.

B. In meeting the above disclosure requirement, the disclosure should be sufficient to address

the following areas of user concern:

1) An appropriate level of detail for the intended use of the financial statements,

2) Appropriate emphasis on disclosure elements,

3) Appropriate level of summarization, and

4) Generic need to prevent the financial statement disclosure(s) from being misleading

C. 50-2 Disclosure of fair value information should include reconciliations, by class/category of

asset or liability, at the following level of detail:

1) Fair value a the reporting date,

2) The level of the fair value hierarchy (see examples, below) that the asset/liability attaches

to,

3) Significant transfers between levels one and two,

4) For assets/liabilities whose fair value was determined through the use of unobservable

inputs, a reconciliation of the beginning and ending balance, to include the following as

applicable

a. Gains and losses for the period -- split between those appearing in the calculation of net

income and comprehensive income

b. Purchases, sales, issuances, and/or settlements,

c. Transfers in and out of the level three category,



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e. Gains and/or losses included in income resulting from changes in unrealized gains and/or

losses during the reporting period (and where such amounts appear within the income

statement.

f. For all significant assets/liabilities whose inputs are derived from either level two or level

three -- a description of the valuation technique used (market approach, income approach, cost

approach)

D. 50-3 There is additional disclosure guidance for derivative assets and/or liabilities, which

includes:

1) Fair value disclosure related to levels 1 through 3 are to be made on a gross basis, while

2) Reconciliations that involve transfers to/from level three may be prepared either on a gross

or net basis.

E. 50-5 For those assets and/or liabilities measured at fair value on a non-recurring basis, the

following disclosures should be made:

1) Fair value measurement amount,

2) Reason for the (re) measurement,

3) The level of the fair value hierarchy (see examples, below) that the asset/liability attaches

to, and

4) Other disclosure requirements attendant to the level of the inputs used in determining the

fair value

F. 50-7 A change in valuation technique and/or method of application is not a change in

accounting estimate, as used in ASC Section 250

G. 50-8 Quantitative disclosures regarding fair value should by made in tabular (table) form.

2. 825-10-50-1 through 19 -- this is guidance on fair value relating to financial instruments that

is mandatory for public reporting entities, but is optional for non-public reporting entities -- No

further specific guidance will be presented in this seminar.



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Examples

1 Fair value is the price that would be received to sell an asset or paid to transfer a liability

in an orderly transaction between market participants at the measurement date (i.e., exit price)

in the principal and most advantageous market for the asset or liability. Assets and liabilities are

classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to

measure fair value into three levels:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by

market data

Level 3: Unobservable inputs reflecting the reporting entity's own assumptions

As of January 28, 2012 and January 29, 2011, the Company had no financial assets or liabilities

measured at fair value on a recurring basis.

Assets and liabilities that are measured at fair value on a non-recurring basis include the

Company's long-lived assets. During 2011, long-lived assets held and used with a carrying value

of $7,533 were written down to their estimated fair value of $2,492, resulting in an impairment

loss of $5,041. During 2010, long-lived assets held and used with a carrying value of $785 were

written down to their estimated fair value of $0, resulting in an impairment loss of $785. The fair

values of long-lived assets held and used were determined using an income-based approach and

are classified as Level 3 within the fair value hierarchy. Significant inputs include projections of

future cash flows and discount rates. These inputs are based on assumptions from the

perspective of market participants.

The fair value of cash and cash equivalents, accounts payable and accrued liabilities

approximates carrying value due to the short-term maturities of these assets and liabilities. See

Note X for disclosure of the fair value of long-term debt.

2 ASC 825-10, formerly Statement of Financial Accounting Standards No. 107, Disclosures

about Fair Value of Financial Instruments, requires disclosures of information about the fair

value of certain financial instruments for which it is practicable to estimate the value. For

purpose of this disclosure, the fair value of a financial instrument is the amount at which the

instrument could be exchanged in a current transaction between willing parties, other than in a

forced sale or liquidation.

At December 31, 2011 the fair value of current liabilities approximated book value.

3 The Company follows the provisions of the accounting standard which defines fair value,

establishes a framework for measuring fair value and enhances fair value measurement

disclosure. Under these provisions, fair value is defined as the price that would be received to



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sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between

market participants at the measurement date.

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the

use of observable inputs and minimizes the use on unobservable inputs by requiring that the

most observable inputs be used when available. Observable inputs are inputs that market

participants would use in pricing the asset or liability developed based on market data obtained

from sources independent of the Company. Unobservable inputs are inputs that reflect the

Company’s assumptions about the assumptions market participants would use in pricing the

asset or liability developed based on the best information available in the circumstances. The

hierarchy is described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement

date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but

corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value

hierarchy gives the lowest priority to Level 3 inputs.

4 Cash equivalents, marketable securities, and derivative financial instruments are

presented in our financial statements on a recurring basis at fair value, while other assets and

liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset

impairment. In measuring fair value, we use various valuation methodologies and prioritize the

use of observable inputs. The use of observable and unobservable inputs and their significance

in measuring fair value are reflected in our fair value hierarchy assessment.

Level 1 - inputs include quoted prices for identical instruments and are the most observable

Level 2 - inputs include quoted prices for similar instruments and observable inputs such as

interest rates, currency exchange rates, and yield curves

Level 3 - inputs include data not observable in the market and reflect management judgment

about the assumptions market participants would use in pricing the instruments

We review the inputs to the fair value measurements to ensure they are appropriately

categorized within the fair value hierarchy. Transfers into and transfers out of the hierarchy

levels are recognized as if they had taken place at the end of the reporting period.

Cash and Cash Equivalents. Included in Cash and cash equivalents are highly liquid investments

that are readily convertible to known amounts of cash, and which are subject to an insignificant

risk of change in value due to interest rate, quoted price, or penalty on withdrawal. A debt

security is classified as a cash equivalent if it meets these criteria and if it has a remaining time

to maturity of 90 days or less from the date of acquisition. Amounts on deposit and available



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upon demand, or negotiated to provide for daily liquidity without penalty, are classified as Cash

and cash equivalents. Time deposits, certificates of deposit, and money market accounts that

meet the above criteria are reported at par value on our balance sheet and are excluded from

the tables below.

Marketable Securities. Investments in securities with a maturity date greater than 90 days at the

date of purchase and other securities for which there is more than an insignificant risk of change

in value due to interest rate, quoted price, or penalty on withdrawal are classified as Marketable

securities. We generally measure fair value using prices obtained from pricing services. Pricing

methodologies and inputs to valuation models used by the pricing services depend on the

security type (i.e., asset class). Where possible, fair values are generated using market inputs

including quoted prices (the closing price in an exchange market), bid prices (the price at which

a buyer stands ready to purchase), and other market information. For fixed income securities

that are not actively traded, the pricing services use alternative methods to determine fair value

for the securities, including: quotes for similar fixed-income securities, matrix pricing,

discounted cash flow using benchmark curves, or other factors to determine fair value. In

certain cases, when market data are not available, we may use broker quotes to determine fair

value.

A review is performed on the security prices received from our pricing services, which includes

discussion and analysis of the inputs used by the pricing services to value our securities. We also

compare the price of certain securities sold close to the quarter-end to the price of the same

security at the balance sheet date to ensure the reported fair value is reasonable.

Derivative Financial Instruments. Our derivatives are over-the-counter customized derivative

transactions and are not exchange traded. We estimate the fair value of these instruments using

industry-standard valuation models such as a discounted cash flow. These models project future

cash flows and discount the future amounts to a present value using market-based expectations

for interest rates, foreign exchange rates, commodity prices, and the contractual terms of the

derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g.,

LIBOR) plus an adjustment for non-performance risk. The adjustment reflects the full credit

default swap (CDS) spread applied to a net exposure, by counterparty, considering the master

netting agreements and posted collateral. We use our counterparty's CDS spread when we are

in a net asset position and our own CDS spread when we are in a net liability position. In certain

cases, market data are not available and we use broker quotes and models (e.g., Black Scholes)

to determine fair value. This includes situations where there is illiquidity for a particular

currency or commodity or for longer-dated instruments.

Finance Receivables. We measure finance receivables at fair value for purposes of disclosure

(see Note 7) using internal valuation models. These models project future cash flows of

financing contracts based on scheduled contract payments (including principal and interest). The

projected cash flows are discounted to present value based on assumptions regarding credit



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losses, pre-payment speed, and applicable spreads to approximate current rates. Our

assumptions regarding pre-payment speed and credit losses are based on historical

performance. The fair value of finance receivables is categorized within Level 3 of the hierarchy.

On a nonrecurring basis, when retail contracts are greater than 120 days past due or deemed to

be uncollectible, or if individual dealer loans are probable of foreclosure, we use the fair value of

collateral, adjusted for estimated costs to sell, to determine the fair value adjustment to our

receivables. The collateral for retail receivables is the vehicle financed, and for dealer loans is

real estate or other property.

The fair value measurements for retail receivables are based on the number of contracts

multiplied by the loss severity and the probability of default (POD) percentage, or the

outstanding receivable balances multiplied by the average recovery value (ARV) percentage to

determine the fair value adjustment.

The fair value measurements for dealer loans are based on an assessment of the estimated fair

value of collateral. The assessment is performed by reviewing various appraisals, which include

total adjusted appraised value of land and improvements, alternate use appraised value,

broker's opinion of value, and purchase offers. The fair value adjustment is determined by

comparing the net carrying value of the dealer loan and the estimated fair value of collateral.

Debt. We measure debt at fair value for purposes of disclosure (see Note 17) using quoted

prices for our own debt with approximately the same remaining maturities, where possible.

Where quoted prices are not available, we estimate fair value using discounted cash flows and

market-based expectations for interest rates, credit risk, and the contractual terms of the debt

instruments. For certain short-term debt with an original maturity date of one year or less, we

assume that book value is a reasonable approximation of the debt's fair value. The fair value of

debt is categorized within Level 2 of the hierarchy.



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Financial Instruments

Professional Standards Regarding Financial Instruments -- 825-10-50-2 through 10, 825-10-50-1

through 19 (optional for non-public entities -- details of disclosures not included in this

discussion), 825-10-50-20 through 22 -- Concentrations of credit risk, 825-10-50-23 -- Market

risk of all financial instruments, and 825-10-50-28 through 32 -- Fair value option

825-10-50-20 et seq -- Concentrations of credit risk should include the following disclosures for

each type of concentration:

1. Information about the nature of the concentration (activity, geography, economic

characteristic, customer type)

2. Maximum amount of loss as if counterparty failed to perform,

3. Matters related to any collateral attendant to the affected financial instrument, and

4. Policies regarding master netting arrangements, if any.

825-10-50-23 Disclosures regarding the existence of Market risk (encouraged, but not required)

should address the following matters:

1. Details regarding instruments subject to market risk,

2. Hypothetical effects on income (net and comprehensive),

3. Gap analysis regarding relevant interest rates,

4. Life of the affected financial instruments, and

5. The reporting entity's value at risk at the end of the reporting period, as well as the average

value at risk during the reporting period.

825-10-50-28 through 30 -- Regarding assets and/or liabilities for which the reporting entity has

opted for the fair value option, the following disclosures should be made:

1. Managements reason(s) for opting for fair value,

2. If the option is used for some items, but not all, in a similar grouping -- the reason for the

selectivity,



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3. For each line item on the position statement that includes items resulting from the fair value

option:

A. Information that relates the line item to the class of asset and/or liability presented at fair

value, and

B. Aggregate carrying amount of items in a particular line that are not eligible for fair value

presentation.

4. The difference between fair value and contractual principal amounts of loans receivable,

long-term receivables, and long-term debt instruments,

5. Regarding loans held a assets, disclosure is required regarding past due (90 days)

instruments, and

6. Disclosures are required for investments that would have been presented using the equity

method, if the fair value option had not been used.

825-10-50-30 Fair value option income statement-related disclosures

1. For each affected line item within an income statement, the amounts of gains and/or losses

included in the line item related to fair value,

2. Disclosure of how interest and/or dividends are measured, and where they appear within

the income statement

3. For loans and other receivables (assets)

A. Amount of gains or losses included attributable to changes in credit risk, and

B. How the amount of gains and/or losses was determined

4. For those liabilities that have been significantly affected by credit risk

A. Estimated gains/losses as a result of the change in credit risk,

B. Qualitative inputs considered in determining change in credit risk, and

C. The method of determination of credit risk gains and/or losses.

825-10-50-31 -- Other Fair Value option disclosures -- In annual financial statements -- methods

and/or assumptions that underpin fair value estimate.



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Examples - Fair value of financial instruments (required for Public reporting entities only)

1 Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to

maximize the use of observable inputs and minimize the use of unobservable inputs when

measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of

independent, objective evidence surrounding the inputs used to measure fair value. A financial

instrument’s categorization within the fair value hierarchy is based upon the lowest level of

input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three

levels that may be used to measure fair value:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for

identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are

observable for the asset or liability such as quoted prices for similar assets or liabilities in active

markets; quoted prices for identical assets or liabilities in markets with insufficient volume or

infrequent transactions (less active markets); or model-derived valuations in which significant

inputs are observable or can be derived principally from, or corroborated by, observable market

data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation

methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company’s financial instruments consist principally of cash, and accounts payable, and

amounts due to related parties. Pursuant to ASC 820, the fair value of our cash is determined

based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. We

believe that the recorded values of all of our other financial instruments approximate their

current fair values because of their nature and respective maturity dates or durations.

2 The carrying value of the Company's current assets and current liabilities approximate

their fair values based upon the relatively short maturity of those instruments.

3 The fair values of our financial instruments (other than long-term debt) approximate

their carrying values at April 27, 2012, and April 29, 2011. At April 27, 2012, the estimated fair

value of our long-term debt approximated 142,025 compared to a carrying amount of 135,716.

At April 29, 2011, the estimated fair value of our long-term debt approximated 160,466

compared to a carrying amount of 149,287. We estimate the fair value of our long-term debt

based on the current interest rates offered for debt of the same maturities. We do not use

derivative financial instruments for speculative purposes.

4 The Company follows paragraph 820-10-35-37 of the FASB Accounting Standards

Codification (Paragraph 820-10-35-37) to measure the fair value of its financial instruments and

paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about

fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for



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measuring fair value in accounting principles generally accepted in the United States of America

(U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency

and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37

establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to

measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined

by Paragraph 820-10-35-37 are described below:

Level 1 -- Quoted market prices available in active markets for identical assets or liabilities as of

the reporting date.

Level 2 -- Pricing inputs other than quoted prices in active markets included in Level 1, which are

either directly or indirectly observable as of the reporting date.

Level 3 -- Pricing inputs that are generally observable inputs and not corroborated by market

data. Financial assets are considered Level 3 when their fair values are determined using pricing

models, discounted cash flow methodologies or similar techniques and at least one significant

model assumption or input is unobservable.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active

markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the

inputs used to measure the financial assets and liabilities fall within more than one level

described above, the categorization is based on the lowest level input that is significant to the

fair value measurement of the instrument. The carrying amounts of the Company’s financial

assets and liabilities, such as accrued expenses approximate their fair values because of the

short maturity of these instruments.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length

basis, as the requisite conditions of competitive, free-market dealings may not exist.

Representations about transactions with related parties, if made, shall not imply that the related

party transactions were consummated on terms equivalent to those that prevail in arm's-length

transactions unless such representations can be substantiated. It is not, however, practical to

determine the fair value of advances from stockholders due to their related party nature.

Examples -- Concentrations of Credit Risk

5 Credit risk represents the accounting loss that would be recognized at the reporting

date if counterparties failed completely to perform as contracted. Concentrations of credit risk

(whether on or off balance sheet) that arise from financial instruments exist for groups of

customers or counterparties when they have similar economic characteristics that would cause

their ability to meet contractual obligations to be similarly affected by changes in economic or

other conditions.

The Company has a diverse customer base, but is currently dependent on four customers. Over

the past three years, one of the four customers has accounted for approximately 66% of the



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Company's sales revenue and the additional three customers have accounted for approximately

23% of the sales revenue during the same timeframe. A loss of the largest major customer could

result in a material adverse effect on our business, results of operations and financial condition.

6 Financial instruments, which potentially subject the Company to concentrations of

credit risk, consist principally of cash and cash equivalents, restricted deposits and accounts

receivable. The Company’s cash, cash equivalents and restricted cash deposits were deposited

with U.S., Israeli and Australian banks and other financial institutions and amounted to $26,961

at December 31, 2012. The Company uses major banks and brokerage firms to invest its excess

cash, primarily in money market funds. The counterparty to the Company's restricted deposits

are two major Israeli banks. The Company does not believe there is significant risk of non-

performance by these counterparties. Related credit risk would result from a default by the

financial institutions or issuers of investments to the extent of the recorded carrying value of

these assets. Approximately 37% of the accounts receivable at December 31, 2012, was due

from one customer who pays their receivables over usual credit periods (as to revenues from

significant customers – see Note 20(d)). Credit risk with respect to the balance of trade

receivables is generally diversified due to the number of entities comprising the Company’s

customer base. Approximately 70% of the balance in unbilled revenue at December 31, 2012

was due from two customers that when billed, pay their trade receivables over usual credit

periods. Credit risk with respect to the balance of unbilled revenue is generally diversified due

to the number of entities comprising our customer base.

7 We maintain cash depository accounts with major banks and invest in high-quality

short-term liquid instruments. Such investments are made only in instruments issued or

enhanced by high-quality institutions. These investments mature within three months and we

have not incurred any related losses.



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Goodwill

Professional Standards Regarding Goodwill -- 350-20-50-1 through 2

350-20-50-1 -- When goodwill is presented in a statement of financial position, the following

disclosures, as applicable, should be made:

1. Gross amount of goodwill and, if applicable, accumulated impairment loss,

2. Additional goodwill recognized during the period,

3. Adjustments resulting from subsequent recognition of deferred tax assets,

4. Goodwill included in a group of assets designated for disposal,

5. Impairment losses recognized during the reporting period,

6. Exchange differences,

7. Other changes in carrying amounts, and

8. Gross and accumulated impairment losses at the end of the reporting period.

350-20-50-2 -- In each period in which a goodwill impairment arises, the following matters

should be disclosed:

1. Facts and/or circumstances leading to recognition of an impairment,

2. Amount of the impairment loss,

3. Method(s) employed in determining fair value,

4. When the estimated impairment loss has not been finalized, this fact should be disclosed as

well as disclosure of the reason for the incomplete estimate.

Examples

1 Goodwill is not amortized but is tested for impairment at least annually, in accordance

with the provisions of ASC Topic 350-20-35-1. Goodwill impairment is deemed to exist if the net

book value of a reporting unit exceeds its estimated fair value. The fair value of a reporting unit

is determined using a discounted cash flow methodology. The Company's reporting units are

determined based upon whether discrete financial information is available and reviewed

regularly, whether those units constitute a business, and the extent of economic similarities

between those reporting units for purposes of aggregation. The Company's reporting units

identified under ASC Topic 350-20-35-33 are at the component level, or one level below the

reporting segment level as defined under ASC Topic 280-10-50-10 Segment Reporting –

Disclosure. The Company's one segment is subdivided into four reporting units.



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When the Company evaluates the potential for goodwill impairment, it assesses a range of

qualitative factors including, but not limited to, macroeconomic conditions, industry conditions,

the competitive environment, changes in the market for its products and services, regulatory

and political developments, entity specific factors such as strategy and changes in key personnel

and overall financial performance. If, after completing this assessment, it is determined that it is

more likely than not that the fair value of a reporting unit is less than its carrying value, the

Company proceeds to a two-step impairment test.

The Company performed its qualitative assessment during the fourth quarter and determined

that it was not more likely than not that the fair value of each of its reporting units was less than

that its applicable carrying value. Accordingly, the Company did not perform the two-step

goodwill impairment test for any of its reporting units. See Note 9 for further discussion of

goodwill and intangible assets.

2 Goodwill and intangible assets determined to have an indefinite useful life are not

amortized, but instead are tested for impairment at least annually. Intangible assets that have

finite useful lives (e.g. purchased technology), are recorded at fair value at the time of the

acquisition, and are carried at such value less accumulated amortization. The Company

amortizes these intangible assets on a straight-line basis over their estimated useful lives, a

portion of which is allocated to cost of sales. Intangible assets are reviewed for impairment in

accordance applicable accounting principles.

Application of the goodwill impairment test requires judgment, including the identification of

reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to

reporting units, and determination of the fair value of each reporting unit. The Company has

identified its operating segments as its reporting units for purposes of the impairment test. The

Company’s existing goodwill and intangible assets are associated with its Energy & Security

Sonar Solutions, GridSense, Power Generation, USSI and Other segments.

