The Milestone 3 Assignment really focuses on the notes to the financial statements and the reasons for specific areas of the notes (i.e., U.S. GAAP). The basic reason for presenting such information is to meet the objectives of financial reporting (e.g., relevance, reliability, etc.). For this Milestone, you will focus on these five (5) areas of the notes section.
Control Procedures
Segment Information
Estimates
Investments and Fair Value
Leases
More specifically, you will address the following elements:
A. Why is the reporting of control procedures required, and what information is disclosed about Starbucks control procedures? Justify your response.
For this element, what is the importance of have proper internal control procedures? Well, one reason for internal controls is to mitigate fraud risk.
B. Why is the reporting of segment information required, and what information is disclosed about Starbucks segment information? Justify your response.
Often times organizations have several reportable segments and generally relates to the specific type of business activity. According to the Financial Accounting Standards Board (FASB):
The objective of requiring disclosures about segments of a public entity [like Starbucks] and related information is to provide information about the different types of business activities in which a public entity engages and the different economic environments in which it operates to help users of financial statements do all of the following:
a. Better understand the public entitys performance
b. Better assess its prospects for future net cash flows
c. Make more informed judgments about the public entity as a whole.
Note: Obtained from https://asc.fasb.org.
C. Why is the reporting of estimates and assumptions required, and what information is disclosed about Starbucks reporting of estimates and assumptions?
Justify your response.
For this one, review accrual accounting and the assumptions related to the GAAP hierarchy found in the textbook.
D. Why is the reporting of investments and fair value required, and what information is disclosed about Starbucks investments and fair value reporting? Justify your response.
The fair value topic concentrates on applying fair value to assets and liabilities.
According to the FASB:
Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable markets transactions and market information might not be available. However, the objective of fair value measurement in both cases is the same-to estimate the price at which an orderly transaction to sell the assets or transfer the liability would take place between market participants at the measurement date [the date of sale] under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the assets or owes the liability.
You will find that fair value is a highly subjective value.
Note: Obtained from https://asc.fasb.org.
E. Why is the reporting of leases required, and what information is disclosed about Starbucks lease structure? Justify your response.
Here is some information on leases from the FASB
Leasing is an important activity for many organizationswhether a public or private company, or a not-for-profit organization. It is a means of gaining access to assets, obtaining financing, and reducing an organizations exposure to the risks of asset ownership. Many organizations lease assets such as real estate, airplanes, trucks, ships, and construction and manufacturing equipment. Because of the prevalence of leasing, it is important for users of financial statements to have a complete and understandable picture of an organizations leasing activities.
The existing accounting models for leases require lessees and lessors to classify their leases as either capital leases or operating leases and to account for those leases differently. Those models have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.
As a result, there has been a widespread request from users of financial statements and other stakeholders to change the accounting guidance so that lessees would be required to recognize assets and liabilities arising from leases.
In addition, the U.S. Securities and Exchange Commission (SEC) issued a report on off-balance sheet activities in 2005 and recommended that changes be made to the existing lease accounting requirements to ensure greater transparency in financial reporting. A number of academic studies have made similar recommendations.
The objective of the project is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. This represents an improvement over existing leases standards, which do not require lease assets and lease liabilities to be recognized by many lessees.
A lessee would recognize assets and liabilities for leases with a lease term of more than 12 months.
Note: Obtained from http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011123
The bottom line is all information that can influence a decision-maker should be included in the notes to the financial statements. According to FASB:
Information about the accounting policies adopted by an entity is essential for financial statement users. When financial statements that are used or are available to be issued purport to present fairly financial position, cash flows, and results of operations in accordance with generally accepted accounting principles (GAAP), a description of all significant accounting policies of the entity shall be included as an integral part of the financial statements. In circumstances where it may be appropriate to issue one or more basic financial statements without the others, purporting to present fairly the information given in accordance with GAAP, statements so presented shall include disclosure of pertinent accounting policies.
Note: Obtained from https://asc.fasb.org.
Now, the question isWhat to disclose? Well, the FASB has an answer for that as well.
Disclosure of accounting policies shall identify and describe the accounting policies followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flow, or results of operations. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenues and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following:
a. A selection from existing acceptable alternatives
b. Principles and methods peculiar to the industry in which the entity operates, even if such principles and methods are predominantly followed in that industry
c. Unusual or innovative applications of GAAP.
Note: Obtained from https://asc.fasb.org.
To help you research and discuss these elements, please take a look at the following articles:
For Dummies Articles
Why Accounting Systems Need Strong Internal Controls
The Purpose of Financial Statements
Mind the GAAP: U.S. Accounting and Financial Reporting Standards
Reading Consolidated Financial Statements
How to Read Consolidated Financial Statement Notes
How to Read the Accounting Policies Notes on Financial Reports These videos may help.
https://www.youtube.com/watch?v=qxvSGfcY9mg
https://www.youtube.com/watch?v=JUJppv68pYg
https://www.youtube.com/watch?v=0QGVeZLIXGI
https://www.youtube.com/watch?v=-VNGj4-t_5s
https://www.youtube.com/watch?v=ZBFjJIBYIK8
https://youtu.be/6YX6SQN-mMA
I have attached the first two milestones, this essay is a continuation of the two essays I’ve attached. You will see all of the calculations and graphs in these essays that will help you write this essay. Milestone Three, which focuses on the importance of accounting regulations and reporting requirements in the preparation of financial reports. This milestone incorporates many of the concepts you have been learning. Instead of working problems, you are thinking, researching, and writing about the theory behind the rules.
