Week 1 – Applied Financial Research

Tanja Snively
Wendy Achilles
 Week 4 Objectives
• Review Asynchronous material
• Walk through case one
• Wrap up – discuss next week
 Asynch Material – U.S. GAAP
• U.S. GAAP Literature
– Topics, Subtopics, Sections and Paragraphs

• U.S. GAAP Hierarchy

– Level 1: What items are in here??
– Level 2 What items are in here??
– Level 3 What items are in here??
 Asynch Material – IFRS
• IAS, IFRS, SIC, IFRIC
• IFRS Hierarchy
– Level 1 – what items are here?
– Level 2 what items are here?
– Level 3 what items are here?
– Level 4 what items are here?
 Six Steps – BE3-10
1. Establish and understand facts
2. Identify the issue: What is the research
question?
3. Search authoritative literature
4. Evaluate results
5. Develop Conclusions
6. Communicate the results
 E3 - 4
Provide the reference to the section in the Codification
where you would most likely begin your research for
the following areas.

a) Determine what amount to record upon acquisition of a

receivable that you received when you sold services.
b) Resolve a question related to the way in which an
airline depreciates PP&E.
c) Determine whether to recognize a contingent loss
liability.
 Case work
• We will look at/review each type of case you
might see in FRA.
 Example Cases, Part 1

Surfing the Standards Inventory Disclosures

• Abtos Company is a U.S. manufacturer that is
publicly. Abtos reports $12 million of inventory on its
balance sheet. This includes raw materials, work-in-
process and finished goods. Is Abtos required to
disclose the amounts for each class of inventory, or
can it simply report the total $12 million balance on
its balance sheet. Provide any Codification
references that you use to answer this question.
 Example Cases, Part 2
Financial Statement Analysis – J&J
Use the Johnson & Johnson 2017 annual report to
answer the following questions. You can locate the
annual report on Johnson & Johnson’s web site or
on the SEC’s website.
a. What are the six major topics that are covered in the
Management Discussion and Analysis (MD&A)?
b. Based on the financial statements, what asset has the
largest balance and what is the balance? What was
Johnson & Johnson’s basic earnings per share (EPS) for
2017? What was its comprehensive income attributable
to Johnson & Johnson in 2017? What was its operating
cash flow for 2017?
 Example Cases, Part 2
Financial Statement Analysis – J&J
c. Please use the Footnotes to answer the following questions:
Johnson & Johnson reported cash and cash equivalents on
the balance sheet of $17,824 million. How much of that was
cash (as opposed to cash equivalents)? Johnson &
Johnson reported inventory on the balance sheet of $8,765
million. How much of that was finished goods? Johnson &
Johnson reported a $16,373 million provision for income
taxes on the statement of earnings. How much of that
relates to US taxes?
 Example Case, Part 3
Basis for Conclusions – Income Statement or Balance Sheet
Certain transactions require a choice about which financial statement is
more important—the income statement or the balance sheet. Read
paragraphs BC1.31 and BC1.32 in the basis for conclusions of Statement
of Financial Accounting Concepts No. 8, Conceptual Framework for
Financial Reporting: Chapter 1, The Objective of General Purpose
Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful
Financial Information.
a. The original portion of the U.S. GAAP conceptual framework that dealt with the
objectives of financial reporting (Concepts Statement 1) has now been
superseded. What opinion did it express related to the importance of these two
financial statements?
b. What opinion did the original IFRS conceptual framework (the Framework)
express related to the importance of these two financial statements?
c. What opinion does the new conceptual framework under U.S. GAAP express
regarding the importance of these two financial statements?
 Example Case, Part 4
Judgment IFRS Disclosures of Judgment and Estimation
Uncertainty
• Unlike U.S. GAAP, IFRS requires that an entity disclose (a)
management’s judgments with the most significant effect on the
financial statements and (b) information about the major sources of
estimation uncertainty that may result in a material adjustment to the
carrying values of the entity’s assets and liabilities. These disclosure
requirements are included in IAS 1, Presentation of Financial
Statements. Paragraph 122 contains the requirement related to
judgments, and paragraph 125 contains the requirement related to
estimation uncertainty.
1. What are the two (of the three) examples of judgments that could have a
significant impact on the financial statements?
2. What are four examples of estimation uncertainty that could result in a material
adjustment in future years?
 Example Cases, Part 4
Judgment IFRS Disclosures of Judgment and Estimation
Uncertainty
• Unlike U.S. GAAP, IFRS requires that an entity disclose (a)
management’s judgments with the most significant effect on the
financial statements and (b) information about the major sources of
estimation uncertainty that may result in a material adjustment to the
carrying values of the entity’s assets and liabilities. These disclosure
requirements are included in IAS 1, Presentation of Financial
Statements. Paragraph 122 contains the requirement related to
judgments, and paragraph 125 contains the requirement related to
estimation uncertainty.
3. Consider an entity that reports an asset at fair value when the fair value is
based on recently observed market prices. If it is likely that this value might
change significantly within the next year, should the entity disclose the
estimation uncertainty? Explain your answer.
4. What reasons did the Board give for requiring the disclosures about judgment?
What reasons did the Board give for requiring the disclosures about estimation
uncertainty?
 Wrap Up and Looking ahead
• Exam 1 open on Friday, 8/21 at 12pm – Monday,
8/24 at 6pm
• Case 1 due on Wednesday, 8/19 at 5:45pm
(EST)
• Next week: Statement of Net Income and
Comprehensive Income, Balance Sheet, SCF,
and review case 1