In September 2011, the Financial Accounting Standards Board (FASB) issued guidance that

simplified how entities test for goodwill impairment. This guidance permits entities to first

assess qualitative factors to determine whether it is more likely than not that the fair value of a

reporting unit is less than its carrying amount as a basis for determining whether it is necessary

to perform a two-step goodwill impairment test. This guidance is effective for annual and

interim goodwill impairment tests performed for fiscal years beginning after December 15,

2011, and early adoption is permitted. As discussed more fully in Note 11(a) to the Consolidated

Financial Statements, the Company early adopted this guidance for its annual goodwill

impairment test that was conducted in the fourth quarter of 2011.

If the Company determined that is was necessary to perform a two-step goodwill impairment

test, it would determine the fair value of each reporting unit and compare it to the carrying

amount of the reporting unit. Calculating the fair value of the reporting units requires

significant estimates and assumptions by management. To the extent the carrying amount of a



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reporting unit exceeds the fair value of the reporting unit, there is an indication that the

reporting unit goodwill may be impaired and a second step of the impairment test is performed

to determine the amount of the impairment to be recognized, if any.

3 Goodwill, which represents the cost in excess of fair market value of net assets acquired,

was $1,567 for both fiscal 2012 and fiscal 2011. Goodwill is not amortized; rather it is tested for

impairment at the beginning of the fourth quarter each year or on a more frequent basis when

events occur or circumstances change between the annual tests that would more likely than not

reduce the fair value of the reporting unit below its carrying value. In fiscal 2012, 2011, and

2010, no indicators existed for impairment, thus no goodwill impairment charges were

recorded.

4 The Corporation evaluates its goodwill for impairment on an annual basis during the

fourth quarter or whenever indicators of impairment exist. In September 2011, the FASB issued

guidance that simplified how entities test for goodwill impairment. This guidance permits

entities to first assess qualitative factors to determine whether it is more likely than not that the

fair value of a reporting unit is less than its carrying amount as a basis for determining whether

it is necessary to perform a two-step goodwill impairment test. The Corporation utilized this

guidance for certain reporting units for the annual impairment evaluation during the fourth

quarter of 2012 where the fair value was well in excess of carrying value in prior year analysis.

The qualitative factors considered included, but were not limited to, general economic

conditions, outlook for the office furniture and hearth products industries and recent and

forecasted financial performance. The Corporation performed the two-step goodwill

impairment test for all other reporting units and used various valuation techniques with the

primary technique being a discounted cash flow method. Determining the fair value of a

reporting unit involves the use of significant estimates and assumptions. Management bases its

fair value estimates on assumptions it believes to be reasonable at the time, but such

assumptions are subject to inherent uncertainty. Actual results may differ from those

estimates.



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Professional Standards Regarding Fiscal Year -- There is no specific requirement, in the

Accounting Standards Codification, that requires disclosure of the fiscal year. However, if the

year-end is other than a calendar year end (December 31) especially if it is a 52/53 week period,

organizations tend to disclose this in the summary of significant accounting policies footnote.

Examples

1 The Company's fiscal year ends on the Saturday closest to January 31st. Fiscal years

2011, 2010, and 2009 ended on January 28, 2012 (2011), January 29, 2011 (2010), and January

30, 2010 (2009), respectively.

2 Fiscal Year: Our fiscal year ends on the last Friday in April. References herein to fiscal

2012, fiscal 2011 and fiscal 2010 refer to fiscal years ended April 27, 2012; April 29, 2011; and

April 30, 2010, respectively. All years presented were comprised of 52 weeks, except for fiscal

2010, which contained 53 weeks.

Prior to fiscal 2012, the consolidated operating results of the parent entity and its segments

were reported based upon a two-day early cutoff. During fiscal 2012, we eliminated this two-

day early cutoff, as it was no longer required to achieve a timely consolidation. The effect of this

change was to reflect 367 days of operating results for the parent entity and its segments within

our fiscal 2012 consolidated income statements. This resulted in $1,803 and $207 of additional

operating income for the parent entity and its segments, respectively.

3 The Corporation follows a 52/53 week fiscal year which ends on the Saturday nearest

December 31. Fiscal year 2012 ended on December 29, 2012; 2011 ended on December 31,

2011; and 2010 ended on January 1, 2011. The financial statements for fiscal years 2012, 2011

and 2010 are on a 52-week basis. A 53-week year occurs approximately every sixth year.



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Warranties

Professional Standards Regarding Warranties -- There is no specific requirement, in the

Accounting Standards Codification, that requires disclosure of warranty expense. However,

warranty expense is a form of contingency, and as such, is subject to those provisions. The

following guidance is specific to contingencies:

450-20-50- 3 and 4 --

1. Disclosure is to be made when it is at least possible, or probable that a loss may exist in

excess of any amount accrued, and should include

2. The nature of the contingency, and

3. An estimate of a possible range of loss in excess of the amount accrued (subject to

materiality considerations).

Examples -- Note: Most of the examples provide a table that discloses warranty activity during

the reporting period -- examples are not included in this resource.

1 The Company offers warranties for certain products it sells. The specific terms and

conditions of those warranties vary depending upon the product sold and the country in which

the Company sold the product. The Company generally provides a basic limited warranty,

including parts and labor for any product deemed to be defective for a period of one year. The

Company estimates the costs that may be incurred under its basic limited warranty, based

largely upon actual warranty repair costs history, and records a liability in the amount of such

costs in the month that the product revenue is recognized. The resulting accrual balance is

reviewed during the year. Factors that affect the Company's warranty liability include the

number of units sold, historical and anticipated rate of warranty claims, and cost per claim.

2 The Company’s subsidiary generally grants its customers a one to two year warranty on

its projects. The Company’s subsidiaries generally grant its customers a one year warranty on

their respective products.

Estimated warranty obligations are provided for as a cost of sales in the period in which the

related revenues are recognized, based on management’s estimate of future potential warranty

obligations and limited historical experience. Adjustments are made to accruals as warranty

claim data and historical experience warrant.

The Company’s warranty obligations may be materially affected by product or service failure

rates and other costs incurred in correcting a product or service failure. Should actual product

or service failure rates or other related costs differ from the Company’s estimates, revisions to

the accrued warranty liability would be required.



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3 The Corporation issues certain warranty policies on its furniture and hearth products

that provide for repair or replacement of any covered product or component failing during

normal use because of a defect in design, materials or workmanship. Reserves have been

established for the various costs associated with the Corporation's warranty programs and are

included in Accounts payable and accrued expenses in the Consolidated Balance Sheets.

A warranty reserve is determined by recording a specific reserve for known warranty issues and

an additional reserve for unknown claims expected to be incurred based on historical claims

experience. Actual claims incurred could differ from the original estimates, requiring

adjustments to the reserve.



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Advertising

Professional Standards Regarding Advertising --

720-35-50-1

1. Disclose the approach taken with respect to the options available (720-35-25-1)

A. As incurred, or

B. The first time that the advertising (project) takes place

2. The total amount charged to advertising for each period for which an income statement is

presented.

Examples

1 We expense advertising costs as incurred. Advertising expense was $ 51,266; $ 49,311;

and $ 45,648 in fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

2 Freight, engineering, and research and development costs are included in automotive

cost of sales; advertising costs are included in Selling, administrative, and other expenses.

3 Advertising and sales promotion costs are expensed in the period in which the

advertising event takes place.



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Commitments and Contingencies

Professional Standards Regarding Commitments and Contingencies --

1. The following guidance is specific to contingencies: 450-20-50- 3 and 4 --

A. Disclosure is to be made when it is at least possible, or probable that a loss may exist in

excess of any amount accrued, and should include

B. The nature of the contingency, and

C. An estimate of a possible range of loss in excess of the amount accrued (subject to

materiality considerations).

2. Professional standards discusses disclosure of commitments at 440-10-50-1 through 7

A. If any of the following commitments exist, they should be disclosed within the financial

statements (each of the following items have item-specific disclosure requirements)

1) Unused letters of credit,

2) Long-term leases,

3) Assets pledged as collateral for loans,

4) Pension plans,

5) Dividend arrearage for cumulative preferred stock,

6) Firm commitments (examples included in ASC)

B. Regarding unconditional purchase orders (UPO) that have not been recognized within the

current financial statements (by virtue of another issue-specific standard) should have the

following matters disclosed (subject to materiality)

1) Nature and term of the commitment,

2) Amount of the fixed and determinable portion of the commitment -- for the current period

and each of the succeeding five years (subject to practicability)

3) The nature of variable attributes attendant to the commitment,

4) Amounts, if any, purchased under the UPO for each reporting period for which an income

statement is presented.

C. With respect to UPOs that have been recognized in the financial statements, the amount of

payments required by the instrument for each of the succeeding five years (5 year schedule)



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Examples

1 We rent certain restaurant facilities under operating leases having initial terms that

primarily expire approximately 20 years from inception. The leases typically contain renewal

clauses of 5 to 30 years exercisable at our option. Certain of these leases require the payment of

contingent rentals based on a percentage of gross revenues, as defined by the terms of the

applicable lease agreement. Most of the leases also contain either fixed or inflation-adjusted

escalation clauses.

We are self-insured for most casualty losses and employee health-care claims up to certain

stop-loss limits per claim. We have accounted for liabilities for casualty losses, including both

reported claims and incurred but not reported claims, based on information provided by

independent actuaries. We have accounted for our employee health-care claims liability through

a review of incurred and paid claims history. We do not believe that our calculation of casualty

losses and employee health-care claims liabilities would change materially under different

conditions and/or different methods. However, due to the inherent volatility of actuarially

determined casualty losses and employee health-care claims, it is reasonably possible that we

could experience changes in estimated losses, which could be material to both quarterly and

annual net income.

We are from time-to-time involved in ordinary and routine litigation, typically involving claims

from customers, employees and others related to operational issues common to the restaurant

and food manufacturing industries. In addition to the class action lawsuits described above, we

are involved with a number of pending legal proceedings incidental to our business.

Management presently believes that the ultimate outcome of these proceedings, individually or

in the aggregate, will not have a material adverse effect on our financial position, cash flows or

results of operations.

2 The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to

report accounting for contingencies. Certain conditions may exist as of the date the

consolidated financial statements are issued, which may result in a loss to the Company but

which will only be resolved when one or more future events occur or fail to occur. The Company

assesses such contingent liabilities, and such assessment inherently involves an exercise of

judgment. In assessing loss contingencies related to legal proceedings that are pending against

the Company or un-asserted claims that may result in such proceedings, the Company evaluates

the perceived merits of any legal proceedings or un-asserted claims as well as the perceived

merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been

incurred and the amount of the liability can be estimated, then the estimated liability would be

accrued in the Company’s consolidated financial statements. If the assessment indicates that a

potentially material loss contingency is not probable but is reasonably possible, or is probable



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but cannot be estimated, then the nature of the contingent liability, and an estimate of the

range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve

guarantees, in which case the guarantees would be disclosed. Management does not believe,

based upon information available at this time, that these matters will have a material adverse

effect on the Company’s consolidated financial position, results of operations or cash flows.

However, there is no assurance that such matters will not materially and adversely affect the

Company’s business, financial position, and results of operations or cash flows.



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Comprehensive Income

Professional Standards Regarding Comprehensive Income disclosure -- Currently, there are no

specific professional standard requirements for footnote disclosure regarding comprehensive

income -- unless the reporting entity believes that the financial statement presentation needs to

be supplemented, on a case-by-case basis. Notice that some reporting entities (SEC registrants)

elect to make this type of supplemental disclosure. The topic of comprehensive income is

addressed in the ASC in topic/area 220.

Examples

1 Comprehensive income (loss) includes net loss as currently reported by the Company

adjusted for other comprehensive income, net of comprehensive losses. Other comprehensive

income for the Company consists of unrealized gains and losses related to the Company's

foreign currency cumulative translation adjustment. The comprehensive loss for the periods

presented in the accompanying consolidated financial statements was not material.

2 Comprehensive income is the same as reported net income.



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Research and Development

Professional Standards Regarding Research and Development disclosure --

ASC 730-10-50-1 states that financial statements should include disclosure of the total amount

of research and development cost charged to expense for the reporting period(s). This

disclosure can be made on the face of a financial statement (line item), or as a note to the


Examples

1 Research and development costs as defined in ASC Topic 730, Research and

Development, were $4,497,000, $2,947,000, and $2,592,000 for the years ended March 31,

2012, 2011 and 2010, respectively, and are classified as general and administrative expense in

the consolidated statements of operations.

2 Research and development expenses consist primarily of labor and related expenses

and are charged to operations as incurred. Participation by third parties in the Company’s

research and development costs as well as credits arising from qualifying research and

experimental development expenditures are netted against research and development.



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Selling, General and Administrative Expense

Professional Standards Regarding Selling, General and Administrative Expense disclosure --

Currently, there are no specific professional standard requirements for footnote disclosure

regarding selling, general and administrative expenses -- unless the reporting entity believes

that the financial statement presentation needs to be supplemented, on a case-by-case basis.

Notice that some reporting entities (SEC registrants) elect to make this type of supplemental

disclosure.

Examples

1 SG&A expenses consist primarily of employee compensation and benefit costs related to

the selling and administrative support functions; advertising; operating and maintenance costs;

proprietary credit card promotion, issuance and servicing costs; insurance programs;

telecommunications; shipping and handling costs; and other operating expenses not specifically

categorized elsewhere on the Consolidated Statements of Income. Payroll taxes, rent,

depreciation, and property taxes are not included in SG&A.

The Company receives allowances and expense reimbursements from merchandise vendors and

from the owner of the proprietary credit card portfolio which are netted against the related

expense -- Allowances received from merchandise vendors in conjunction with:

Incentive compensation programs for employees who sell the vendors' merchandise and netted

against the related compensation expense were $35,657, $36,098, and $41,846 in 2011, 2010,

and 2009, respectively.

Jointly produced and distributed print and television media and netted against the gross

expenditures for such advertising were $30,526, $29,323, and $33,287 in 2011, 2010, and 2009,

respectively. Net advertising expenses were $59,036, $45,465, and $36,025 in 2011, 2010, and

2009, respectively.

2 Selling and marketing expenses are expensed as incurred. These expenses were $11,368

and $4,016, respectively, for the years ended December 31, 2011 and 2010.

General and administrative expenses are expensed as incurred. These expenses were $140,358

and $111,100, respectively, for the years ended December 31, 2011 and 2010.



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Cash Flow Statement

Professional Standards Regarding Cash Flow Statement Disclosure --

230-10-50-2 through 6 addresses supplemental disclosures that, circumstantially, should

accompany the cash flow statement, in addition to the disclosure of the entity's cash equivalent

policy. Such additional disclosures are:

1. Interest and income taxes paid -- supplemental when the indirect method is used, line item

when the direct method is employed,

2. Non-cash investing and/or financing activities -- supplemental in all cases -- may not be

folded into the body of the cash flow statement

Note that the example, below, cites area/topics 230-10-45 and 830 -- these sections present

alternative methods of presenting elements within the body of the cash flow statement (by

activity, and indirect or direct method of addressing operating cash). Area/topic 830 deals with

foreign exchange matters.

Example

1 The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards

Codification for cash flows reporting, classifies cash receipts and payments

according to whether they stem from operating, investing, or financing activities

and provides definitions of each category, and uses the indirect or reconciliation

method (Indirect method) as defined by paragraph 230-10-45-25 of the FASB

Accounting Standards Codification to report net cash flow from operating activities

by adjusting net income to reconcile it to net cash flow from operating activities by

removing the effects of (a) all deferrals of past operating cash receipts and

payments and all accruals of expected future operating cash receipts and payments

and (b) all items that are included in net income that do not affect operating cash

receipts and payments. The Company reports the reporting currency equivalent of

foreign currency cash flows, using the current exchange rate at the time of the cash

flows and the effect of exchange rate changes on cash held in foreign currencies is

reported as a separate item in the reconciliation of beginning and ending balances

of cash and cash equivalents and separately provides information about investing

and financing activities not resulting in cash receipts or payments in the period

pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.



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Cost of Sales

Professional Standards Regarding Cost of Sales disclosure -- Currently, there are no specific

professional standard requirements for footnote disclosure regarding cost of sales -- unless the

reporting entity believes that the financial statement presentation needs to be supplemented,

on a case-by-case basis. Notice that some reporting entities (SEC registrants) elect to make this

type of supplemental disclosure. The topic of cost of sales is addressed in the ASC in topic/area

705.

Example

1 Cost of sales represents primarily food cost for Restaurants and cost of materials in

the Foods segments. Cash rebates that we receive from suppliers are recorded as a

reduction of cost of sales in the periods in which they are earned. The amount of

each rebate is directly related to the quantity of product purchased from the

supplier.



Page 105 of 329

Equity and Cost investments

Professional Standards Regarding equity and cost investments disclosure --

323-10-50-3 -- Describes disclosure matters for investments carried using the equity method

1. Name of the investee,

2. Applicable accounting policies of the investor entity with respect to non-controlling

investments in common stock,

3. Any difference between underlying equity in the investee and the carrying amount of the

investment -- and how that difference is accounted for.

4. Market value of the investment -- if a quoted market price is available.

5. For equity investees that constitute a material investment by the reporting entity --

summarized information regarding assets, liabilities and results of operations,

6. If conversion of securities or exercise of options would have a material effect on the

reporting entity's share of earnings and/or losses -- this fact should be disclosed.

Example

1 Investments in other non-consolidated entities are accounted for using the equity

method or cost basis depending upon the level of ownership and/or the Company’s ability to

exercise significant influence over the operating and financial policies of the investee. When the

equity method is used, investments are recorded at original cost and adjusted periodically to

recognize the Company’s proportionate share of the investees’ net income or losses after the

date of investment. When net losses from an investment accounted for under the equity

method exceed its carrying amount, the investment balance is reduced to zero and additional

losses are not provided for as the Company is not obligated to provide additional capital. The

Company resumes accounting for the investment under the equity method if the entity

subsequently reports net income and the Company’s share of that net income exceeds the share

of net losses not recognized during the period the equity method was suspended.

When an investment accounted for using the equity method issues its own shares, the

subsequent reduction in the Company’s proportionate interest in the investee is reflected in

equity as an adjustment to paid-in-capital. The Company evaluates its investments in companies

accounted for by the equity or cost method for impairment when there is evidence or indicators

that a decrease in value may be other than temporary.

The Company’s investment in GS was accounted for by the equity method until the Company

completed its acquisition of GS in May 2010 (see Note V) at which time the Company began



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consolidating GS's results. The Company’s investment in US was accounted for by the cost

method until the Company increased its investment and began consolidating US’s results in

February 2010 (see Note X). The Company’s investment in ETC (see Note XX) was accounted for

by the cost method until its disposition in December 2010.



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Intangible assets

Professional Standards Regarding intangible assets disclosure --

350-30-50-1 through 3 --

1. With respect to intangible assets that are subject to amortization

A. Amount assigned to the intangible asset/class of assets

B. Any presumed, significant, residual value,

C. Average amortization period

2. For those intangible assets not subject to amortization -- the amount assigned to such asset.

3. Amounts attributable to purchased research and development costs

350-30-50-2 -- Required disclosures for each period for which a position statement is presented

1. For intangible assets subject to amortization

A. Gross carrying amount and accumulated amortization,

B. Amortization expense for the reporting period,

C. Estimated amortization expense for each of the subsequent five years.

2. For intangible assets not subject to amortization -- total carrying amount of such assets.

3. Reporting entity's accounting policy regarding treatment of costs incurred to renew or

extend use of an intangible asset,

4. With respect to renewals -- costs incurred during the reporting period and the average

period before the next renewal.

350-30-50-3 -- Disclosures dealing with impairment losses related to intangible assets

1. Both a description of the impaired intangible asset and why the intangible asset is deemed

to be impaired,


3. Method(s) used in arriving at the impairment amount,

4. Line item, in the income statement, where the impairment loss appears (unless it is a line

item),

5. When applicable, the segment in which the impaired intangible asset appears.



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Examples

1 At acquisition, the Company estimates and records the fair value of purchased

intangible assets which primarily consist of trade names, customer relationships and technology.

The fair values are estimated based on management's assessment as well as independent third

party appraisals. Such valuations may include a discounted cash flow of anticipated revenues

resulting from the acquired intangible asset.

Amortization of intangible assets with finite lives is recognized over their estimated useful lives

using an amortization method that reflects the pattern in which the economic benefits of the

intangible assets are consumed or otherwise realized. The straight line method is used for

customer relationships. As a result of the negligible attrition rate in our customer base, the

difference between the straight line method and attrition method is not considered significant.

The estimated useful lives for our intangible assets range from 3 to 18 years.

2 The Corporation also determines the fair value of indefinite-lived trade names on an

annual basis or whenever indications of impairment exist. The Corporation estimates the fair

value of the trade names based on a discounted cash flow model using inputs which include

projected revenues from management’s long-term plan, assumed royalty rates that could be

payable if the trade names were not owned and a discount rate. Determining the fair value of a

trade name involves the use of significant estimates and assumptions. Actual results may differ

from those estimates.

