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. (B)</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 (B)</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. (C)</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. (A)</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 (B)</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 (A)</p> Signup and view all the answers

Which financial metric indicates potential sustainability issues for a business?

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

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

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

How often should financial management monitor trading securities during uncertainties?

<p>Monthly (B)</p> Signup and view all the answers

What does the concept of 'values formation' emphasize?

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

Which of the following statements regarding estimates is false?

<p>Estimates are always accurate. (A)</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. (B)</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. (A)</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. (C)</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. (D)</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. (D)</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. (D)</p> Signup and view all the answers

What must be included in cash flow projections if certain?

<p>Assured proceeds from sale of assets. (D)</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. (C)</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. (A)</p> Signup and view all the answers

Flashcards

Estimates during uncertainty

Estimating in financial statements is different when facing high uncertainty. Companies must consider the fair value of assets in potential impairment.

Fair Value Estimate

Evaluating the possible value loss (impairment) of assets during high uncertainty, particularly financial assets, intangibles, and sometimes property.

Risk of Material Misstatement

The risk of inaccurate estimates due to approximations in uncertain periods.

Independent Committee

A committee to review estimates to avoid possible material misstatements, ensuring neutrality and accuracy.

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Professional Skepticism

A critical and questioning approach to estimates, especially in uncertain times. Looks for potential errors or fraud.

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Financial Assets in Crisis

Financial assets in periods of high uncertainty are subject to fair value estimations for possible loss considerations.

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Intangible Assets and Impairment

The possibility of a loss in value in intangible assets must be considered during heightened uncertainty; fair valuation is necessary.

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Property, Plant & Equipment

In some instances during times of heightened uncertainty, these assets may also warrant reassessment via fair value estimation for impairment.

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Management Bias in Estimates

Management might use estimates, like revenue accruals, to present a favorable picture, or reduce expenses to appear better during tough times.

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Projected Cash Flows

Forecasts of future cash inflows and outflows, used to assess a company's financial position. Not an actual financial report.

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Reliable Cash Flow Projections

Projections should be based on realistic expectations of collections, asset sales (if certain), asset acquisitions (if certain), investment returns, and capital infusions (if certain).

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Goodwill Impairment

Goodwill, an intangible asset, needs assessment for potential value loss (impairment) during uncertain times; write-offs may be needed.

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Impairment of Fixed Assets

Land and other fixed assets might lose value during significant uncertainties.

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Financial Statement Estimates

Estimates are used in preparing financial statements, these use values that are not precisely known, but rather estimates.

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Oversight Role of the Board

The board of directors plays a crucial role in reviewing and approving estimates to prevent bias or manipulation.

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Realistic Estimates

Estimates should accurately depict financial position, and not reflect a desired image to improve the perceived financial health of a company.

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Going Concern Assumption

This assumption believes a company will continue operating for the foreseeable future. It's important for estimating the value of assets, debts, and the overall business.

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Debt to Equity Ratio

The ratio that compares a company's total liabilities to its shareholders' equity. If the ratio is high, the company relies more on borrowed money, which can be risky during uncertain times.

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Market Behavior in Uncertainty

How the market price of investments (like stocks and bonds) changes in times of uncertainty. This is crucial for companies to monitor as it impacts the value of their assets.

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Trading Securities

These are investments that a company buys and sells frequently to make a profit. They need close monitoring for changes in value, especially during uncertain times.

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Impairment of Non-Financial Assets

The possibility of a loss in value for assets like buildings, equipment, and land due to factors like economic downturn or disasters.

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Projection of Cash Flows

Estimating how much cash a business will generate and use in the future. This helps evaluate the company's stability and ability to pay debts during uncertain times.

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Management Bias

When managers influence estimates to present a more positive picture of the company's performance, even if it's not completely accurate.

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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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Related Documents

Financial Reporting Lecture 03 PDF

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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