Financial Reporting Updates - Lecture 03
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Questions and Answers

What must be considered when making fair value estimates during heightened uncertainties?

  • Profit margins of similar companies
  • Potential impairment of affected assets (correct)
  • Inflation rates over the past decade
  • Historical financial performance only
  • What is a common risk when making estimates during periods of uncertainty?

  • Reduction of operational costs
  • Material misstatement risk (correct)
  • Increased asset valuation
  • Overly optimistic forecasts
  • What approach should companies take to ensure the reliability of financial estimates during crises?

  • Use estimates from external stakeholders exclusively
  • Create an independent committee for deliberating estimates (correct)
  • Rely solely on past figures for estimates
  • Increase the frequency of estimates without review
  • How is professional skepticism relevant in financial reporting estimates?

    <p>It fosters an attitude of questioning and alertness to misstatements.</p> Signup and view all the answers

    What types of assets may require fair value estimates due to uncertainties?

    <p>Financial assets and intangible assets</p> Signup and view all the answers

    Why is adapting professional skepticism important during financial estimations?

    <p>It provides a systematic approach to mitigating errors.</p> Signup and view all the answers

    Which statement is true regarding the estimates made during heightening uncertainties?

    <p>Estimates may be more prone to inaccuracies without adequate review.</p> Signup and view all the answers

    What type of assets could be included in assessing possible impairment due to uncertainties?

    <p>Financial assets and property, plant, and equipment</p> Signup and view all the answers

    What is a key consideration when assessing the going concern assumption of a company?

    <p>Salability of the products or services</p> Signup and view all the answers

    Which financial metric indicates potential sustainability issues for a business?

    <p>Liabilities greater than capital</p> Signup and view all the answers

    What is essential for management to monitor during periods of uncertainty?

    <p>Changes in market prices of financial assets</p> Signup and view all the answers

    Which of the following is associated with the risk of material misstatements?

    <p>Management bias on estimates</p> Signup and view all the answers

    How often should financial management monitor trading securities during uncertainties?

    <p>Monthly</p> Signup and view all the answers

    What does the concept of 'values formation' emphasize?

    <p>Developing hidden talents and potential</p> Signup and view all the answers

    Which of the following statements regarding estimates is false?

    <p>Estimates are always accurate.</p> Signup and view all the answers

    What is an important aspect of cash flow projections?

    <p>They need to account for possible future risks.</p> Signup and view all the answers

    What is a key concern regarding management's role in financial estimates during uncertainties?

    <p>Management may bias estimations to present a more favorable outcome.</p> Signup and view all the answers

    Which aspect of cash flow projections should be approached with certainty?

    <p>Additional capital influx from existing shareholders expected with certainty.</p> Signup and view all the answers

    What assets are specifically mentioned as needing testing for impairment in times of uncertainty?

    <p>Goodwill and non-financial assets.</p> Signup and view all the answers

    What is the implication of underestimating expenses by management?

    <p>It may mislead stakeholders about the company's financial health.</p> Signup and view all the answers

    Which statement is true regarding the treatment of goodwill?

    <p>Goodwill is tested for impairment but not amortized.</p> Signup and view all the answers

    What must be included in cash flow projections if certain?

    <p>Assured proceeds from sale of assets.</p> Signup and view all the answers

    What is the potential risk of not addressing impairment of fixed assets?

    <p>It could result in misrepresentation of financial statements.</p> Signup and view all the answers

    How can projected cash inflows be made more reliable?

    <p>By basing them on possible amounts expected to be collected.</p> Signup and view all the answers

    Study Notes

    Financial Reporting Updates - Lecture 03

    • Lecture is about estimates in financial reporting
    • Lecture 03, page 1

    Summary of Previous Lesson

    • Impact of Covid 19 on financial reporting
    • Financial reporting of entities affected by Covid 19
    • Information to disclose about assumptions used
    • Other disclosures, page 3

    Estimates During Heightened Uncertainties

    • Estimates during heightened uncertainties are different from normal situations
    • Fair value estimates are applicable if a company evaluates impairment of assets affected by uncertainties (financial assets,intangible assets, and property, plant, and equipment)
    • page 4

    Risk of Material Misstatement

    • Risk of material misstatement exists when creating estimates during uncertainty periods
    • This risk involves possible abuse of providing approximated figures
    • Companies create independent committees to deliberate estimates (for example, by controllers) to avoid this risk
    • The committee reports to the board. Page 5

    Professional Skepticism

    • Professional skepticism, although primarily applicable to auditors, also applies to making estimates
    • Professional skepticism emphasizes a questioning attitude and alertness to conditions indicating possible misstatements from fraud or error
    • Management should use this attitude whenever evaluating estimated amounts during business planning. Page 6

    Accounting Estimates and Management Bias

    • Stakeholders want to avoid management bias in times of uncertainty
    • Management may try to inflate accruals of revenue or deflate accruals of expenses to improve reported financial performance
    • The role of the board of directors as overseers is critical in estimating processes. page 7

    Projections of Future Cash Flows

    • Projections of cash flows are an important part of estimating future performance.
    • Projected cash inflows should be based on the possibility of collected amounts
    • If a company anticipates selling assets, that possible sale is essential information for cash flow analysis. The principle is applicable for asset acquisitions. page 8,9
    • Estimates of cash inflow from investments should be certain. Page 9

    Testing for Impairment of Non-Financial Assets

    • Goodwill: Goodwill is not amortized, but tested for possible impairment. It is most likely to be impaired during uncertainty. Management needs to consider impairment of intangible assets, page 10
    • Land and other affected assets: Impairment of land and other fixed assets values can happen if uncertainty significantly impacts their value. Civil war in Marawi City or an earthquake in Luzon are examples. Page 11

    Effect of Uncertainties in Going Concern Assumption

    • To determine the going concern assumption, consider these factors:
      • Salability of products or services
      • Adequacy of capital to cover risk assets
      • Debt to equity ratio (high debt relative to equity could indicate potential sustainability issues if the business environment is not favorable.) Page 12

    Market Behavior in the Period of Uncertainties

    • Market behavior refers to changes in market prices of investment instruments (debt and equity securities)
    • Management should actively monitor market price changes of financial assets. In uncertain times, monthly valuation and monitoring are appropriate
    • Focus should be on Trading Securities. Page 13

    Summary of Today's Lesson

    • Estimates during heightened uncertainties
    • Fair value estimates
    • Possible risk of material misstatements
    • Professional skepticism
    • Management bias in estimates
    • Cash flow projections
    • Testing non-financial asset impairment
    • Going concern assumption impact
    • Market behavior effects page 14

    Values Formation

    • A quote about starting with the necessary, then the possible, and eventually doing the impossible. Page 15

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    Description

    This lecture focuses on the importance of estimates in financial reporting, particularly in the context of heightened uncertainties such as the Covid-19 pandemic. It examines the risks of material misstatement and the role of independent committees in ensuring accurate estimates. Gain insights into the necessary disclosures and fair value assessments related to financial assets and liabilities.

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