The Corporation has definite-lived intangibles that are amortized over their estimated useful

lives. Impairment losses are recognized if the carrying amount of an intangible, subject to

amortization, is not recoverable from expected future cash flows and its carrying amount

exceeds its fair value. Intangibles, net of amortization, of approximately $87 million are

included in other assets on the consolidated balance sheet as of the end of fiscal 2012.



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Leases

Professional Standards Regarding Lease disclosure -- 840-10-50-1 through 5

840-10-50-1 -- Requires that reporting entities disclose any leasing activities with related parties

(both lessee and lessor).

840-10-50-2 -- This section contain the generic requirement (general description that includes,

but not limited to) for lessees to disclose the following matters, as applicable

1. Basis for determination of contingent rentals,

2. Existence of elements such as; renewal, purchase option, escalation provisions, and

3. Restrictive covenants in the leasing arrangement (payment of dividends, entering into other

leases, etc.)

840-10-50-3 -- If a lessee reporting entity has provided guarantees regarding a lease, ASC 460-

10-50-4 delineates significant disclosure requirements

840-10-50-4 and 5 -- Disclosure requirements for lessor reporting entities

1. When leasing is a significant activity of a reporting entity, that entity should provide a

general description of its leasing line of business,

2. Lessors should disclose accounting policies regarding contingent rentals -- when lessor

accrues contingent rental prior to lessee achievement of target, disclosure of the impact of such

a procedure should be disclosed, as well (subject to materiality)

Example

1 The Company leases the land or the land and building at many of its stores, as well

as its distribution centers, administrative facilities, and certain equipment. Most of

these leases are classified as operating leases. Most of the Company's lease

agreements include renewal periods at the Company's option. Store lease

agreements generally include rent holidays, rent escalation clauses, and contingent

rent provisions that require additional payments based on a percentage of sales in

excess of specified levels. Contingent rental payments are recognized when the

Company determines that it is probable that the specified levels will be reached

during the fiscal year. For leases that contain rent holiday periods and scheduled

rent increases, the Company recognizes rent expense on a straight-line basis over

the lease term from the date the Company takes possession of the leased property.

The difference between the straight-line rent amounts and amounts payable under

the leases are recorded as deferred rent. Tenant improvement allowances and



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other lease incentives are recorded as deferred rent liabilities and are recognized on

a straight–line basis over the life of the lease. As of January 28, 2012 and January 29,

2011, deferred rent liabilities were $66,524 and $57,042, respectively. These

amounts are included in other long-term liabilities on the Consolidated Balance

Sheets.



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Long-lived Assets

Professional Standards Regarding Long-lived Assets -- 360-10-50-1 and 2

360-10-50-1 -- This section sets out minimum disclosures regarding each significant

category of long-lived assets (predominantly Property, Plant, and Equipment)

1. Balances of major classes of depreciable assets,

2. Accumulated depreciation, by major class of asset,

3. Depreciation expense for the reporting period, and

4. A general description of the method(s) of depreciation used -- by major class of asset

360-10-50-2 -- This section provided disclosure guidance regarding impairment of long-

lived assets

1. A description of the impaired asset(s), along with why the asset is deemed to be

impaired,

2. The line item in the income statement where the impairment loss is presented (unless

the loss is its own line item),

3. Method(s) used by the reporting entity to determine the fair value estimate, and when

applicable

4. The segment in which the impaired asset appears.

Examples

1 Long-lived assets are reviewed for impairment as events or changes in circumstances

occur indicating the amount of the asset reflected in the Corporation’s balance sheet may

not be recoverable. An estimate of undiscounted cash flows produced by the asset, or the

appropriate group of assets, is compared to the carrying value to determine whether

impairment exists. The estimates of future cash flows involve considerable management

judgment and are based upon assumptions about expected future operating

performance. The actual cash flows could differ from management’s estimates due to

changes in business conditions, operating performance and economic conditions. Asset

impairment charges recorded in connection with the Corporation’s restructuring activities

are discussed in Restructuring Related Charges. These assets included real estate,

manufacturing equipment and certain other fixed assets. The Corporation’s continuous

focus on improving the manufacturing process tends to increase the likelihood of assets

being replaced; therefore, the Corporation is regularly evaluating the expected lives of its

equipment and accelerating depreciation where appropriate.



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2 The Company assesses impairment of its long-lived assets in accordance with the

provisions of ASC Topic 360 Property, Plant, and Equipment. This statement requires long-

lived assets, such as property and equipment and purchased intangibles subject to

amortization to be reviewed for impairment whenever events or changes in circumstances

indicate that the carrying amount of an asset group may not be recoverable. Recoverability

of assets to be held and used is measured by a comparison of the carrying amount of an

asset group to estimated undiscounted future cash flows expected to be generated by the

asset group. If the carrying amount of an asset group exceeds its estimated future cash

flows, an impairment charge is recognized equal to the amount by which the carrying

amount of the asset group exceeds the fair value of the asset group.

In assessing long-lived assets for an impairment loss, assets are grouped with other assets

and liabilities at the lowest level for which identifiable cash flows are largely independent of

the cash flows of other assets and liabilities. Asset grouping requires a significant amount of

judgment. Accordingly, facts and circumstances will influence how asset groups are

determined for impairment testing. In assessing long-lived assets for impairment,

management considered the Company's product line portfolio, customers and related

commercial agreements, labor agreements and other factors in grouping assets and

liabilities at the lowest level for which identifiable cash flows are independent. The

Company considers projected future undiscounted cash flows, trends and other factors in its

assessment of whether impairment conditions exist. While the Company believes that its

estimates of future cash flows are reasonable, different assumptions regarding such factors

as future production volumes, customer pricing, economics and productivity and cost

initiatives, could significantly affect its estimates. In determining fair value of long-lived

assets, management uses management estimates, discounted cash flow calculations, and

appraisals where necessary.



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Marketable Securities

Professional Standards Regarding Marketable Securities -- 320-10-50-2 through 10

320-10-50-2 -- This section of the ASC address disclosures related to marketable securities

classified as available-for-sale, and includes the following:

1. Cost,

2. Fair value,

3. Any other-than-temporary impairment reflected in accumulated other comprehensive

income,

4. Total gains for those securities with net gains in accumulated comprehensive income,

5. Total losses for those securities with a net loss position in accumulated comprehensive

income, and

6. For those securities that mature, information about the contractual maturity attendant

to the instrument.

320-10-50-3 -- With respect to maturity disclosure (see above), such disclosure must be

presented with the following level of detail

1. One year,

2. Greater than one year to five years,

3. Greater than five years and through ten years, and

4. Greater than ten years.

320-10-50-5 -- Disclosures required for securities (debt) classified as held-to-maturity

1. Cost basis,

2. Fair value,

3. Gross unrecognized holding gains and/or losses,

4. Net carrying amount,

5. Any other-than-temporary impairment reflected in accumulated comprehensive

income,

6. Gross gains and/or losses included in other comprehensive income attendant to hedge

derivatives intended to offset acquisition risks of held to maturity securities,



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7. Information regarding contractual maturities, at the same level of detail described

above for available for sale securities.



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320-10-50-6 -- Following, are the disclosures required for impairment of marketable

securities (such disclosures are to grouped by investments that have been in a continuous

unrealized loss position for less than 12 months, and those in such position for greater than

12 months 320-10-50-7)

1. For each position statement presented, by category of investment, the following

quantitative information:

A. Fair value of investments with unrealized losses, and

B. Aggregate amount of unrealized losses.

2. As of the date of the most recent position statement presented, sufficient information

to enable users to understand the need for impairment recognition. At a minimum, such

disclosure should include -- but is not limited to:

A. Nature of the affected investment,

B. Cause that gave rise to the impairment,

C. Number of investment positions that are in an unrealized loss position,

D. Relative severity, and expected duration of the impairment,

E. Other information to enable users to understand the impairment situation (examples

provided in the ASC)

320-10-50-8 -- Clarifies that the starting point for calculating period of continuous unrealized

loss is the balance sheet date in the period in which the impairment occurred. The period

ends when the reporting entity

1. Recognizes the impairment as other than temporary, or

2. The amount of the impairment is recovered.



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320-10-50-9 -- This section begins the disclosure requirements related to the income

statement relative to marketable securities: For each income statement presented

1. Proceeds from sale of available-for-sale securities and the amount of gain or loss

included in earnings for the period,

2. Cost flow assumption for both the security and any balances in other comprehensive

income (lifo, fifo, etc.),

3. Gross gains and/or losses reflected in earnings resulting from a transfers from available-

for-sale to trading category,

4. Gross period inputs to and outputs from accumulated comprehensive income related to

available-for-sale securities,

5. Trading gains and/or losses relating to trading securities still held as the report date.

320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the

following disclosures are required:

1. Carrying amount of the security,

2. Any gain or loss in accumulated comprehensive income related to hedges that were

intended to offset risk associated with sold/transferred securities,

3. Realized gain or loss,

4. Circumstances leading to the decision to sell or transfer held-to-maturity security.

320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the

following disclosures are required:


2. Any gain or loss in accumulated comprehensive income related to hedges that were

intended to offset risk associated with sold/transferred securities,





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Example

1 All of the Company's marketable securities, which consist of equity securities, have been

classified as available-for-sale securities and are therefore recorded at their fair values with

the unrealized gains and losses, net of tax, reported in accumulated other comprehensive

loss in the shareholders' equity section of the balance sheet unless unrealized losses are

deemed to be other than temporary. In such instance, the unrealized losses are reported in

the consolidated statements of operations within investment income. Estimated fair value is

based on published trading values at the balance sheet dates. The cost of securities sold is

based on the specific identification method. Interest and dividend income are included in

investment income in the consolidated statements of operations.

The marketable securities are carried as long-term assets since they are held for the

settlement of the Company's general and products liability insurance claims filed through a

wholly owned captive insurance subsidiary. The marketable securities are not available for

general working capital purposes.



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Pension Cost

Professional Standards Pension Cost -- 715-20-50-5 through 8 for defined benefit plans, and

715-70-50-1 for defined contribution plans

715-20-50-5 -- Basic defined benefit pension plan disclosures for a non-public reporting

entity are comprised of the following elements:

1. Benefit obligation,

2. Fair value of plan assets,

3. Funded status,

4. Employer contributions,

5. Participant contributions,

6. Benefits paid,

7. Accumulated benefit obligation balance,

8. Benefits expected to be paid for each of the succeeding five years, and the balance

expected for the next five year period,

9. Employer estimate of contributions expected to be received by the plan during the

following year from the latest position statement presented.

10. Amounts recognized in the position statement -- level of detail -- postretirement

benefit assets, current and noncurrent postretirement benefit obligations,

11. Significant underpinning assumptions used, namely: Assumed discount rate, rate of

compensation increase, long-term rate of return on plan assets,

12. Assumed health care cost trend,

13. Any employer securities and/or related parties included in plan assets (amounts and

types of)

14. The nature and effect of significant non-routine events,

15, Any amounts in accumulated comprehensive income expected to be recognized as part

of the periodic benefit cost in the next year,

16. Amounts expected to be returned to the employer within the succeeding twelve

months (timing, as well)

715-20-50-7 -- Interim financial statements should disclose: 1. Employer contributions paid,

and 2. Contributions expected to be paid during the current year.



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715-20-50-8 -- Normally the expected rate of return is used, consistently, throughout the

reporting year -- however, if the rate is changed, that fact should be disclosed.

715-70-50-1 -- Professional standards requires the following disclosure for defined

contribution plans -- amount of cost recognized, and any other changes that could affect the

comparability of amounts presented for pension cost.

Example

1 Pension expense is based on actuarial models used to estimate the total benefits

ultimately payable to participants and is allocated to the respective service periods. The

Company's funding policy provides that contributions to the pension trusts shall be at

least equal to the minimum funding requirement of the Employee Retirement Income

Security Act of 1974. The Company may provide additional contributions from time to

time, generally not to exceed the maximum tax-deductible limitation. The Company's

pension plans are valued annually as of the fiscal year-end balance sheet date. Actuarial

gains and losses are amortized over the average life expectancy of the plan's

participants, to the extent the cumulative gains or losses exceed 10% of the greater of

the projected benefit obligation or market-related value of plan assets.



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Related Party Transactions

Professional Standards Regarding Related Party Transactions -- 850-10-50-1 through 6

850-10-50-1 -- The basic, required, disclosures for related party transactions are:

1. Nature of the relationship,

2. A description of the types of transactions that occur between the parties,

3. Dollar amounts of transactions that actually transpired during the reporting period

(shown gross ins and outs)

4. Any report date due to/from balance.

850-10-50-2 -- Balances related to officers, employees, or affiliated entities should not be

combined with notes or accounts receivable.

850-10-50-3 -- Aggregation of related party transactions by type of related party is

permitted.

850-10-50-5 -- Prohibits stating that any related party transaction transpired at arm's-

length, unless the statement can be objectively substantiated.

850-10-50-6 -- Brother/sister organizations may comprise related party relationships

Example

1 The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for

the identification of related parties and disclosure of related party transactions.

Pursuant to Section 850-10-20 the Related parties include a. affiliates of the Company;

b. Entities for which investments in their equity securities would be required, absent the

election of the fair value option under the Fair Value Option Subsection of Section 825–10–

15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit

of employees, such as pension and profit-sharing trusts that are managed by or under the

trusteeship of management; d. principal owners of the Company; e. management of the

Company; f. other parties with which the Company may deal if one party controls or can

significantly influence the management or operating policies of the other to an extent that

one of the transacting parties might be prevented from fully pursuing its own separate

interests; and g. Other parties that can significantly influence the management or operating

policies of the transacting parties or that have an ownership interest in one of the

transacting parties and can significantly influence the other to an extent that one or more of

the transacting parties might be prevented from fully pursuing its own separate interests.

The financial statements shall include disclosures of material related party transactions,

other than compensation arrangements, expense allowances, and other similar items in the



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ordinary course of business. However, disclosure of transactions that are eliminated in the

preparation of consolidated or combined financial statements is not required in those

statements. The disclosures shall include: a. the nature of the relationship(s) involved.

description of the transactions, including transactions to which no amounts or nominal

amounts were ascribed, for each of the periods for which income statements are presented,

and such other information deemed necessary to an understanding of the effects of the

transactions on the financial statements; c. the dollar amounts of transactions for each of

the periods for which income statements are presented and the effects of any change in the

method of establishing the terms from that used in the preceding period; and d. amounts

due from or to related parties as of the date of each balance sheet presented and, if not

otherwise apparent, the terms and manner of settlement.



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Subsequent Events

Professional Standards Regarding Subsequent Events -- 855-10-50-1 through 3

855-10-50-1 -- Disclosure of the date through which subsequent events have been

evaluated, at the following level of detail:

1. The date through which subsequent events were evaluated, and

2. Whether that date was

A. The issue date, or

B. The date available to be issued.

855-10-50-2 -- For beta-type subsequent events (disclosure-type), the following disclosures

should be made:

1. The nature of the event, and

2. A estimate of the effect of the event, or a statement that such an estimate cannot be

made.

855-10-50-3 -- Depending on the significance of the beta-type subsequent event, reporting

entities should consider pro forma presentations.

Example

1 The Company follows the guidance in Section 855-10-50 of the FASB Accounting

Standards Codification for the disclosure of subsequent events. The Company will

evaluate subsequent events through the date when the financial statements were

issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the

Company as an SEC filer considers its financial statements issued when they are widely

distributed to users, such as through filing them on EDGAR.



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CHAPTER 4 -- SPECIALIZED INDUSTRIES

CONSTRUCTION CONTRACTORS

Construction contractors are a specialized industry unto themselves in several ways. Following

are example financial statements and disclosures that are specially geared for entities in the

construction industry:

DISCLOSURES COMMONLY APPLICABLE TO CONSTRUCTION CONTRACTORS

INCLUDE:

REVENUE AND COST RECOGNITION Revenues from fixed-price and modified fixed-price construction contracts are recognized on the

percentage-of-completion method, measured by the percentage of labor hours incurred to date to

estimated total labor hours for each contract. * This method is used because management

considers expended labor hours to be the best available measure of progress on these contracts.

Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the

period plus the fee earned, measured by the cost-to-cost method.

Contracts to manage, supervise, or coordinate the construction activity of others are recognized

only to the extent of the fee revenue. The revenue earned in a period is based on the ratio of hours

incurred to the total estimated hours required by the contract.

Contract costs include all direct material and labor costs and those indirect costs related to

contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs.

Selling, general, and administrative costs are charged to expense as incurred. Provisions for

estimated losses on uncompleted contracts are made in the period in which such losses are

determined. Changes in job performance, job conditions, and estimated profitability, including

those arising from contract penalty provisions, and final contract settlements may result in

revisions to costs and income and are recognized in the period in which the revisions are

determined. Profit incentives are included in revenues when their realization is reasonably assured.



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An amount equal to contract costs attributable to claims is included in revenues when realization

is probable and the amount can be reliably estimated.

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,”

represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs

and estimated earnings on uncompleted contracts,” represents billings in excess of revenues

recognized.



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CONTRACT RECEIVABLES Contract receivables at year end were comprised of the following components:

Contract receivables

Billed:

Completed contracts 18,110$

Contracts in progress 89,569

Retained 11,580

Unbilled: 14,986

134,245

Less: Allowances for doubtful collections (7,646)

126,599$



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REVENUES, JOB COSTS, AND BILLINGS (WORK-IN-PROCESS) – BALANCE SHEET

PRESENTATION

Costs incurred on uncompleted contracts 265,964$

Estimated earnings 55,852

Total costs incurred and estimated earnings 321,816

Less: Billings to date (259,034)

Net amount 62,782$

Included in accompanying balance sheets under the following captions:

Costs and estimated earnings in excess of billings on uncompleted contracts 115,282$

Billings in excess of costs and estimated earnings on uncompleted contracts (52,500)

Net amount 62,782$



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NOTES PAYABLE (NOTHING REALLY UNIQUE TO CONTRACTORS – JUST A GOOD

EXAMPLE)

Unsecured note payable to bank, due in quarterly installments of $12,500 plus interest

at 1% over prime 100,000$

Note payable to bank, collateralized by equipment, due in monthly installments of

$1,667 plus interest at 10% through January, 20X6 75,000

Total 175,000$

Principal payments on note payables are due as follows:

Year ending December 31,

20X2 70,004$

20X3 70,004

20X4 34,992

20X5 -

20X6 -

Total 175,000$



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EXAMPLES OF TYPICAL CONTRACTOR FINANCIAL STATEMENTS FOLLOW:

Assets

Cash and cash equivalents 27,711$

Contract receivables 126,599

Costs and estimated earnings in excess of billings

on uncompleted contracts 115,282

Inventory, at lower of cost, on a first-in

first-out basis 13,250

Prepaid charges and other assets 17,283

Note receivable, related company 33,000

Property and equipment, net of accumulated

depreciation and amortization 315,908

Total Assets 649,033$

Liabilities and Shareholders’ Equity

Liabilities

Notes payable 175,000$

Lease obligations payable 28,789

Accounts payable 179,875

Billings in excess of costs and estimated

earnings on uncompleted contracts 52,500

Other accrued liabilities 36,250

Deferred tax liability 9,782

482,196

Contingent liability (see footnote number ##)

Shareholders’ equity

Common stock — $1 par value,

500,000 authorized shares, 100,000 shares

issued and outstanding. 100,000

Retained earnings 66,837

Total shareholders’ equity 166,837

Total Liabilities and Shareholders’ Equity 649,033$

Build-It-From-Scratch, Inc.

Consolidated Balance Sheet

December 31, 20X1



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Contract revenues earned 31,254$

Cost of revenues earned (23,440)

Gross profit 7,814

Selling, general, and administrative expense (6,125)

Income from operations 1,689

Other income (expense)

Gain on sale of equipment 986

Interest expense (net of interest income of $880) (125)

Total Other income (expense) 861

Income before taxes 2,550

Provision for income taxes (663)

Net income 1,887

Retained earnings, beginning of year 64,950

Retained earnings, end of year 66,837$

Consolidated Statement of Income and Retained Earnings

Year Ended December 31, 20X1

Build-It-From-Scratch, Inc.



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NOT-FOR-PROFIT ORGANIZATIONS

Professional standards, in SFAS 117, states that a complete set of Not-For-Profit financial

statements include the following four elements:

1. Statement of financial position,

2. Statement of activities, and a

3. Statement of cash flows, as well as

4. Notes to the financial statements, and

If the not-for-profit entity is a voluntary health and welfare organization, and this is not a

topic for debate, the financial statements must include a statement of functional expenses.

The statement of financial position should focus on the organization as a whole and should

report the amounts of its assets, liabilities, and net assets. SFAS 117 requires that the Statement

of Financial Position (Balance Sheet) include six specific totals:

1. Assets

2. Liabilities

3. Net Assets

4. Unrestricted Net Assets

5. Temporarily Restricted Net Assets, and

6. Permanently Restricted Net Assets

Assets and liabilities within the statement of financial position should be combined into

reasonably homogeneous groups. Assets need not be broken out on the basis of the presence of

donor- imposed restrictions on their use; for example, cash available for unrestricted current

use need not be reported separately from cash received with donor-imposed restrictions that is

also available for current use. However, cash or other assets that are either, designated for long-

term purposes or, received with donor-imposed restrictions that limit their use to long-term

purposes should not be reflected in a statement of financial position with cash or other assets

that are available for current use.



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Professional standards (SFAS 117) provides considerable flexibility in how the statement of

financial position should appear, however, it does restrict the formats to one of three options:

1. Sequencing assets according to their liquidity, and sequencing liabilities according to

their respective maturities.

2. Classifying assets and liabilities as current and non-current, i.e. a classic example of a

classified balance sheet.

3. Disclosing relevant information about the liquidity or maturity of assets and liabilities in

the notes to the financial statements.

The statement of activities, just as the statement of financial position, should focus on the

organization as a whole and should report the amount of the change in net assets for the period

for the entity as a total unit, as well as for each of the net asset categories described earlier.

Revenues, expenses, gains, and losses should be classified by net asset class. However,

professional standards clearly states that all expenses should be reported in the statement of

activities as reduction from unrestricted net assets. If expenses are (appropriately) incurred that

should be handled through the use of temporarily or permanently restricted net assets, then an

amount equal to the expenses paid should be reclassified from the restricted net asset balance

and reflected as an increase in the unrestricted net assets. This reclassification should not be

included with other revenues recorded in the statement of activities. Normally, such

reclassifications are presented as a separate line item below total revenues and before expenses

paid in the unrestricted net asset section of the statement of activities. The reclassification

amounts (out of the restricted net asset groups) are reflected as reductions in the respective net

asset group.

SFAS No. 117 requires subtotals within a statement of activities for the change in each class of

net assets.

In the absence of donor imposed restrictions, revenues are to be reported as increases in

unrestricted net assets. Gains or losses should be reported in unrestricted net assets unless their

use is temporarily or permanently restricted by explicit donor stipulations or by law. Expirations

of donor-imposed restrictions (time and/or purpose) should be reported as separate

reclassification items in the respective net asset categories.



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Formatting guidance was intended to provide a good deal of latitude. SFAS 117 offers several

equally acceptable ways that financial statement items could be sequenced: (a) revenues and

gains, reclassifications, expenses, and losses; (b) revenues, expenses, gains, losses, and

reclassifications; and (c) certain revenues, less directly related expenses, followed by a subtotal,

then other revenues, other expenses, gains and losses, and reclassifications.

All not-for-profit organizations are required to present a statement of activities that reflects

expenses by their functional classification, such as major programs, support, membership, and

fund raising activities. Additionally, voluntary health and welfare organizations are required to

report expenses by their natural classification in a matrix format in a separate financial

statement. Natural expense classification presents expense categories such as salaries, rent,

electricity, interest expense, depreciation, awards and grants to others, and professional fees.

Professional standards encourage, but pull up short of requiring, similar matrix-type

presentation by not-for-profit organizations other than voluntary health and welfare

organizations.

With the effectiveness of SFAS 117, the statement of cash flows became a required basic

financial statement for all not-for-profit organizations presenting financial statements in

accordance with generally accepted accounting principles. A statement of cash flows provides

relevant information about an organization’s cash receipts and cash payments during a period.

Just like its commercial counterpart, the statement is required to classify receipts and payments

as investing, financing, or operating activities. Separate disclosure of non-cash transactions (for

example, receiving contributions of buildings, securities, or recognized collection items) is also

required by professional standards.

Operating activities are defined as the default classification for cash receipts and disbursements

and include “all transactions and other events that are not defined as investing or financing

activities”. FASB Statement No. 117 permits entities to use either the direct or the indirect

method of reporting cash flows from operating activities. The direct method of presenting

operating cash is encouraged, but either presentation is acceptable. If the direct method of

analyzing cash provided or used from operations is used, there must also be a reconciliation of

the increase of decrease in (total) net assets to cash provided by or used in operations (the

classic indirect approach).

FASB Statement No. 117 expands the description of financing activities to include receipts of

contributions that are donor-restricted for long-term purposes.



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Not all cash in not-for-profit organizations that meet the definition of cash and cash equivalents

in SFAS 95 will be considered cash and/or cash equivalents for purposes of preparing statements

of financial position and cash flows. Cash balances that relate to net assets that bear donor

imposed restrictions that would be considered long-term in nature are not cash for purposes of

cash and cash equivalents presentation purposes. Such amounts should be reclassified and

changes reflected in the reclassified (non-unrestricted cash balance) balance.

The financial statements include certain prior-year summarized comparative information in total

but not by net asset class. Such information does not include sufficient detail to constitute a

presentation in conformity with generally accepted accounting principles. Accordingly, such

information should be read in conjunction with the organization’s financial statements for the

year ended June 30, I9PY, from which the summarized information was derived.

In the absence of donor-imposed restrictions, net assets should be classified as unrestricted.

Paragraph 16 of FASB Statement No. 117 permits organizations to disclose self- imposed

limitations on the use of unrestricted net assets (such as board-designated endowments) in the

notes to the financial statements or on their face, provided that total unrestricted net assets are

displayed.

Professional standards require that not-for-profit organizations prepare footnote disclosures.

Many of the disclosures are similar to that of a commercial enterprise, but there are some

disclosures that are fairly unique to the industry. Following is a listing of topics of disclosure that

are required for not-for-profit organizations:

1. Information that describes the nature and extent of restrictions on the use of various

net assets, including any instances of noncompliance,

2. Information concerning liquidity,

3. Any derivative instruments held by the organization,

4. Risks and Uncertainties,

5. Investments,

6. Collection items — Stewardship policies, disposals, changes in valuation,

7. Gifts of long-lived assets — policies regarding classification as unrestricted or

temporarily restricted,



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8. Unconditional promises to give — Receivable in less than one year, 1-5 years, more than

5 years. The allowance for uncollectible pledges must also be disclosed,

9. Conditional promises to give — total amounts that have been promised by general

category,

10. Restrictions — Entity policy for accounting for contributions that will have restrictions

met within the same accounting period, and

11. Contributed services — Recorded and not recorded because of failure to meet

qualifications for recording.

Following are examples of footnotes that might appear in a typical not-for-profit set of financial

statements that are unique to the type of industry:

Nature of the Organization:

Not-For-Profit (the Organization) is a nonprofit organization dedicated to providing for the basic

survival needs of homeless families with children in the metropolitan area. Revenues to the

Organization are derived principally through grants provided by various local and federal

governmental agencies, as well as through contributions from individuals and organizations.

ACCOUNTING TREATMENT OF REVENUES AND EXPENSES:

Contributions received, and pledges receivable evidenced by signed pledge cards or approved

grant applications are measured at their fair values and are measured at the fair value at the date

of receipt of the contribution or unconditional promise. In the absence of a donor stipulation, such

support is reflected as an increase in the unrestricted net assets of the organization in the period

in which such support is received. Support received subject to donor stipulations is recorded as an

increase in restricted net assets (temporary or permanent, depending on the nature of the

stipulation). When a donor stipulation is satisfied, either as a result of the passage of time or

having been used for the stipulated purpose, the temporarily restricted net assets are reclassified

to unrestricted net assets, and are reflected in the statement of activities as “Net Assets Released

from Restrictions”. The Organization has adopted a policy whereby restricted contributions whose

restrictions will be met in the same reporting period (year) are initially recorded as unrestricted

support. The Organization has also adopted a policy with respect to the receipt of contributions

other than cash (goods in kind, and equipment) that states that such support will be reflected as

unrestricted support, unless there are express donor stipulations with respect to the use of such

donated items. Such donor-restricted contributions are reflected as increases in restricted net



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assets. The policy further states that, absent restrictions as to how the donated resource is to be

used and/or maintained, restrictions surrounding the contribution will be considered satisfied in

the accounting period when the asset is placed in (its intended) service. Expenses are recorded as

reductions in unrestricted net assets in accordance with the accrual-based accounting principles.

DONATED SERVICES, GOODS, AND USE OF FACILITIES:

The Organization depends heavily on volunteers to accomplish its mission. Donated professional

services, such as accounting, dietician, and physicians are reflected in the statement of activities

as contributions at the fair value of such donated services. However, many other volunteer hours

(that do not require the use of “specialized skills” as defined in accounting standards) must be

expended in order to carry out the operation of the Organization and those hours have not been

reflected in monetary amounts in the statement of activities. To that end, the organization has

benefited from approximately 8,000 hours of other volunteer time. Goods and use of facilities are

recorded at their respective fair values in the period of receipt and/or when the unconditional

promise is received.

Conditional promises to give:

The Organization does not reflect conditioned promises to give in the financial statements as

contribution revenues or increases in net assets until any and all conditions attendant to the

conveyance have been met. As of the date of this financial statement, an anonymous benefactor

of the Organization has agreed to match all contributions received from the general public during

the next fiscal year, up to a maximum amount of $10,000.

Functional Allocation of Expenses:

The Statement of Activities reflects expenses and costs of the Organization allocated between

various programs of the entity, as well as other functional areas such as support, membership,

and fund raising functions. In developing such presentation of costs and expenses, it is necessary

that certain costs and expenses be allocated between and among functions and programs.

(Generally followed by a brief description of the significant allocated costs and the principal

methodology for allocation)

Policies with respect to classification of net assets:

The Organization reports gifts of cash and other assets as restricted support when they are

received with donor stipulations that limit either the time the Organization has use of the donated



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assets or purpose for which the donated assets may be used. When such donor restrictions expire,

that is, when a stipulated time restriction ends or purpose (use) restriction is accomplished,

temporarily restricted net assets are reclassified to unrestricted net assets and reported in the

statement of activities as net assets released from restrictions. In those instances where it is the

intention of the donor that a restriction never expire, as in the case of endowments to the

organization, such gifts are classified as permanently restricted net assets.

The Organization reports gifts of long-lived assets such as land, buildings, and equipment as

unrestricted support unless there are explicit donor stipulations that specify how the donated

assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets

are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are

reported as restricted support. The Organization has adopted a policy of reflecting expiration of

any (temporary) donor restrictions when the donated or acquired long-lived assets are placed in

its intended service, provided that there are no explicit donor stipulations to the contrary.



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(Footnote disclosure as to further information with respect to assets classified as

restricted) Temporarily restricted net assets are available for the following purposes or

periods:

Detail by program, within each (significant) program provide detail of restricted (natural) uses.

Example: Certain net assets are restricted to use in the Assistance to the homeless program.

These net assets may only be used to purchase food, clothing, and/or provide housing vouchers

to individuals over the age of sixty who have been certified as eligible for assistance in this

program.

Permanently restricted net assets are restricted to:

Disclosure should be made of each category of permanently restricted net assets, as well as the

purpose for which the funds exist. Normally, this disclosure also speaks to the use of earnings

attributable to the corpus of the permanently restricted net assets as well.

Net assets were released from donor restrictions by incurring expenses satisfying the restricted

purposes or by occurrence of other events specified by donors. (Detailed by major category or

program, as appropriate)

Purpose restrictions accomplished

Time restrictions expired

Organization policies regarding investments:

Investments are carried at market or appraised value, and realized and unrealized gains and losses

are reflected in the statement of activities. The Organization invests cash in excess of daily

requirements in short-term investments. Most long-term investments are held in two investment

pools. Annuity trusts, term endowments, and certain permanent endowments are separately

invested. The board of trustees has interpreted state law as requiring the preservation of the

purchasing power (real value) of the permanent endowment funds unless explicit donor

stipulations specify how net appreciation must be used.

EXAMPLES OF NOT-FOR-PROFIT FINANCIAL STATEMENTS



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2000 1999

Assets:

Cash and cash equivalents 75$ 460$

Accounts and interest receivable 2,130 1,670

Inventories and prepaid expenses 610 1,000

Contributions receivable 3,025 2,700

Short-term investments 1,400 1,000

Assets restricted to investment

in land, buildings, and equipment 5,210 4,560

Land, buildings, and equipment 61,700 63,590

Long-term investments 218,070 203,500

Total assets 292,220$ 278,480$

Liabilities and net assets:

Accounts payable 2,570$ 1,050$

Refundable advance 650

Grants payable 875 1,300

Notes payable 1,140

Annuity obligations 1,685 1,700

Long-term debt 5,500 6,500

Total liabilities 10,630 12,340

Net assets:

Unrestricted 115,228 103,670

Temporarily restricted 24,342 25,470

Permanently restricted 142,020 137,000

Total net assets 281,590 266,140

Total liabilities and net assets 292,220$ 278,480$

Not-for-Profit Organization

Statements of Financial Position

June 30, 2000 and 1999



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Changes in unrestricted net assets:

Revenues and gains:

Contributions 8,640$

Fees 5,400

Income on long-term investments 5,600

Other investment income 850

Long-term investments 8,228

Other 150

Total unrestricted revenues and gains 28,868

Net assets released from restrictions:

Satisfaction of program restrictions 11,990

Satisfaction of equipment acquisition restrictions 1,500

Expiration of time restrictions 1,250

Total net assets released from restrictions 14,740

Total unrestricted revenues, gains, and other support 43,608

Expenses and losses:

Program A 13,100

Program B 8,540

Program C 5,760

Management and general 2,420

Fund raising 2,150

Total expenses 31,970

Fire loss 80

Total expenses and losses 32,050

Increase in unrestricted net assets 11,558

Changes in temporarily restricted net assets:

Contributions 8,110

Income on long-term investments 2,580

Net unrealized and realized gains on

long-term investments 2,952

Actuarial loss on annuity obligations (30)

Net assets released from restrictions (14,740)

Decrease in temporarily restricted net assets (1,128)

Changes in permanently restricted net assets:

Contributions 280

Income on long-term investments 120

Net unrealized and realized gains on

long-term investments 4,620

Increase in permanently restricted net assets 5,020

Increase in net assets 15,450

Net assets at beginning of year 266,140

Net assets at end of year 281,590$


Statement of Activities

Year Ended June 30, 2000



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Temporarily Permanently

Unrestricted Restricted Restricted Total

Revenues, gains, and other support:

Contributions 8,640$ 8,110$ 280$ 17,030$

Fees 5,400 5,400

Income on long-term investments 5,600 2,580 120 8,300

Other investment income 850 850

Net unrealized and realized gains on Long-term Investments 8,228 2,952 4,620 15,800

Other 150 - - 150

28,868 13,642 5,020 47,530

Net assets released from restrictions:

Satisfaction of program restrictions 11,990 (11,990)

Satisfaction of equipment acquisition restrictions 1,500 (1,500)

Expiration of time restrictions 1,250 (1,250) - -

Total revenues, gains, and other support 43,608 (1,098) 5,020 47,530

Expenses and losses:

Program A 13,100 13,100

Program B 8,540 8,540

Program C 5,760 5,760

Management and general 2,420 2,420

Fund raising 2,150 - - 2,150

Total expenses 31,970 - - 31,970

Fire loss 80 80

Actuarial loss on annuity obligations 30 - 30

Total expenses and losses 32,050 30 - 32,080

Change in net assets 11,558 (1,128) 5,020 15,450

Net assets at beginning of year 103,670 25,470 137 266,140

Net assets at end of year 115,228$ 24,342$ 5,157$ 281,590$


Statement of Activities




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Cash flows from operating activities:

Cash received from service recipients 5,220$

Cash received from contributors 8,030

Cash collected on contnbutions receivable 2,615

Interest and dividends received 8,570

Miscellaneous receipts 150

Interest paid (382)

Cash paid to employees and suppliers (23,808)

Grants paid (425)

Net cash used by operating activities (30)

Cash flows from investing activities:

Insurance proceeds from fire loss on building 250

Purchase of equipment (1,500)

Proceeds from sale of investments 76,100

Purchase of investments (74,900)

Net cash used by investing activities (50)

Cash flows from financing activities:

Proceeds from contributions restricted for: Investment in endowment 200

Investment in term endowment 70

Investment in plant 1,210

Investment subject to annuity agreements 200

Interest and dividends restricted for reinvestment 300

Payments of annuity obligations (145)

Payments on notes payable (1,140)

Payments on long-term debt (1,000)

Net cash used by financing activities (305)

Net decrease in cash and cash equivalents (385)

Cash and cash equivalents at beginning of year 460

Cash and cash equivalents at end of year 75$

Reconciliation of change in net assets to net cash used by operating activities:

Change in net assets 15,450$

Adjustments to reconcile change in net assets to net cash used by operating activities:

Depreciation 3,200

Fire loss 80

Actuarial loss on annuity obligations 30

Increase in accounts and interest receivable (460)

Decrease in inventories and prepaid expenses 390

Increase in contributions receivable (325)

Increase in accounts payable 1,520

Decrease in refundable advance (650)

Decrease in grants payable (425)

Contributions restricted for long-term investment (2,740)

Interest and dividends restricted for long-term investment (300)

Net unrealized and realized gains on long-term investments (15,800)

Net cash used by operating activities (30)$


Statement of Cash Flows




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Supplemental data for noncash investing and financing activities:

Gifts of equipment 140$

Gift of paid-up life insurance, cash surrender value 80$



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A B C Management Fund raising Total

Salaries 2,500$ 1,120$ 1,425$ 500$ 5,545$

Rent 1,180 1,300 450 350 150 3,430

Insurance 975 789 250 250 2,264

Payroll Taxes 400 193 238 150 981

Outside Services 2,300 1,438 3,100 200 1,500 8,538

Telephone 1,289 970 87 120 2,466

Office Supplies 35 35

Depreciation 45 20 65

Lease and Maintenance 220 220

Dues 150 150

Accounting and Legal 200 200

Postage 755 382 72 200 1,409

Advertising 125 100 225

Mileage reimbursements 972 661 38 80 1,751

Newsletter 1,804 1,256 200 200 3,460

Awards 500 256 756

Miscellaneous 300 175 - - - 475

13,100$ 8,540$ 5,760$ 2,420$ 2,150$ 31,970$

Program


Statements of Functional Expenses (Matrix Format)

For the Year Ended June 30, 20X1



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PERSONAL FINANCIAL STATEMENTS

Personal financial statements are one of the most perplexing financials that are produced by

professional accountants. The biggest reason for difficulty with these financial statements is the

infrequency of requests for personal financial statements. Personal financial statements also are

high-risk financial statements for several reasons; 1. The need for personal financial statements

generally arises when there is a specific need for dealing with a potentially adverse party such as

a lender or divorcing spouse, 2. It is a rare situation where an individual maintains records that

allow for the easy development of complete financial statements, and 3. Many individuals in

need of personal financial statements drastically underestimate the time necessary to prepare

reliable financial statements.

Fortunately, many requests for personal financial statements involve the filling out of a pre-

printed form provided by the principal user. However, even this type of presentation can be a

difficult task. For the participants in public accounting, there are some special reporting

provisions that apply to “prescribed form engagements”. Typically pre-printed forms request

specific information, and since the user developed the form, no additional information is

necessary. Sometimes these forms have statements that the preparing individual (accountant) is

asked to sign. Before signing, read the statement carefully to determine the level of

responsibility (liability) that you assume by doing this.

GAAP for personal financial statements is based upon full-accrual accounting of assets at their

estimated current values and liabilities at their estimated current amounts at the date of the

financial statements, however, other comprehensive bases of accounting (OCBOA) are

recognized by the Guide. These OCBOAs, we are told, include historical cost, tax, and cash.

The basic financial statement for personal financial statement purposes is a position statement

(like a balance sheet), generally referred to as a Statement of Financial Condition. It was

determined by the standard setters that the primary focus of personal financial statements

should be a person’s assets and liabilities, and the primary users of personal financial

statements normally consider estimated current value information to be more relevant than

historical cost in the majority of situations. The form of this statement is markedly different

from what most of us are accustomed to seeing in a position statement. The top part of the

statement reflects total assets of the reporting entity. Following assets is an enumeration of the

liabilities of the individual. This difference is net assets before income taxes. A unique liability for

income taxes is deducted from this subtotal to arrive at the prime term “net worth”. This is the

bottom line in the Statement of Financial Condition. Net worth, in summary, is the difference



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between total assets and total liabilities, after deducting estimated income taxes on the

differences between the estimated current values of assets and the estimated current amounts

of liabilities and their tax bases.

There are other terms that shed light on the definition of net worth discussed above. The first

term is “estimated current value of an asset”. The estimated current value of an asset in

personal financial statements is that amount at which the item could be exchanged between a

buyer and seller, each of whom is well informed and willing, and neither of whom is compelled

to buy or sell said asset. The other term that enters into the definition of net worth is

“estimated current amounts of liabilities”. The estimated current amount of a liability is that

amount necessary to settle the claim that counter-party has with respect to the assets of the

individual. There are times when this amount can be considerably different from the face

amount of a liability.

There is another financial statement covered in professional standards — the Statement of

Changes in Net Worth. This financial statement is a close relative to the income statement of a

commercial entity, but the breadth of what is included in the changes in net worth statement is

much broader that what is included in a commercial income statement. In general terms, it

should present the major sources of increases in net worth: income, increases in the estimated

current values of assets, decreases in the estimated current amounts of liabilities, and decreases

in estimated income taxes on the differences between the estimated current values of assets

and the estimated current amounts of liabilities and their tax bases. Presentation of a statement

of changes in net worth is optional.

Personal financial statements may be prepared for an individual, a husband and wife, or a

family. The individual(s) comprising the reporting unit must qualify in one of the above

categories in order to qualify as a personal financial statement. This is a prime consideration in

determining whether a given transaction should be reflected in a defined unit’s personal

financial statements. The presentation of comparative financial statements is optional.

Professional standards prescribe that the presentation of assets and liabilities in personal

financial statements be in order of liquidity and maturity, without classification as current and

non-current. Therefore, a classified personal financial statement is contrary to prescribed GAAP.

If the personal financial statement was prepared using an OCBOA, it would still be a departure

from the promulgated formatics for such financial statements.



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When financial statements are prepared for one of a group of joint owners of assets, the

statements of that separate owner should include only that person’s interest, as determined

under the laws of the state having jurisdiction over the assets in question.

Personal financial statements should reflect the estimated current value of an investment in a

separate entity, such as a closely held corporation, a partnership, or a sole proprietorship, as

one amount. The investment in the assets and liabilities of that separate entity should not be

combined with similar personal items. That is to say, there is no consolidation of personal assets

with the assets of an investee. The investment appears as a line-item on the face of the financial

statements. Several procedures or combinations of procedures may be used to determine the

estimated current value of a closely held business, including a multiple of earnings, liquidation

value, reproduction value, appraisals, discounted amounts of projected cash receipts and

payments, or adjustments of book value or cost of the person’s share of the equity of the

business. An important point that has to be considered in determining an estimated current

value regarding an interest in a closely held business is that the individual may have entered into

a buy-sell agreement that specifies an amount (or the basis of determining the amount) to be

received in the event of withdrawal, retirement, or sale. If such an agreement exists, it needs to

be considered. Valuation of this type of investment at its estimated current value can be a very

difficult task.

This last thought must be contrasted with the situation where estimated current values of assets

and the estimated current amounts of liabilities of limited business activities not conducted in a

separate business entity, such as an investment in real estate and a related mortgage, should be

presented as separate amounts. This is an example of the standard setter’s aversion to netting.

Estimated current value of assets is a term that professional standards has interpreted in

professional standards. Some of the guidelines follow in the section below.

Amounts receivable, due to the individual, are generally the result of advances made to others.

There seems to be a presumption that, at least a portion of, the amount receivable is long-term

in nature. This brings up the issue of time value of money. This can be a real consideration, and

can significantly change the reflected values related to amounts due in future years.

Professional standards requires that, when time is an issue with respect to an amount

receivable, that the financial statements present receivables at the discounted amounts of cash

the person estimates will be collected, using appropriate interest rates as at the date of the




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Non-forfeitable rights to receive future sums that have each of the following characteristics are

reflected as assets at their discounted amounts: The rights are

1. For fixed or determinable amounts, that are

2. Not contingent on the holders life expectancy or the occurrence of a particular event,

such as disability or death, and

3. Not such that they require future performance of service by the holder.

Disclosures of the following elements related to guaranteed minimum portions of pensions are

also required:

1. Vested interests in pension or profit sharing plans,

2. Deferred compensation contracts,

3. Beneficial interests in trusts,

4. Remainder interests in property subject to life estates, and lastly

5. Annuities.

Also, there are guidelines for reflection of the estimated current amount of certain liabilities.

Non-cancelable commitments to pay future amounts that exhibit all the following characteristics

should be reflected as liabilities at the appropriate discounted amounts if:

1. The commitments are for fixed or determinable amounts,

2. The commitments are not contingent on others’ life expectancies or the occurrence of a

particular event, such as disability or death., and

3. The commitments do not require future performance of service by others.

Examples of non-cancelable commitments that more often than not have the characteristics

enumerated above include fixed amounts of alimony for a definite future period and charitable

pledges.

With respect to securities, the general rule with respect to valuation is that the estimated

current values of such securities are their quoted market prices. There are variations on this



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theme, but third-party objectivity in determining the reported value is the benchmark set by

professional standards. All circumstances surrounding the investment must be considered. For

instance an investor may hold a large block of the equity securities of a company. In some cases

this might mean that the investment could not be liquidated without reducing the amount that

the market would be willing to pay. On the other hand, if that large holding represented a

controlling interest, then that might cause the position to sell at a premium.

One of the most critical areas in personal financial statements is the reflection of the income tax

liability. This liability is actually composed of three separate elements: 1. Any amount that is

currently due and owing, 2. An accrual for taxes from the date of the last return to the date of

the financial statement (even if no return is due as of the date of the financial statements), and

3. An amount that reflects the amount of income tax that would be due if the assets were

disposed of at their current (reflected) values, and liabilities liquidated at their estimated

current amounts using applicable income tax laws and regulations, considering recapture

provisions and available carryovers. Element three can be very difficult to estimate. Estimated

income taxes should be presented in the statement of financial condition between liabilities and

net worth. The methods and assumptions used to compute the estimated income taxes must

always be fully disclosed.

The AICPA Guide to Personal Financial Statements prescribes additional disclosures that, when

applicable, should always accompany personal financial statements. These disclosures can

appear either on the face of the financial statement or in the notes to the financial statement(s).

1. A clear indication of the individuals covered by the financial statements

2. That assets are presented at their estimated current values and liabilities are presented

at their estimated current amounts

3. The methods used in determining the estimated current values of major assets and the

estimated current amounts of major liabilities or major categories of assets and

liabilities, since several methods are available, and changes in methods from one period

to the next

4. If assets held jointly by the person and by others are included in the statements, the

nature of the joint ownership

5. If the person’s investment portfolio is material in relation to his or her other assets and

is concentrated in one or a few companies or industries, the names of the companies or

industries and the estimated current values of the securities

6. If the person has a material investment in a closely held business, at least the following:



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a. The name of the company and the person’s percentage of ownership

b. The nature of the business

c. Summarized financial information about assets, liabilities, and results of

operations for the most recent year based on the financial statements of the

business, including information about the basis of presentation (for example,

generally accepted accounting principles, income tax basis, or cash basis) and

any significant loss contingencies

7. Descriptions of intangible assets and their estimated useful lives

8. The face amount of life insurance the individuals own

9. Non-forfeitable rights such as pensions based on life expectancy



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10. The following tax information:

a. The methods and assumptions used to compute the estimated income taxes on

the differences between the estimated current values of assets and the

estimated current amounts of liabilities and their tax bases and a statement that

the provision will probably differ from the amounts of income taxes that might

eventually be paid because those amounts are determined by the timing and

the method of disposal, realization, or liquidation and the tax laws and

regulations in effect at the time of disposal, realization, or liquidation

b. Unused operating loss and capital loss carryforwards

c. Other unused deductions and credits, with their expiration periods, if applicable

d. The differences between the estimated current values of major assets and the

estimated current amounts of major liabilities or categories of assets and

liabilities and their tax bases

11. Maturities, interest rates, collateral, and other pertinent details relating to receivables

and debt

12. Non-cancelable commitments that do not have the characteristics discussed earlier in

this section, for example, operating leases



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EXAMPLES OF PERSONAL FINANCIAL STATEMENTS



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20X1 20X0

Assets

Cash 3,700$ 15,600$

Bonus receivable 20,000 10,000

Investments

Marketable securities 160,500 140,700

Stock options 28,000 24,000

K Associates 48,000 42,000

D Company, Inc. 550,000 475,000

Vested interest in deferred profit sharing plan 111,400 98,900

Remainder interest in testamentary trust 171,900 128,800

Cash value of life insurance ($43,600 and $42,900),

less loans payable to insurance companies ($38,100 and $37,700) 5,500 5,200

Residence 190,000 180,000

Personal effects (excluding jewelry) 55,000 50,000

Jewelry 40,000 36,500

Total Assets 1,384,000 1,206,700

Liabilities

Income taxes - current year balance 8,800 400

Demand 10.5% note payable to bank 25,000 26,000

Mortgage payable 98,200 99,000

Contingent liabilities

Total Liabilities 132,000 125,400

Estimated income taxes on the differences between the estimated current values of

assets and the estimated current amounts of liabilities and their tax bases 239,000 160,000

Net worth 1,013,000$ 921,300$

December 31,

Individual, Married Unit, Family Unit

Statements of Financial Condition

December 31, 20X1 and 20X0



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20X1 20X0

Realized increases in net worth

Salary and bonus 95,000$ 85,000$

Dividends and interest income 2,300 1,800

Distribution from limited partnership 5,000 4,000

Gains on sales of marketable securities 1,000 500

103,300 91,300

Realized decreases in net worth

Income taxes (26,000) (22,000)

Interest expense (13,000) (14,000)

Real estate taxes (4,000) (3,000)

Personal expenditures (36,700) (32,500)

(79,700) (71,500)

Net realized increase in net worth 23,600 19,800

Unrealized increases in net worth

Marketable securities (net of realized gains on securities sold) 3,000 500

Stock options 4,000 500

D Company, Inc. 75,000 25,000

K Associates 6,000

Deferred profit sharing plan 12,500 9,500

Remainder interest in testamentary trust 43,100 25,000

Jewelry 3,500 -

147,100 60,500

Unrealized decrease in net worth

Estimated income taxes on the differences between the estimated

current values of assets and the estimated current amounts of liabilities

and their tax bases (79,000) (22,000)

Net unrealized increase in net worth 68,100 38,500

Net increase in net worth 91,700 58,300

Net worth at the beginning of year 921,300 863,000

Net worth at the end of year 1,013,000$ 921,300$

Individual, Married Unit, Family Unit

Statements of Changes in Net Worth

For the Years Ended December 31, 20X1 and 20X0

Year ended December 31



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PROSPECTIVE FINANCIAL INFORMATION

Prospective financial statements are another type of financial statement that might have to be

prepared in the course of a professional accountant’s career. In fact, one of the frequent

findings in peer reviews is that public accountants frequently come into contact with

prospective information, and don’t recognize that information for what it really is. Whenever

there is a column for “budget”, if any of the budgeted amount(s) is other than already expired,

you are dealing with prospective information. Just as with historical financial information, if the

financial statements are for use within the organization then the form and contents is strictly a

matter of user need within the company. However, if any of the prospective information is

destined for limited or general distribution (see the definitions below), then the guidance

provided by professional standards is useful, and required if a public accountant is to be

involved with the prospective information. Prospective information is, by definition, difficult to

assemble because it requires looking into the future. Prospective information contains an aspect

of subjectivity because anticipated events may well not occur as planned. Users of such

information need to be adequately informed about the assumptions and risks attendant to such

information. The rest of this chapter will briefly describe some of the key points regarding the

actual prospective financial statement formatics, as well as provide a discussion and examples

with respect to disclosures that are applicable, and unique, to such presentations. It is strongly

suggested that you obtain a copy of the AICPA Guide to Prospective Financial Information, or

another reliable resource for assistance in actually preparing prospective financial statements.

Prospective financial statements have a lexicon that is somewhat unique. Following is a selected

glossary of key definitions used in describing the preparation of prospective financial

statements.

Financial forecast — A financial forecast is a prospective financial statement(s) that presents, to

the best of the responsible party’s knowledge and belief at the time the information for the

prospective financial statement is gathered, an entity’s expected financial position, results of

operations, and cash flows. (Loosely speaking, the most likely scenario). Financial statement

titles for a financial forecast should describe the nature of the presentation and should (must)

include the word forecast or forecasted.

Hypothetical assumption – This type of assumption in the deciding factor in determining

whether a presentation qualifies as a forecast, as defined above, or is a projection as discussed

below. A hypothetical assumption is an assumption used in a financial projection or in a partial



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presentation of projected information that is not necessarily expected to occur, but is consistent

(not unrealistic) with the purpose of the presentation.

Financial projection — A financial projection is a prospective financial statement(s) that

presents, to the best of the responsible party’s knowledge and belief at the time the information

for the prospective financial statement is gathered, given one or more hypothetical

assumptions, an entity’s expected financial position, results of operations, and cash flows. There

is a common misconception that a financial projection is somewhat inferior to a financial

forecast. This is just not the case. In fact, there are times when a projection is more useful to the

user than a forecast would be in the same circumstances. If an entity does not have much

experience with a certain area, a set of prospective financial statements that reflect best-case

and worst-case scenarios or a range could well be far more useful than a forecast that reflects

the most-likely scenario of someone who doesn’t have a strong experience base to draw upon in

the first place.



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Full presentation — A full presentation is a presentation that contains, at least, each of the

twelve elements that are discussed below. The first nine elements relate to what is contained in

the financial statement(s), as opposed to in the form of footnotes. If a set of prospective

financial statements omit any of those nine elements (and they are applicable to the entity and

not otherwise able to be derived from the presentation) it is a partial presentation. Full

presentations can range from prospective counterparts to complete GAAP historical financial

statements to little more than an abbreviated income statement with some added disclosure(s)

for significant changes in financial position.

The essential items for a full presentation are:

1. Sales or gross revenues

2. Gross profit or cost of sales

3. Unusual or infrequently occurring items

4. Provision for income taxes

5. Income from continuing operations

6. Discontinued operations or extraordinary items

7. .Net income

8. Basic and diluted earnings per share (if the entity is required or elects to present EPS)

9. Significant changes in financial position (not cash flows)

10. A description of what the responsible party intends for the financial forecast to present,

a statement that the assumptions are based on the responsible party’s judgment at the

time the prospective information was prepared, and a caveat that the forecasted results

may not be achieved

11. Summary of significant assumptions

12. Summary of significant accounting policies

The omission of any of the items numbered 10, 11, or 12 does not result in a partial

presentation; in all cases it results in a deficient presentation because of the lack of required

disclosures. Public accountants cannot be associated with deficient presentations.

Partial presentation – A partial presentation of prospective financial information excludes one or

more of the applicable items required for prospective financial statements as discussed below.



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Statement titles in financial projections should, just as in the case of forecasts, be descriptive of

the presentation. Financial statement titles must not imply that the presentation is a forecast.

Professional standards also requires that partial presentation titles describe or reference to any

significant hypothetical assumptions. For example, a break-even analysis might be titled

“Projected Results of Operations and Cash Flows at Break-Even Sales Volume.” (Break-even level

of sales being an unlikely level of operations, and thus a hypothetical assumption).

Responsible party – The person or persons who are responsible for the assumptions underlying

the prospective financial information. The responsible party usually is management, but it can

be persons outside the entity who currently do not have the authority to direct operations (for

example, a party considering acquiring the entity).

Key factors – Key factors are the underpinnings of the prospective presentation. Key factors are

generally few in number, but variance in factors defined by the responsible party as key factors

could significantly influence the outcome of the scenario. Such factors are basic to the entity’s

operations and some financial statement elements that are usually seen as key factors include:

sales, production, service, and financing activities. Key factors serve as the bases for the

assumptions.



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General use – General use prospective financial statements can be distributed to anyone that

the organization or client deems necessary to receive such information. Technically, general use

prospective financial statements can be provided to individuals who do not have direct access to

the responsible party.

Limited use – Limited use prospective financial statements should only be distributed to those

persons with whom the responsible party is negotiating directly. This means that such recipients

are able to ask questions of, and (potentially) negotiate the terms or structure of a transaction

directly with, the responsible party. Limited use presentations may be a financial forecast (if so

deemed by the entity), a financial projection, or a partial presentation.

There are some other considerations regarding the formatics and preparation of prospective

financial statements that need to be discussed at this point. Sometimes there is a level of

confusion as to what constitutes a prospective financial statement. The professional standards

clearly state that pro forma financial statements and partial presentations are not considered to

be prospective financial statements. Pro forma financial statements always are historic financial

statements restated “as if” a certain event had occurred in the past.

There is a protocol for obtaining information for prospective financial statements. This listing is

actually relatively intuitive, but variance from the protocol can result in faulty financial

reporting.

1. Identify all key factors underpinning the financial forecast

2. Develop specific assumptions that are responsive to each of the key factors. For

example, if a key factor is labor, develop assumptions regarding manpower availability

and anticipated labor rates.

Prospective information presented in the format of historical financial statements lends itself to

comparisons with historical financial position, results of operations, and cash flows of prior

periods. Financial forecasts preferably should be in the same format as the historical financial

statements that are expected to be issued for the expired prospective period(s). Other

presentation formats are permitted, provided there is an agreement between the responsible

party and potential users specifying another mutually acceptable format. Financial forecasts



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may take the form of complete basic financial statements or may be limited to the minimum

elements discussed in the definition of a full presentation.

The topic of adequate disclosure in prospective financial statements focuses on those additional

disclosures that are unique to prospective financial statements. Do be aware that prospective

financial statement must have a summary of significant accounting policies, just like their

historic counterpart. Professional standards does, however, permit the use of cross-referencing

in those cases where a financial forecast is included in a document that already contains some

of the information included in a summary of significant accounting policies

Ordinarily a financial projection should use the same accounting principles expected to be used

in the historical statements. Sometimes because of the special purpose a presentation might

require, it may be prepared using other accounting principles. In such cases, those different

accounting principles should be disclosed. Differences in financial position and results of

operations arising from the use of different accounting principles should be reconciled and

disclosed in the financial statements. An example of such a disclosure might state:

The projection assumes that revenues will be recognized on the completed contract basis, whereas

the company has historically used the percentage complete method of revenue recognition. If the

latter method were used in this projection, income before income taxes would be increased by

$XX, provision for income taxes would be increased and other working capital decreased by $XX,

and net income and shareholders’ equity would be increased by $XX.

If the historical financial statements for the prospective period are expected to be prepared in

conformity with a comprehensive Special Purpose Framework (basis of accounting) other than

generally accepted accounting principles, the financial forecast, preferably, should be prepared

on that Special Purpose Framework (basis of accounting), and the specific information required

to be presented should be adapted as appropriate for the Special Purpose Framework (basis of

accounting) used. The Special Purpose Framework (basis of accounting) used should be

disclosed, along with the fact that the disclosed basis is different than generally accepted

accounting principles.

The use of a different framework (basis) should be disclosed, and differences in results of

operations and changes in financial position or cash flows resulting from the use of a different

framework (basis) usually would be reconciled in the financial forecast. In some circumstances,



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such as certain tax shelters, a detailed reconciliation would not be useful. In such a case, a

general description of the differences resulting from the use of different frameworks (bases)

should be presented.

Financial forecasts are normally expressed in specific monetary amounts as a single- point

estimate of forecasted results, but also can be expressed as a range if the responsible party

selects key assumptions to form a range within which it reasonably expects, to the best of its

knowledge and belief, the item or items subject to the assumptions actually to fall.

If financial forecasts and projections are presented together, each needs to be clearly labeled.



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Notes to the financial statements must include disclosures surrounding the underpinning

assumptions inherent to presentation. The assumptions disclosed should include:

1. Assumptions about which there is a reasonable possibility of the occurrence of a

variation that may significantly affect the prospective results; that is, sensitive

assumptions. This is a requirement for the financial statement preparer to isolate

particularly volatile assumptions, and provide information regarding the impact that a

level of imprecision in estimation could have upon the overall presentation.

2. Assumptions about anticipated conditions that are expected to be significantly different

from current conditions, which may not otherwise reasonably be apparent to the user.

3. Other matters deemed important to the prospective information or its interpretation.

The responsible party should, in addition to the above, identify which, if any, assumptions in the

projection are hypothetical. The resulting disclosure should indicate whether the hypothetical

assumptions are improbable.

Examples of disclosures of assumptions that are typically deemed significant in most prospective

financial presentations include:

An introduction preceding the summary of assumptions should be provided to make clear that

the assumptions disclosed are not an all-inclusive list of those used in the preparation of the

prospective information, and that they were based on the responsible party’s judgment at the

time the prospective information was prepared.

This financial forecast presents, to the best of management’s knowledge and belief, the

Company’s expected financial position, results of operations, and cash flows for the forecast

period. Accordingly, the forecast reflects its judgment as of September 30, 2000, the date of this

forecast, of the expected conditions and its expected course of action. The assumptions disclosed

herein are those that management believes are significant to the forecast There will usually be

differences between the forecasted and actual results because events and circumstances

frequently do not occur as expected and those differences may be material

A presentation with an improbable hypothetical assumption; the example should be modified as

appropriate in the circumstances.



Page 163 of 329

This financial projection is based on ideal-capacity sales volume to make use of the Company’s

maximum productive capacity and presents, to the best of management’s knowledge and belief,

the Company’s expected financial position, results of operations, and cash flows for the projection

period if such ideal-capacity sales volume were to be attained. This projection reflects the

responsible party’s judgment as of September 30, 2000, the date of this projection, of the expected

conditions and the entity’s expected course of action if such sales volume actually occurred. The

presentation is designed to provide information to the Company’s board of directors concerning

the maximum profitability that might be achieved if current production were expanded to its

(theoretic) maximum capacity, and should not be considered to be a presentation of expected

future results Accordingly, this projection may not be useful for other purposes The assumptions

disclosed herein are those that management believes are significant to the projection.

Management considers it highly unlikely that the stated sales volume will be experienced during

the projection period. Furthermore, even if the stated sales volume were attained, there will

usually be differences between projected and actual results, because events and circumstances

frequently do not occur as expected, and those differences may be material



Page 164 of 329

Some examples of disclosure of assumptions follow:

The projection is based on the assumption that production capacity will be increased by

approximately 20 percent by the construction of a 160,000 square foot production facility in

Anywhere, USA.

Materials used by the Company are expected to be readily available, and the Company has

generally used producer estimates of prices in the projection period to project material costs. The

Company expects to be able to assure a sufficient supply of materials and estimates that the cost

of materials will increase by 12 percent per annum.

The Company’s labor union contract, which covers substantially all manufacturing personnel, will

be subject to renegotiation in 20X3. Labor cost until that time are projected based on the existing

contract.

The forecast assumes that management is able to maintain tight controls over manufacturing

costs and inventory levels. If the downturn in the economy continues, management plans to

continue substantial reduction in inventory levels.



Page 165 of 329

Power Point Handouts



Page 166 of 329

Slide 1

1

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Page 167 of 329

Slide 2

Today’s Topics

Today’s Topics

1. Overview of presentation and

disclosure processes,

2. Formatics – matters involving

financial statement

A. Appearance and

B. Content 2

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Page 168 of 329

Slide 3

Today’s Topics

3. Researching Presentation and

Disclosure Issues


Accounting Policies

5. Other Footnote Disclosures

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Slide 4

Why Spend a Day?

Peer Review Feedback!

Largest source of findings.

Potential for Value-Added Service to Client

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Slide 5

Protocol for Effective Presentation and Disclosure

Protocol for Effective Financial

Statement Presentation and

Disclosure

1. Identify the Principal Users of the

financial statements. A. You can’t even get started without knowing

who will use the financial statements.

B. Users, generally, include the following

1) Management

2) Lenders

3) Owners

4) Regulators

5) Sureties 5

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Slide 6



Disclosure1. Identify the Principal Users of the financial statements.

2. Determine the key points users

are looking for.

A. Restrictive Covenants

B. Compliance with budgets

C. Asset amounts (balances)

D. Income

E. What is material to the user (focus) 6

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Slide 7




2. Determine the key points users are looking for.

3. Provide options to users. A. Level of detail – Does one-size fit all?

B. Non-traditional formats (charts, graphs)

C. Cost-Volume-Profit analysis

D. Variance analysis

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Slide 8




2. Determine the key points users are looking for.

3. Provide options to users.

4. “Test-Drive” the financial

statements (or significant changes

to) prior to issuance. A. Use “blank format” or pro-forma approach

B. Ask for inputs and/or suggestions

C. Respond (positively) to feedback

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Page 174 of 329

Slide 9

The three “A”s in

Presentation and Disclosure

1.Appearance A. Unsophisticated User

B. Peer Review shock

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Page 175 of 329

Slide 10


Presentation and Disclosure1. Appearance

2.Approach A. Compliance (What’s the least I

have to do?)

B.Value-Added – How do I

1) Meet user needs, and

2) Distinguish myself from the

competition 10

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Page 176 of 329

Slide 11


Presentation and Disclosure1. Appearance

2. Approach

3.Acceptance – The

other side of approachA. Who provides this (commodity)

product at the lowest price?

B. User sees little or no value, or

C. This is valuable input 11

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Page 177 of 329

Slide 12

Characteristics of a Financial Statement


Derived from Accounting Records.

Intended to Communicate: Economic Resources or Claims Against Resources

In accordance with a financial reporting framework.

Principally financial in nature.

IFRS

for

SMEs

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Page 178 of 329

Slide 13

IFRS for SMEs

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Page 179 of 329

Slide 14


Derived from Accounting Records.

Intended to Communicate: Economic Resources or Claims Against Resources

In accordance with a financial reporting framework.

Principally financial in nature.

IFRS

for

SMEs

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Slide 15

Special Purpose Framework (Other Comprehensive Bases of Accounting)

Statutory -

Insurance

Utility

Regulatory

Modified

CashFair

Value?

Cash Accrual

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Page 181 of 329

Slide 16

Titling of SPF

Financial

Statements. Disclosures

Cash Flow Statement

Level of Detail

Parenthetic, or

Footnote Disclosure

Summary of

Significant

Accounting Policies

Standard Required Generic

1. Balance Sheet

2. Statement of

Financial

Position

3. Income

Statement,

4. Statement of

Income

16

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Page 182 of 329

Slide 17

Financial Statement Formatics

Titling

Elements

Refer to

Footnotes?

$

Comparative

or Stand-

Alone

Tombstone --

Content

Underscore

-- Subtotals

--Terminal or Balancing

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Page 183 of 329

Slide 18

Titling

Elements

1.Name of Entity

2.Title of Financial

Statement, and

3.Dating

information.18

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Slide 19

Tombstone --

Content

Only Required When Third-Party Accountant is Involved

1. When the level of service is covered by SSARS

(Compilation and Review) – The tombstone (footer)

must refer to the accountants’ report..

2. When the level of service is covered by SAS (Audits)

– The tombstone (footer) must refer to the notes to

the financial statements.

19

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Page 185 of 329

Slide 20

Comparative

or Stand-

Alone

1.Comparative presentations not

required for U.S. GAAP or SPF


2.Two-period comparative financial

statements are required for

financial statements prepared in

accordance with IFRS (for SMEs).

20

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Page 186 of 329

Slide 21

Comparative

or Stand-

Alone

1. Comparative presentations not required for U.S.

GAAP or SPF financial statements.

2. Two-period comparative financial statements are

required for financial statements prepared in

accordance with IFRS (for SMEs).

1.Two-period comparative financial statements are

used to establish a common reference point for

analysis purposes.

2.More than two periods are necessary when trend

(or trend-break) information is to be conveyed by

the presentation. 21

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Page 187 of 329

Slide 22

$

Not Required by Professional Standards

Generally used to indicate

Initial monetary amounts, and

Terminal and/or balancing amounts.

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Page 188 of 329

Slide 23

$

Underscore

-- Subtotals

--Terminal or

Balancing






1. Single underscore used to indicate/set-off

subtotals

2. Double underscore used to indicate

terminal and/or balancing amounts.

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Page 189 of 329

Slide 24

Refer to

Footnotes?

$

Underscore

-- Subtotals

--Terminal or

Balancing






1. Single underscore used to indicate/set-off

subtotals

2. Double underscore used to indicate

terminal and/or balancing amounts.


24

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Page 190 of 329

Slide 25

Balance Sheet Formatics

1.Classified vs. Unclassified

25

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Page 191 of 329

Slide 26

1. Classified vs. Unclassified

ASSETS

5,096$ -$

2,429,185 2,750,801

1,439,218 1,226,258

170,478 167,500

4,043,977 4,144,559

1,435,506 1,048,717

(470,204) (330,804)

965,302 717,913

56,622 45,677

56,622 45,677

5,065,901$ 4,908,149$ TOTAL ASSETS

Fixed Assets


Cash


Inventories

Prepaid Expenses

Current Assets:

Deposits

OTHER ASSETS

CURRENT ASSETS

FIXED ASSETS

26

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Page 192 of 329

Slide 27


-$ 253,070$

832,518 1,000,005

110,332 189,443

484,826 6,836

21,873 832,944

1,574,075 282,086

3,023,624 2,564,384

714,546 713,873

3,738,170 3,278,257

490,000 490,000

837,731 1,139,892

1,327,731 1,629,892


shares outstanding

Retained Earnings


TOTAL LIABILITIES

STOCKHOLDERS EQUITY



Current Liabilities


CURRENT LIABILITIES

Bank Overdraft


Sales Tax Payable

Accrued Expenses

Other Liabilities


27

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Slide 28

5,096$ -$

2,429,185 2,750,801

1,439,218 1,226,258

56,622 45,677

170,478 167,500

1,435,506 1,048,717

(470,204) (330,804)

5,065,901$ 4,908,149$

-$ 253,070$

832,518 1,000,005

110,332 189,443

484,826 6,836

21,873 832,944

2,288,621 995,959

490,000 490,000

837,731 1,139,892



STOCKHOLDERS EQUITY



shares outstanding

Retained Earnings

Deposits

TOTAL ASSETS

Bank Overdraft


Sales Tax Payable

Accrued Expenses

Other Liabilities

Long Term Debt (with explanation)


Prepaid Expenses

Fixed Assets


Inventories

Cash


28

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Page 194 of 329

Slide 29


2.Totals/Subtotals

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Page 195 of 329

Slide 30

ASSETS

5,096$ -$

2,429,185 2,750,801

1,439,218 1,226,258

170,478 167,500

4,043,977 4,144,559

1,435,506 1,048,717

(470,204) (330,804)

965,302 717,913

56,622 45,677

56,622 45,677

5,065,901$ 4,908,149$ TOTAL ASSETS

Fixed Assets


Cash


Inventories

Prepaid Expenses

Current Assets:

Deposits

OTHER ASSETS

CURRENT ASSETS

FIXED ASSETS

30

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Page 196 of 329

Slide 31

-$ 253,070$

832,518 1,000,005

110,332 189,443

484,826 6,836

21,873 832,944

1,574,075 282,086

3,023,624 2,564,384

714,546 713,873

3,738,170 3,278,257

490,000 490,000

837,731 1,139,892

1,327,731 1,629,892


shares outstanding

Retained Earnings


TOTAL LIABILITIES

STOCKHOLDERS EQUITY



Current Liabilities


CURRENT LIABILITIES

Bank Overdraft


Sales Tax Payable

Accrued Expenses

Other Liabilities


31

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Slide 32


2. Totals/Subtotals

3. Method of Presentation

A. Portrait (over/under)

B. Landscape (side-by-side)

32

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Page 198 of 329

Slide 33

Income Statement Formatics

Basic Level of Detail1) Revenues (OR)

2) Cost of Sales (AND)

3) Gross Profit

33

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Page 199 of 329

Slide 34



3) Gross Profit

4) Income from operations

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Page 200 of 329

Slide 35



3) Gross Profit


5) Income Tax Expense

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Page 201 of 329

Slide 36



3) Gross Profit



6) Net Income

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Page 202 of 329

Slide 37



3) Gross Profit



6) Net Income

7) Below the Line Items

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Page 203 of 329

Slide 38



3) Gross Profit



6) Net Income

7) Below the Line Items

a) Discontinued Operations/ Disposal of a Segment

b) Extraordinary Items

c) Changes in Accounting Principle

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Slide 39

Extraordinary items (225-20-45-1 through 15)

1) Criteria

A.Unusual in nature, and

B.Infrequent in occurrence

C.There are no longer any definitional extraordinary items

2)Subject to materiality

39

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Page 205 of 329

Slide 40

Extraordinary items

3) Not extraordinary, by definition

A. Write-down/off of receivables, inventories, leased equipment, other intangible assets

B. Translation of foreign currencies

C. Disposal of a component of an entity

D. Sale or abandonment of PPE used in a business

E. Effects of work stoppage

F. Adjustment of accruals on long-term contracts

4) 225-20-55-4 Provides eight specific examples of events that are not, by definition, extraordinary.

40

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Slide 41

16,333,643$ 12,916,911$ (1)

(87,139) (47,774) (1)

16,246,504 12,869,137 (1)

(9,460,815) (6,373,896) (2)

6,785,689 6,495,241 (3)

(6,493,219) (5,332,033)

292,470 1,163,208 (4)

23,680 733

(151,809) (113,307)

- 513,307

- (304,168)

164,341 1,259,773 (4)

(21,118) (250,437) (5)

143,223$ 1,009,336$ (6)

Proceeds from lawsuit

Abandonment of assets

Income From Continuing Operations before income taxes

Income taxes

Net Income

Cost of Goods Sold

Gross Income:

Selling and G&A Expenses


Interest Income

Interest Expense

Sales

Returns & Allowances

Net Sales:

41

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Slide 42


Other Comprehensive Income Elements– Available-For-Sale investment Unrealized

gains/losses

– Hedging unrealized gains/losses

– Foreign Exchange Translation adjustment

– SFAS No. 87 – Addl. Minimum Liability

– Changes Embodied in SFAS No. 158 – Re: Defined Benefit Pension

42

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Page 208 of 329

Slide 43

Other Comprehensive Income Elements– Available-For-Sale investment Unrealized

gains/losses

– Hedging unrealized gains/losses

– Foreign Exchange Translation adjustment

– SFAS No. 87 – Addl. Minimum Liability

– Changes Embodied in SFAS No. 158 – Re: Defined Benefit Pension

Required Elements in DisclosureNet Income

Each (applicable) OCI component

Total Other Comprehensive Income

Comprehensive Income43

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Slide 44

One Statement (Combined) approach

44

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Page 210 of 329

Slide 45

Revenues 470,000$

Expenses (135,000)

Other gains and losses 10,500

Gain on sale of securities 2,000

Income from operations before tax 347,500

Income tax expense (83,400)

Income before extraordinary item and cumulative effect of accounting change 264,100

Extraordinary item, net of tax (198,350)

Cumulative effect of accounting change, net of tax (1,250)

Net income 64,500









45

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Slide 46

Presentation Options

Separate (Stand-Alone) Statement

46

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Slide 47

Net income 64,500$









47

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Page 213 of 329

Slide 48

Presentation Options

Statement-of-Changes-in-Equity Approach

48

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Slide 49

Accumulated

Other





Net income 64,500 64,500 64,500










Ending balance 660,000$ 81,500$ 143,000$ 42,000$ 150,000$ 325,000$ 49

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Slide 50

Statement of Cash Flows Formatics


1. Better than APB 19 – By a

long-shot!

A.Changes in financial

position?

B.Little industry input.

C.No “meaningful” target - ∆ in

working capital

50

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Slide 51


1. Better than APB 19 – By a long-shot!

A. Changes in financial position?

B. Little industry input.

C. No “meaningful” target - ∆ in

working capital

2. Cash is the defined target, and

3. Cash is looked at from the

perspective of activities – three

activities. 51

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Slide 52

Defined Activities

Investing Financing

52

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Page 218 of 329

Slide 53


Investing and Financing

(10,945) (45,677)

15,000 (15,000) (386,789) (428,572)

(382,734) (489,249)

(832,944) 275,639

- (240,221)

1,292,662 800,000

- 82,500

(445,385) (281,716)

(253,070) 118,554

152,500 28,106

(86,237) 782,862

NET CASH USED BY INVESTING ACTIVITIES

CASH FLOWS (USED BY) INVESTING ACTIVITIES

Deposits

BondsAcquisition of Equipment

Dividends Paid

Decrease in Bank Overdraft

Due From Shareholder

NET CASH PROVIDED BY FINANCING ACTIVITIES

CASH FLOWS FROM & (USED BY) FINANCING ACTIVITIES

Decrease in Lines of Credit

Payment of Notes Payable

New Proceeds of Notes Payable

Sale of Treasury Stock

53

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Page 219 of 329

Slide 54

Defined Activities

Operating

•Direct Method

•Indirect Method

Investing Financing

54

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Page 220 of 329

Slide 55


Operations – Indirect/Direct

55

Net Income 143,223$

Adjustments to Reconcile Net Income

to Net Cash Provided by Operating Activities

Depreciation 139,401

Trade Accounts Receivable 321,616

Inventory (212,960)

Prepaid Expenses (170,478)

Trade Accounts Payable (145,614)

Sales Tax Payable (79,111)

Accrued Expenses 477,990

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 474,067$

Sales (Net) 16,246,504$

Cost of Sales (9,460,815)

Gross Margin 6,785,689

Selling, General and Administrative Expense (6,493,219)

Other Income and Expense

Interest Income 23,680

Interest Expense (151,809)

(6,621,348)

Income Before Income Taxes 164,341

Income Tax Expense (21,118)

Net Income 143,223$

Cash Received From Customers 16,568,120$

Cash Paid Out To Suppliers and Employees (15,865,695)

Cash Paid Out For Interest Expense (151,809)

Cash Received From Interest 23,680

Cash Paid Out For Taxes (100,229)

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 474,067$

Indirect Method

Direct Method

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Page 221 of 329

Slide 56


Operations – Direct Conversion

56

Cash Received From Customers

Sales (Net) 16,246,504$

Trade Accounts Receivable 321,616

16,568,120$

Cash Paid Out To Suppliers and Employees

Cost of Sales (9,460,815)$

Selling, General and Administrative Expense(6,493,219)

Depreciation 139,401

Inventory (212,960)

Prepaid Expenses (170,478)

Trade Accounts Payable (145,614)

Accrued Expenses 477,990

(15,865,695)$

Cash Paid Out For Taxes

Income Tax Expense (21,118)$

Sales Tax Payable (79,111)

(100,229)$

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Page 222 of 329

Slide 57

Converting from the Indirect

Method to the Direct Method1. Complete the traditional

A. Income Statement, and

B. Cash flow statement – Indirect method

2. Combine income statement detail with

A. Revenues/Gains = Sources

B. Expenses/Losses = Uses

3. Reconciling items on cash flow statement

A. Non-Cash Reconcilers

B. Reclassification Reconcilers

C. Discretionary Reconcilers

57

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Page 223 of 329

Slide 58

Defined Activities

Operating

•Direct Method

•Indirect Method

Investing FinancingCash

Equivalents

58

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Page 224 of 329

Slide 59

Articulation RequirementsFormaticsAmounts

When the Indirect

method is used on

the face of the

statement of cash

flows:

1. Interest Paid, and

2. Income taxes

Paid

59

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Page 225 of 329

Slide 60


5,096 -

- -

5,096$ -$

131,809$ 78,307$

366,229$ 591,573$ Taxes Paid

SUPPLEMENTAL DISCLOSURES

Interest Paid

CASH AND CASH EQUIVALENTS AT END OF YEAR

NET CHANGE IN CASH

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

60

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Page 226 of 329

Slide 61


When the Indirect

method is used on

the face of the

statement of cash

flows:


2. Income taxes

Paid

When the direct method is

used on the face of the

statement of cash flows:

Reconcile net income to

cash from operations

61

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Page 227 of 329

Slide 62


Non-Cash Transactions

When the Indirect

method is used on

the face of the

statement of cash

flows:


2. Income taxes

Paid

When the direct method is

used on the face of the

statement of cash flows:

Reconcile net income to

cash from operations

62

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Page 228 of 329

Slide 63

Equity Statement Formatics

Is this a Basic Financial Statement?

When to Present?

How to Present?

63

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Page 229 of 329

Slide 64


When to Present?

How to Present?

Stand-Alone

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Page 230 of 329

Slide 65

Retained Earnings (Equity)

Statement – Stand-Alone

1,139,893$ 530,102$

143,223 1,009,336

- (117,830)

(445,385) (281,715)

837,731$ 1,139,893$ Ending Retained Earnings (Equity)

Dividends Paid

Loss on Sale of Treasury Stock

Net Income

Beginning Retained Earnings (Equity)

65

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Page 231 of 329

Slide 66


Statement – Enhanced Stand-Alone

Accumulated

Other





Net income 64,500 64,500 64,500










Ending balance 660,000$ 81,500$ 143,000$ 42,000$ 150,000$ 325,000$ 66

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Page 232 of 329

Slide 67


When to Present?

How to Present?

Stand-Alone

Combined on face of Income Statement –NB Titling of the Financial Statement

67

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Page 233 of 329

Slide 68


Statement – CombinedSales $ 16,333,643 $ 12,916,911

Returns & Allowances (87,139) (47,774)

Net Sales: 16,246,504 12,869,137

Cost of Goods Sold (9,460,815) (6,373,896)

Gross Income: 6,785,689 6,495,241

Selling and G&A Expenses (6,493,219) (5,332,033)

Income From Continuing Operations 292,470 1,163,208

Interest Income 23,680 733

Interest Expense (151,809) (113,307)

Proceeds from lawsuit - 513,307

Abandonment of assets - (304,168)

Income From Continuing Operations before income taxes 164,341 1,259,773

Income taxes (21,118) (250,437)

Net Income 143,223 1,009,336

Beginning Retained Earnings 1,139,893 530,102

Loss on Sale of Treasury Stock - (117,830)

Dividends Paid (445,385) (281,715)

Ending Retained Earnings $ 837,731 $ 1,139,893 68

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Page 234 of 329

Slide 69


When to Present?

How to Present?

Stand-Alone

Combined on face of Income Statement –NB Titling of the Financial Statement

Combined on face of Balance Sheet --NB Titling of the Financial Statement

69

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Page 235 of 329

Slide 70

What is Meant by “Disclosure”

What Constitutes “Disclosure”

in Financial Statements?

1. Level of Detail.

A. Every element of the title to a

financial statement is a form of

disclosure.

B. Each line item is a form of disclosure.

C. Does one size fit all?

70

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Page 236 of 329

Slide 71


in Financial Statements?1. Level of Detail.

2. Parenthetic, and

3. Footnote

A. Parenthetic is an option to footnote

disclosure.

B. Financial statements that omit these

elements of disclosure have a

tendency to raise more questions

than they answer.71

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Page 237 of 329

Slide 72



2. Parenthetic, and

3. Footnote content is comprised

of

A. Summary of Significant

Accounting Policies

72

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Page 238 of 329

Slide 73



2. Parenthetic, and


ofA. Summary of Significant Accounting Policies

B.Standard Required,

1) Prescribed by a particular

standard.

2) Standard checklist matter73

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Page 239 of 329

Slide 74



2. Parenthetic, and


ofA. Summary of Significant Accounting Policies

B. Standard Required, and

C.Generic

1) Such other disclosure as may be

necessary

2) Requirement has been expanded 74

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Page 240 of 329

Slide 75

Researching Presentation and Disclosure Matters

Researching Presentation

and Disclosure Matters1. Check with the FASB.

75

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Page 241 of 329

Slide 76

Access the FASB

Access the FASB – FASB.org


Presentation

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Page 242 of 329

Slide 77

Logging on to the Accounting

Standards Codification


Presentation

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Page 243 of 329

Slide 78

Initial Codification Page


Presentation

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Page 244 of 329

Slide 79

FASB Accounting Standards

Codification – Areas Screen

79

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Page 245 of 329

Slide 80

Topic Screen

80

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Page 246 of 329

Slide 81

Section Screen

81

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Page 247 of 329

Slide 82

Sub-Section Screen

82

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Page 248 of 329

Slide 83


Codification – Areas and Topics100 General Principles

105 Generally Accepted Accounting Principles

200 Presentation205 Presentation of Financial Statements

210 Balance Sheet

215 Statement of Shareholder Equity

220 Comprehensive Income

225 Income Statement

230 Statement of Cash Flows

235 Notes to Financial Statements

250 Accounting Changes and Error Corrections

255 Changing Prices

260 Earnings Per Share

270 Interim Reporting

272 Limited Liability Entities

274 Personal Financial Statements

275 Risks and Uncertainties

280 Segment Reporting83

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Page 249 of 329

Slide 84


Codification – Areas and Topics300 Assets

305 Cash and Cash Equivalents

310 Receivables

320 Investments—Debt and Equity Securities

323 Investments—Equity Method and Joint Ventures

325 Investments—Other

330 Inventory

340 Other Assets and Deferred Costs

350 Intangibles—Goodwill and Other

360 Property, Plant, and Equipment

400 Liabilities405 Liabilities

410 Asset Retirement and Environmental Obligations

420 Exit or Disposal Cost Obligations

430 Deferred Revenue

440 Commitments

450 Contingencies

460 Guarantees

470 Debt

480 Distinguishing Liabilities from Equity

500 Equity505 Equity

84

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Page 250 of 329

Slide 85


Codification – Areas and Topics

600 Revenue605 Revenue Recognition

700 Expenses705 Cost of Sales and Services

710 Compensation—General

712 Compensation—Nonretirement Postemployment Benefits

715 Compensation—Retirement Benefits

718 Compensation—Stock Compensation

720 Other Expenses

730 Research and Development

740 Income Taxes85

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Page 251 of 329

Slide 86


Codification – Areas and Topics

800 Broad Transactions805 Business Combinations

808 Collaborative Arrangements

810 Consolidation

815 Derivatives and Hedging

820 Fair Value Measurements and Disclosures

825 Financial Instruments

830 Foreign Currency Matters

835 Interest

840 Leases

845 Nonmonetary Transactions

850 Related Party Disclosures

852 Reorganizations

855 Subsequent Events

860 Transfers and Servicing 86

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Page 252 of 329

Slide 87


Codification – Areas and Topics900 Industry

905 Agriculture

908 Airlines

910 Contractors—Construction

912 Contractors—Federal Government

915 Development Stage Entities

920 Entertainment—Broadcasters

922 Entertainment—Cable Television

924 Entertainment—Casinos

926 Entertainment—Films

928 Entertainment—Music

930 Extractive Activities—Mining

932 Extractive Activities—Oil and Gas

940 Financial Services—Broker and Dealers

942 Financial Services—Depository and Lending

944 Financial Services—Insurance

946 Financial Services—Investment Companies

948 Financial Services—Mortgage Banking

950 Financial Services—Title Plant

952 Franchisors

954 Health Care Entities

958 Not-for-Profit Entities

960 Plan Accounting—Defined Benefit Pension Plans

962 Plan Accounting—Defined Contribution Pension Plans

965 Plan Accounting—Health and Welfare Benefit Plans

970 Real Estate—General

972 Real Estate—Common Interest Realty Associations

974 Real Estate—Real Estate Investment Trusts

976 Real Estate—Retail Land

978 Real Estate—Time-Sharing Activities

980 Regulated Operations

985 Software

995 U.S. Steamship Entities87

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Page 253 of 329

Slide 88


Codification – Section Screen

88

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Page 254 of 329

Slide 89


Codification – Sections

Standard Section Titles5 Overview and Background

10 Objectives

15 Scope and Scope Exceptions

20 Glossary

25 Recognition

30 Initial Measurement

35 Subsequent Measurement

40 Derecognition

45 Other Presentation Matters

50 Disclosure

55 Implementation Guidance and Illustrations

60 Relationships

65 Transition and Open Effective Date Information

70 Grandfathered Guidance

75 XBRL Definitions

S99 SEC Materials 89

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Page 255 of 329

Slide 90


Codification – Sub-Sections

90

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Page 256 of 329

Slide 91


Codification – Cross Reference

91

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Page 257 of 329

Slide 92


Codification – Cross Reference

92

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Page 258 of 329

Slide 93



2. Resist the urge to be original.

A. See how the “big-guys” do (did) it.

93

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Page 259 of 329

Slide 94

Use the SEC – Access EDGAR

Check with the SEC

94

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Page 260 of 329

Slide 95

Check with the SEC

95

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Page 261 of 329

Slide 96

Check with the SEC

96

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Page 262 of 329

Slide 97

Check with the SEC

97

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Slide 98

Check with the SEC

98

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Page 264 of 329

Slide 99

Check with the SEC

99

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Page 265 of 329

Slide 100

Check with the SEC

100

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Page 266 of 329

Slide 101

Check with the SEC

101

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Page 267 of 329

Slide 102

Check with the SEC

102

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Page 268 of 329

Slide 103

Check with the SEC

103

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Page 269 of 329

Slide 104

Check with the SEC

104

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Page 270 of 329

Slide 105

Check with the SEC

105

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Slide 106



2. Resist the urge to be original. A. See how the “big-guys” do (did) it.

B. Develop a library of footnotes.

106

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Slide 107





C. Professional accountant should do the

“cut-and-paste”

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Slide 108





C. Professional accountant should do the “cut-and-paste”

D. Use a professional writer (English PhD) to

finish the job.

1) Draft original footnotes (very rare in

practice),

2) Conform “voice” of cut-and-paste

contents108

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Slide 109

Footnotes – Summary of Significant Accounting Policies



Accounting Policies



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Slide 110



Accounting Policies





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Page 276 of 329

Slide 111



Accounting Policies







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Slide 112



Accounting Policies







D. Other matters – usage.112

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Slide 113



Professional Standards Regarding Cash and Cash

Equivalents (ASC 230-10-50-1)

When a reporting entity presents a cash flow

statement, it is required to state its policy regarding

cash equivalents

A. This is required, whether or not the entity currently

has cash equivalents, because it is an election,

B. A change in policy regarding cash equivalents is

defined/disclosed

1. As a change in accounting policy, that is to be

reflected

2. Through restatement of all periods presented for

comparative purposes. 113

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Slide 114

Use of Estimates

Use of Estimates

Professional Standards Regarding Use ofEstimates (ASC 275-10-50-4, 275-10-55-6(example language))

When a reporting entity presents financialstatements that include footnotes is shouldinclude a footnote disclosure that notes thatthe preparation of financial statementsrequires that management make estimates.

The example language, provided in theCodification, suggests that the footnote shouldconclude by stating that certain estimates maynot be achieved. 114

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Slide 115

Income Taxes

Income TaxesProfessional Standards Regarding Income Taxes (ASC740-10-50-2 - 21)

1. 50-2 -- Balance sheet disclosures

A. Total deferred tax

1) Liabilities, and/or

2) Assets

B. Total valuation allowance recognized, re. deferred tax assets, as well

as change in valuation allowance during reporting period.

2. 50-3 Amounts and expiration dates of

A. Loss carryforwards, and/or

B. Tax credit carryforwards

C. Valuation allowance amounts that will be credited directly to

contributed capital.

3. 50-4 When a reporting entity's tax status changes with respect to the

following reporting period, but prior to the issuance of financial

statements, this matter should be disclosed in the notes.

4. 50-8 For nonpublic reporting entities, disclosure of the types of

significant temporary differences is required -- numeric reconciliation is

permitted, but not required. 115

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Slide 116

Income Taxes5. 50-9 Significant components of income tax need to bedisclosed, either on the face of the financial statement or withinthe footnotes, elements that commonly comprise such itemsinclude

A. Current expense,

B. Deferred expense,

C. Benefit of loss carryforwards, and/or

D. Adjustments to deferred tax liability and/or asset resultingfrom changes in tax laws and/or rates.

6. 50-10 When applicable, amount of income tax expenseallocated to continuing operations and other separately reportedelements (intraperiod tax allocation).

7. 50-13 Nonpublic reporting entities are required to disclose thenature of significant matters that cause a difference betweenexpected and reflected income tax expense (effect of the surtaxexemption).

8. 50-14 Any matters that may affect comparability of financialstatements included in a particular presentation.

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Slide 117

Income Taxes9. 50-15 Non Public entities are required to disclose the following

matters regarding unrecognized income tax benefits

A. Total interest and/or penalties recognized in the balance sheet

and/or income statement,

B. For positions for which it is reasonable possible there will be a

significant change within the following 12 months

1) Nature of the uncertainty,

2) The type of event that could give rise to the change,

3) An estimate of the range of the effect of the change, or a

statement that such a range cannot be reasonable estimated

C. Tax years open -- subject to examination, by jurisdiction.

10. 50-18 Choice(s) between alternative acceptable tax options.

11. 50-19 Interest and/or penalty recognition policy(ies).

12. 50-20 Policy regarding recognition of investment tax credits, and

13. 50-21 Generic disclosure requirement -- to prevent the financial

statements from being misleading (for their intended usage).117

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Page 283 of 329

Slide 118

New Accounting Pronouncements

New Accounting Pronouncements

While the Codification does not provideany specific guidance/requirementregarding disclosure of a reportingentity's treatment of new accountingpronouncements, 70 percent of thefinancial statements reviewed incompiling data for this session includedthis category of disclosure within theSummary of Significant AccountingPolicies.

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Slide 119

Reclassification of Amounts

Reclassification of amounts

Professional Standards Reclassification

of amounts appearing in financial

statements (ASC 250-10-50 -1) -- When

significant reclassifications have been

made within financial statements,

presented for comparative purposes,

with the current period, information

should be included that will explain the

reason for and nature of the change.

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Page 285 of 329

Slide 120

Revenue Recognition

Revenue RecognitionProfessional Standards Regarding RevenueRecognition -- Currently, there is no specificrequirement for an entity to discloserevenue recognition policies, unless thatreporting entity is a member of an industrywhere the revenue recognition approach isunique to that industry (constructioncontractor, or franchise operations).However, because of a stated preference bythe SEC (for its registrants) for suchdisclosure, non-registrants are includingdisclosure regarding revenue recognitionpolicies, even when such approaches arenot unique to the industry.

120

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Slide 121


Property, Plant and EquipmentProfessional Standards Regarding Property, Plant and

Equipment (ASC 360-10-50-1 through 3)

1. 50-1 Each of the following matters should be disclosed

either on the face of the financial statement or notes

thereto:

A. Depreciation expense for each period presented,

B. Disaggregated balance information for PP&E by the

following categories (for each balance sheet presented)

1) Major class,

2) Nature and/or function

C. Accumulated depreciation -- by either -- major class or

total -- for each balance sheet presented.

D. General description of method(s) used to depreciate --

by major class of assets subject to depreciation121

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Slide 122


2. 50-2 Impairment of long-lived assets (toinclude those assets that are currently heldand used within the reporting entity)

A. A description of the impaired long-livedasset(s)

B. Reason(s) for impaired status,

C. If given other than line-item status -- theamount of the impairment loss, and where theamount appears within the income statement,

D. When applicable, disclosure of whichsegment of the reporting entity in which theimpairment appears.

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Slide 123


Consolidation PoliciesProfessional Standards Regarding Consolidation Policies (ASC810-10-50-1 through 2)

1. 50-1 Consolidation policies should be disclosed -- eithercommunicated on the face of the financial statement or a note tothe financial statements

2. 50-1A When the consolidated financial statements reflectconsolidation of less-than-wholly-owned subsidiaries, thefollowing additional information should be disclosed for suchsubsidiaries

A. Consolidated net income, and when applicable,comprehensive income (appears on the face of the financialstatement -- not to be a footnote disclosure)

B. Net income and comprehensive income attributable to theparent and non-controlling interest (minority) -- (appears on theface of the financial statement -- not to be a footnote disclosure)

C. The following subtotals, with respect to the Parentorganization, should be disclosed either on the face of thefinancial statement or as a footnote disclosure

1) Income from continuing operations,

2) Discontinued operations, and/or

3) Extraordinary items. 123

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Slide 124


D. Reporting entities are to report, either within the equitystatement or notes to the financial statements

1) Reconciliation of the equity accounts of the following,from the beginning to the end of the reporting period,

a. Total equity -- at the consolidated level,

b. Parent,

c. Non-controlling (minority) interests

2) The level of detail of the reconciliations shoulddisclose the following elements

a. Net income,

b. Transactions with owners -- acting as owners, and

c. Each component, as applicable, of othercomprehensive income.

E. Any changes in parent ownership of a consolidatedsubsidiary should be disclosed in a footnote.

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Slide 125

Inventories

InventoriesProfessional Standards Regarding Inventories (ASC 330-10-50-1through 6)

1. 50-1 Requires

A. Consistency in application (statement if not followed), and

B. Disclosure of the basis of stating inventories

C. If there has been a change that affects consistency, thenature of the change and effect (subject to materialityconsiderations) on income should be provided

2. 50-2 Significant losses arising from the application of lower-of-cost-or-market should be disclosed -- potentially as a separateline item.

3. 50-3 Inventory stated above cost should be disclosed.

4. Inventory stated as sales price should be disclosed.

5. 50-5 Any losses resulting from firm purchase (inventory)commitments should be disclosed, and separately presented inthe income statement.

6. 50-6 Significant estimates made in development of amountsfor inventory should be disclosed. 125

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Slide 126

Nature of Operations

Nature of OperationsProfessional Standards Regarding Nature ofOperations (ASC 275-10-50-2)

50-2 All reporting entities should disclose thefollowing matters, as applicable, regarding thenature of their operations;

1. Major products and/or services,

2. Principal markets,

3. Location(s) of markets,

4. Relative significance of operations/services inreporting entities that provide multipleproducts/services,

5. Not-for-Profit reporting entities should disclosethe services performed, and significant revenuesources

6. Disclosures need not be quantified.126

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Page 292 of 329

Slide 127

Accounts Receivable

Accounts ReceivableProfessional Standards Regarding Accounts Receivable(ASC 310-10-50-1 through 14) Note: Guidance provided isrestricted, primarily, to trade and financing receivables --this section is much broader in coverage.

1. 50-3 The following matters, as applicable, must appearin the Summary of Significant Accounting Policies;

A. Basis for accounting for loans, as well as, tradereceivables,

B. How lower-of-cost-or-market considerations apply tonon-mortgage loans that are held for sale,

C. Classification and method of accounting for accountsreceivable that can be settled in a manner whereby themaker (reporting entity) would not recover substantially allof its recorded investment in such receivable(s),

D. The method used to recognize interest income onreceivables for which interest accrues.

2. 50-3 If there is more than one significant category ofreceivables, accounts receivable by category -- either on theface of the balance sheet or notes thereto. 127

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Slide 128

Accounts Receivable3. 50-4 The allowance for doubtful accountsshould appear on the face of the financialstatements, and 50-14, the valuation allowanceshould be netted on the face of the balance sheet

4. 50-4A -- For all trade receivables (other thancredit card), reporting entities should disclosetheir policy for writing off short-term receivablesthat arose from the sale of goods and/or services(trade)

5. 50-5 The amount of any receivables that havebeen pledged as collateral, as well as the amountof related debt

6. 50-6 (Partial) The entity's policy fordetermining that accounts receivable are pastdue/delinquent

128

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Slide 129

Asset Impairments

Asset ImpairmentProfessional Standards Regarding Asset Impairment -- As indicated,below

1. Long-lived assets -- ASC 360-10-50-1 through 3 -- The following itemsare the minimum disclosure matters when an impairment of a long-livedasset that is currently held and used by a reporting entity occurs

A. A description of the impaired asset,

B. Circumstances that led to the presumed impairment,

C. If the impairment loss is not a line item in the income statement, theamount of the loss and the line item in which it appears,

D. How fair value was determined, and

E. When applicable, the segment in which the impaired asset appears.

2. Goodwill Impairment -- 350-20-50-2 -- Following are the minimumdisclosures required when it has been determined that there is animpairment related to goodwill

A. Facts and/or circumstances that indicate that an impairment hasoccurred,

B. Amount of the impairment loss,

C. The manner by which fair value was determined, and

D. When an estimate of the impairment loss has yet to be finalized, astatement that the impairment loss has not been finalized, and thereasons for the delay

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Slide 130

Asset Impairment

3. Intangible assets other than goodwill -- 320-30-50-3-- When an impairment of an intangible asset, otherthan goodwill, is identified the following disclosuresare to be made by the reporting entity

A. Description of the impaired asset,

B. Facts and/or circumstances resulting in theimpairment,

C. Amount of the impairment loss,

D. Method of estimating fair value,

E. If the impairment loss does not appear as a lineitem in the income statement, the amount and linewhere such loss appears in the income statement,

F. When applicable, the segment in which theimpaired asset appears.

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Slide 131



Professional Standards Regarding Basis

of Presentation -- There does not appear

to be any specific professional standard

requiring the disclosure of the basis of

presentation. However, this disclosure

appears in approximately 40 to 50

percent of the reporting entities reviewed

for this session.

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Slide 132

Fair Value

Fair Value MeasurementProfessional Standards Regarding Fair ValueMeasurement -- 820-10-50-1 through 10, 825-10-50-2through 19 (optional for non-public entities -- detailsof disclosures not included in this discussion) --Note: Examples do not include tabular requireddisclosure

1. 820-10-50 Fair Value Measurement -- General

A. 50-1 Reporting entities should discloseinformation regarding fair value in each of thefollowing two circumstances:

1) Assets and/or liabilities measured at fair valueon a recurring basis -- Both the techniques andinputs used in development of the estimate, and

2) For fair value estimates dealing with level 3(unobservable) inputs -- the effect of themeasurement on earnings for the reporting period.

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Slide 133

Fair Value MeasurementB. In meeting the above disclosure

requirement, the disclosure should besufficient to address the following areas ofuser concern:

1) An appropriate level of detail for theintended use of the financial statements,

2) Appropriate emphasis on disclosureelements,

3) Appropriate level of summarization,and

4) Generic need to prevent the financialstatement disclosure(s) from beingmisleading

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Slide 134

Fair Value MeasurementC. 50-2 Disclosure of fair value information should include

reconciliations, by class/category of asset or liability, at the followinglevel of detail:

1) Fair value a the reporting date,

2) The level of the fair value hierarchy (see examples, below) thatthe asset/liability attaches to,

3) Significant transfers between levels one and two,

4) For assets/liabilities whose fair value was determined throughthe use of unobservable inputs, a reconciliation of the beginning andending balance, to include the following as applicable

a. Gains and losses for the period -- split between those appearingin the calculation of net income and comprehensive income

b. Purchases, sales, issuances, and/or settlements,

c. Transfers in and out of the level three category,

e. Gains and/or losses included in income resulting from changesin unrealized gains and/or losses during the reporting period (andwhere such amounts appear within the income statement.

f. For all significant assets/liabilities whose inputs are derivedfrom either level two or level three -- a description of the valuationtechnique used (market approach, income approach, cost approach)

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Slide 135

Fair Value MeasurementD. 50-3 There is additional disclosure guidance for derivative assets and/orliabilities, which includes:

1) Fair value disclosure related to levels 1 through 3 are to be made on a grossbasis, while

2) Reconciliations that involve transfers to/from level three may be preparedeither on a gross or net basis.

E. 50-5 For those assets and/or liabilities measured at fair value on a non-recurring basis, the following disclosures should be made:

1) Fair value measurement amount,

2) Reason for the (re) measurement,

3) The level of the fair value hierarchy (see examples, below) that theasset/liability attaches to, and

4) Other disclosure requirements attendant to the level of the inputs used indetermining the fair value

F. 50-7 A change in valuation technique and/or method of application is not achange in accounting estimate, as used in ASC Section 250

G. 50-8 Quantitative disclosures regarding fair value should by made in tabular(table) form.

2. 825-10-50-1 through 19 -- this is guidance on fair value relating to financialinstruments that is mandatory for public reporting entities, but is optional for non-public reporting entities -- No further specific guidance will be presented in thisseminar.

135

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Slide 136

Financial Instruments

Financial InstrumentsProfessional Standards Regarding Financial Instruments --825-10-50-2 through 10, 825-10-50-1 through 19 (optionalfor non-public entities -- details of disclosures not includedin this discussion), 825-10-50-20 through 22 --Concentrations of credit risk, 825-10-50-23 -- Market risk ofall financial instruments, and 825-10-50-28 through 32 -- Fairvalue option

825-10-50-20 et seq -- Concentrations of credit risk shouldinclude the following disclosures for each type ofconcentration:

1. Information about the nature of the concentration(activity, geography, economic characteristic, customertype)

2. Maximum amount of loss as if counterparty failed toperform,

3. Matters related to any collateral attendant to theaffected financial instrument, and

4. Policies regarding master netting arrangements, if any.136

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Slide 137

Financial Instruments825-10-50-23 Disclosures regarding the existence of

Market risk (encouraged, but not required) should

address the following matters:

1. Details regarding instruments subject to market

risk,

2. Hypothetical effects on income (net and

comprehensive),

3. Gap analysis regarding relevant interest rates,

4. Life of the affected financial instruments, and

5. The reporting entity's value at risk at the end of the

reporting period, as well as the average value at risk

during the reporting period.

137

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Slide 138

Financial Instruments825-10-50-28 through 30 -- Regarding assets and/or liabilities forwhich the reporting entity has opted for the fair value option, thefollowing disclosures should be made:

1. Managements reason(s) for opting for fair value,

2. If the option is used for some items, but not all, in a similargrouping -- the reason for the selectivity,

3. For each line item on the position statement that includes itemsresulting from the fair value option:

A. Information that relates the line item to the class of asset and/orliability presented at fair value, and

B. Aggregate carrying amount of items in a particular line that arenot eligible for fair value presentation.

4. The difference between fair value and contractual principalamounts of loans receivable, long-term receivables, and long-termdebt instruments,

5. Regarding loans held a assets, disclosure is required regardingpast due (90 days) instruments, and

6. Disclosures are required for investments that would have beenpresented using the equity method, if the fair value option had notbeen used. 138

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Slide 139

Financial Instruments825-10-50-30 Fair value option income statement-related disclosures

1. For each affected line item within an income statement, theamounts of gains and/or losses included in the line item related to fairvalue,

2. Disclosure of how interest and/or dividends are measured, andwhere they appear within the income statement

3. For loans and other receivables (assets)

A. Amount of gains or losses included attributable to changes incredit risk, and

B. How the amount of gains and/or losses was determined

4. For those liabilities that have been significantly affected by creditrisk

A. Estimated gains/losses as a result of the change in credit risk,

B. Qualitative inputs considered in determining change in creditrisk, and

C. The method of determination of credit risk gains and/or losses.

825-10-50-31 -- Other Fair Value option disclosures -- In annualfinancial statements -- methods and/or assumptions that underpinfair value estimate.

139

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Page 305 of 329

Slide 140

Goodwill

Goodwill

Professional Standards Regarding Goodwill -- 350-20-50-1 through 2

350-20-50-1 -- When goodwill is presented in a statement of financial position,the following disclosures, as applicable, should be made:

1. Gross amount of goodwill and, if applicable, accumulated impairment loss,

2. Additional goodwill recognized during the period,

3. Adjustments resulting from subsequent recognition of deferred tax assets,

4. Goodwill included in a group of assets designated for disposal,

5. Impairment losses recognized during the reporting period,

6. Exchange differences,

7. Other changes in carrying amounts, and

8. Gross and accumulated impairment losses at the end of the reportingperiod.

350-20-50-2 -- In each period in which a goodwill impairment arises, thefollowing matters should be disclosed:

1. Facts and/or circumstances leading to recognition of an impairment,


3. Method(s) employed in determining fair value,

4. When the estimated impairment loss has not been finalized, this fact shouldbe disclosed as well as disclosure of the reason for the incomplete estimate.

140

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Page 306 of 329

Slide 141

Warranties

WarrantiesProfessional Standards Regarding Warranties --There is no specific requirement, in theAccounting Standards Codification, that requiresdisclosure of warranty expense. However,warranty expense is a form of contingency, and assuch, is subject to those provisions. The followingguidance is specific to contingencies:

450-20-50- 3 and 4 --

1. Disclosure is to be made when it is at leastpossible, or probable that a loss may exist inexcess of any amount accrued, and should include

2. The nature of the contingency, and

3. An estimate of a possible range of loss inexcess of the amount accrued (subject tomateriality considerations).

141

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Page 307 of 329

Slide 142

Advertising

Advertising

Professional Standards Regarding

Advertising -- 720-35-50-1

1. Disclose the approach taken with respect

to the options available (720-35-25-1)

A. As incurred, or

B. The first time that the advertising

(project) takes place

2. The total amount charged to advertising

for each period for which an income statement

is presented.142

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Slide 143



Professional Standards RegardingCommitments and Contingencies --

1. The following guidance is specific tocontingencies: 450-20-50- 3 and 4 --

A. Disclosure is to be made when it is atleast possible, or probable that a loss mayexist in excess of any amount accrued, andshould include

B. The nature of the contingency, and

C. An estimate of a possible range of lossin excess of the amount accrued (subject tomateriality considerations).

143

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Page 309 of 329

Slide 144

Commitments and Contingencies2. Professional standards discusses disclosure of commitments at 440-10-50-1 through 7

A. If any of the following commitments exist, they should be disclosed within the financial

statements (each of the following items have item-specific disclosure requirements)

1) Unused letters of credit,

2) Long-term leases,

3) Assets pledged as collateral for loans,

4) Pension plans,

5) Dividend arrearage for cumulative preferred stock,

6) Firm commitments (examples included in ASC)

B. Regarding unconditional purchase orders (UPO) that have not been recognized within

the current financial statements (by virtue of another issue-specific standard) should have

the following matters disclosed (subject to materiality)

1) Nature and term of the commitment,

2) Amount of the fixed and determinable portion of the commitment -- for the current

period and each of the succeeding five years (subject to practicability)

3) The nature of variable attributes attendant to the commitment,

4) Amounts, if any, purchased under the UPO for each reporting period for which an

income statement is presented.

C. With respect to UPOs that have been recognized in the financial statements, the amount

of payments required by the instrument for each of the succeeding five years (5 year

schedule) 144

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Slide 145



Professional Standards Regarding ComprehensiveIncome disclosure –

Currently, there are no specific professionalstandard requirements for footnotedisclosure regarding comprehensive income -- unless the reporting entity believes that thefinancial statement presentation needs to besupplemented, on a case-by-case basis.Notice that some reporting entities (SECregistrants) elect to make this type ofsupplemental disclosure. The topic ofcomprehensive income is addressed in theASC in topic/area 220.

145

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Page 311 of 329

Slide 146



Professional Standards Regarding

Research and Development disclosure -

ASC 730-10-50-1 states that financial

statements should include disclosure of

the total amount of research and

development cost charged to expense

for the reporting period(s). This

disclosure can be made on the face of a

financial statement (line item), or as a

note to the financial statements.146

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Page 312 of 329

Slide 147

Selling, General and Administrative Expenses

Selling, General and Administrative Expense

Professional Standards Regarding Selling,General and Administrative Expensedisclosure --

Currently, there are no specific professionalstandard requirements for footnotedisclosure regarding selling, general andadministrative expenses -- unless thereporting entity believes that the financialstatement presentation needs to besupplemented, on a case-by-case basis.Notice that some reporting entities (SECregistrants) elect to make this type ofsupplemental disclosure.

147

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Page 313 of 329

Slide 148

Cash Flow

Cash Flow Statement

Professional Standards Regarding Cash Flow StatementDisclosure --

230-10-50-2 through 6 addresses supplemental disclosuresthat, circumstantially, should accompany the cash flowstatement, in addition to the disclosure of the entity's cashequivalent policy. Such additional disclosures are:

1. Interest and income taxes paid -- supplemental whenthe indirect method is used, line item when the directmethod is employed,

2. Non-cash investing and/or financing activities --supplemental in all cases -- may not be folded into the bodyof the cash flow statement

Note that the example, below, cites area/topics 230-10-45and 830 -- these sections present alternative methods ofpresenting elements within the body of the cash flowstatement (by activity, and indirect or direct method ofaddressing operating cash). Area/topic 830 deals withforeign exchange matters.

148

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Page 314 of 329

Slide 149

Cost of Sales

Cost of Sales

Professional Standards Regarding Cost ofSales disclosure -- Currently, there are nospecific professional standard requirementsfor footnote disclosure regarding cost ofsales -- unless the reporting entity believesthat the financial statement presentationneeds to be supplemented, on a case-by-case basis. Notice that some reportingentities (SEC registrants) elect to make thistype of supplemental disclosure. The topicof cost of sales is addressed in the ASC intopic/area 705.

149

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Page 315 of 329

Slide 150

Equity and Cost Investments

Equity and Cost investmentsProfessional Standards Regarding equity and costinvestments disclosure --

323-10-50-3 -- Describes disclosure matters for investmentscarried using the equity method

1. Name of the investee,

2. Applicable accounting policies of the investor entity withrespect to non-controlling investments in common stock,

3. Any difference between underlying equity in the investeeand the carrying amount of the investment -- and how thatdifference is accounted for.

4. Market value of the investment -- if a quoted market priceis available.

5. For equity investees that constitute a materialinvestment by the reporting entity -- summarized informationregarding assets, liabilities and results of operations,

6. If conversion of securities or exercise of options wouldhave a material effect on the reporting entity's share ofearnings and/or losses -- this fact should be disclosed. 150

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Page 316 of 329

Slide 151

Intangible Assets

Intangible assetsProfessional Standards Regarding intangible assets disclosure --

350-30-50-1 through 3 --

1. With respect to intangible assets that are subject to amortization

A. Amount assigned to the intangible asset/class of assets

B. Any presumed, significant, residual value,

C. Average amortization period

2. For those intangible assets not subject to amortization -- the amount assignedto such asset.

3. Amounts attributable to purchased research and development costs

350-30-50-2 -- Required disclosures for each period for which a position statementis presented

1. For intangible assets subject to amortization

A. Gross carrying amount and accumulated amortization,

B. Amortization expense for the reporting period,

C. Estimated amortization expense for each of the subsequent five years.

2. For intangible assets not subject to amortization -- total carrying amount ofsuch assets.

3. Reporting entity's accounting policy regarding treatment of costs incurred torenew or extend use of an intangible asset,

4. With respect to renewals -- costs incurred during the reporting period and theaverage period before the next renewal. 151

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Page 317 of 329

Slide 152

Intangible assets

350-30-50-3 -- Disclosures dealing with impairment

losses related to intangible assets

1. Both a description of the impaired intangible asset

and why the intangible asset is deemed to be impaired,


3. Method(s) used in arriving at the impairment

amount,

4. Line item, in the income statement, where the

impairment loss appears (unless it is a line item),

5. When applicable, the segment in which the

impaired intangible asset appears.152

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Page 318 of 329

Slide 153

Leases

LeasesProfessional Standards Regarding Lease disclosure -- 840-10-50-1 through 5

840-10-50-1 -- Requires that reporting entities disclose any leasing activitieswith related parties (both lessee and lessor).

840-10-50-2 -- This section contain the generic requirement (general descriptionthat includes, but not limited to) for lessees to disclose the following matters,as applicable

1. Basis for determination of contingent rentals,

2. Existence of elements such as; renewal, purchase option, escalationprovisions, and

3. Restrictive covenants in the leasing arrangement (payment of dividends,entering into other leases, etc.)

840-10-50-3 -- If a lessee reporting entity has provided guarantees regarding alease, ASC 460-10-50-4 delineates significant disclosure requirements

840-10-50-4 and 5 -- Disclosure requirements for lessor reporting entities

1. When leasing is a significant activity of a reporting entity, that entity shouldprovide a general description of its leasing line of business,

2. Lessors should disclose accounting policies regarding contingent rentals -- when lessor accrues contingent rental prior to lessee achievement of target,disclosure of the impact of such a procedure should be disclosed, as well(subject to materiality)

153

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Page 319 of 329

Slide 154

Other Long-lived Assets

Long-lived AssetsProfessional Standards Regarding Long-lived Assets -- 360-10-50-1and 2

360-10-50-1 -- This section sets out minimum disclosures regardingeach significant category of long-lived assets (predominantlyProperty, Plant, and Equipment)

1. Balances of major classes of depreciable assets,

2. Accumulated depreciation, by major class of asset,

3. Depreciation expense for the reporting period, and

4. A general description of the method(s) of depreciation used -- bymajor class of asset

360-10-50-2 -- This section provided disclosure guidance regardingimpairment of long-lived assets

1. A description of the impaired asset(s), along with why the asset isdeemed to be impaired,

2. The line item in the income statement where the impairment lossis presented (unless the loss is its own line item),

3. Method(s) used by the reporting entity to determine the fair valueestimate, and when applicable

4. The segment in which the impaired asset appears.154

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Page 320 of 329

Slide 155

Marketable Securities

Marketable SecuritiesProfessional Standards Regarding MarketableSecurities -- 320-10-50-2 through 10

320-10-50-2 -- This section of the ASC addressdisclosures related to marketable securities classifiedas available-for-sale, and includes the following:

1. Cost,

2. Fair value,

3. Any other-than-temporary impairment reflected inaccumulated other comprehensive income,

4. Total gains for those securities with net gains inaccumulated comprehensive income,

5. Total losses for those securities with a net lossposition in accumulated comprehensive income, and

6. For those securities that mature, information aboutthe contractual maturity attendant to the instrument.

155

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Slide 156

Marketable Securities320-10-50-3 -- With respect to maturity disclosure (see above), suchdisclosure must be presented with the following level of detail

1. One year,

2. Greater than one year to five years,

3. Greater than five years and through ten years, and

4. Greater than ten years.

320-10-50-5 -- Disclosures required for securities (debt) classified asheld-to-maturity

1. Cost basis,

2. Fair value,

3. Gross unrecognized holding gains and/or losses,

4. Net carrying amount,

5. Any other-than-temporary impairment reflected in accumulatedcomprehensive income,

6. Gross gains and/or losses included in other comprehensiveincome attendant to hedge derivatives intended to offset acquisitionrisks of held to maturity securities,

7. Information regarding contractual maturities, at the same level ofdetail described above for available for sale securities.

156

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Slide 157

Marketable Securities320-10-50-6 -- Following, are the disclosures required for impairmentof marketable securities (such disclosures are to grouped byinvestments that have been in a continuous unrealized loss positionfor less than 12 months, and those in such position for greater than12 months 320-10-50-7)

1. For each position statement presented, by category ofinvestment, the following quantitative information:

A. Fair value of investments with unrealized losses, and

B. Aggregate amount of unrealized losses.

2. As of the date of the most recent position statement presented,sufficient information to enable users to understand the need forimpairment recognition. At a minimum, such disclosure shouldinclude -- but is not limited to:

A. Nature of the affected investment,

B. Cause that gave rise to the impairment,

C. Number of investment positions that are in an unrealized lossposition,

D. Relative severity, and expected duration of the impairment,

E. Other information to enable users to understand theimpairment situation (examples provided in the ASC) 157

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Slide 158

Marketable Securities320-10-50-8 -- Clarifies that the starting point for calculating period ofcontinuous unrealized loss is the balance sheet date in the period inwhich the impairment occurred. The period ends when thereporting entity

1. Recognizes the impairment as other than temporary, or

2. The amount of the impairment is recovered.

320-10-50-9 -- This section begins the disclosure requirementsrelated to the income statement relative to marketable securities: Foreach income statement presented

1. Proceeds from sale of available-for-sale securities and theamount of gain or loss included in earnings for the period,

2. Cost flow assumption for both the security and any balances inother comprehensive income (lifo, fifo, etc.),

3. Gross gains and/or losses reflected in earnings resulting from atransfers from available-for-sale to trading category,

4. Gross period inputs to and outputs from accumulatedcomprehensive income related to available-for-sale securities,

5. Trading gains and/or losses relating to trading securities stillheld as the report date. 158

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Page 324 of 329

Slide 159

Marketable Securities320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the following disclosures are required:


2. Any gain or loss in accumulated comprehensive income relatedto hedges that were intended to offset risk associated withsold/transferred securities,



320-10-50-10 -- With respect to sales and/or transfers of held-to-maturity securities, the following disclosures are required:


2. Any gain or loss in accumulated comprehensive income relatedto hedges that were intended to offset risk associated withsold/transferred securities,


4. Circumstances leading to the decision to sell or transfer held-to-maturity security. 159

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Slide 160

Pension Cost

Pension CostProfessional Standards Pension Cost -- 715-20-50-5 through 8 for definedbenefit plans, and 715-70-50-1 for defined contribution plans

715-20-50-5 -- Basic defined benefit pension plan disclosures for a non-public reporting entity are comprised of the following elements:

1. Benefit obligation,

2. Fair value of plan assets,

3. Funded status,

4. Employer contributions,

5. Participant contributions,

6. Benefits paid,

7. Accumulated benefit obligation balance,

8. Benefits expected to be paid for each of the succeeding five years, andthe balance expected for the next five year period,

9. Employer estimate of contributions expected to be received by the planduring the following year from the latest position statement presented.

10. Amounts recognized in the position statement -- level of detail --postretirement benefit assets, current and noncurrent postretirement benefitobligations,

11. Significant underpinning assumptions used, namely: Assumeddiscount rate, rate of compensation increase, long-term rate of return onplan assets,

12. Assumed health care cost trend, 160

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Slide 161

Pension Cost

13. Any employer securities and/or related parties included inplan assets (amounts and types of)

14. The nature and effect of significant non-routine events,

15, Any amounts in accumulated comprehensive incomeexpected to be recognized as part of the periodic benefit costin the next year,

16. Amounts expected to be returned to the employer withinthe succeeding twelve months (timing, as well)

715-20-50-7 -- Interim financial statements should disclose: 1.Employer contributions paid, and 2. Contributions expected tobe paid during the current year.

715-20-50-8 -- Normally the expected rate of return is used,consistently, throughout the reporting year -- however, if therate is changed, that fact should be disclosed.

715-70-50-1 -- Professional standards requires the followingdisclosure for defined contribution plans -- amount of costrecognized, and any other changes that could affect thecomparability of amounts presented for pension cost. 161

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Slide 162



Professional Standards Regarding Related Party Transactions -- 850-10-50-1

through 6

850-10-50-1 -- The basic, required, disclosures for related party transactions

are:

1. Nature of the relationship,

2. A description of the types of transactions that occur between the parties,

3. Dollar amounts of transactions that actually transpired during the

reporting period (shown gross ins and outs)

4. Any report date due to/from balance.

850-10-50-2 -- Balances related to officers, employees, or affiliated entities

should not be combined with notes or accounts receivable.

850-10-50-3 -- Aggregation of related party transactions by type of related

party is permitted.

850-10-50-5 -- Prohibits stating that any related party transaction transpired at

arm's-length, unless the statement can be objectively substantiated.

850-10-50-6 -- Brother/sister organizations may comprise related party

relationships162

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Slide 163

Subsequent Events

Subsequent EventsProfessional Standards Regarding Subsequent Events -- 855-10-50-1

through 3

855-10-50-1 -- Disclosure of the date through which subsequent

events have been evaluated, at the following level of detail:

1. The date through which subsequent events were evaluated, and

2. Whether that date was

A. The issue date, or

B. The date available to be issued.

855-10-50-2 -- For beta-type subsequent events (disclosure-type), the

following disclosures should be made:

1. The nature of the event, and

2. A estimate of the effect of the event, or a statement that such an

estimate cannot be made.

855-10-50-3 -- Depending on the significance of the beta-type

subsequent event, reporting entities should consider pro forma

presentations. 163

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Slide 164

RealisticApproach Seminars, Inc. Email Information

THANK YOU for attending

Financial Statement

Presentation & Disclosure

If you have questions and/or comments

164

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