CHAPTER
10
Corporate Governance, Notes
to the Financial Statements, and
Other Disclosures
CHAPTER OUTLINE:
I. Corporate Governance
A. General background and perspective
2. Variety of reform measures
B. Sarbanes-Oxley Act (SOX) of 2002
2. Prohibited non-audit services for audit clients
1. Regulation of executive compensation
2. Enhanced shareholder rights
D. Financial Reporting Misstatements
1. Trends in SEC filings for financial misstatements in recent years
2. Thirteen Types of Financial Shenanigans identified by Schilit and Perler
II. General Organization of Notes to the Financial Statements
A. Significant Accounting Policies
2. Inventory valuation method
4. Income taxes
6. Goodwill and other acquisition-related intangibles
8. Stock option and stock purchase plans
B. Details of Other Financial Statement Amounts
1. Reporting to the Securities and Exchange Commission
C. Other Disclosures
1. Accounting changes
Chapter 10 Corporate Governance, Notes to the Financial Statements, and Other Disclosures
3. Contingencies and commitments
5. Impact of inflation
6. Segment information
D. Management’s Statement of Responsibility
1. Financial statements are the responsibility of management—not the auditors
III. Management’s Discussion and Analysis (MD&A)
A. Enhance public disclosure of information about the corporation
B. Non-GAAP Financial Measures—reconciled to comparable GAAP measures
IV. Five-Year (or Longer) Summary of Financial Data
A. Adjustment of per share data for stock dividends and stock splits
B. Supplemental disclosures—not part of the financial statements themselves
V. Independent Auditors’ Report
A. Structure of the standard audit report
1. Introductory paragraph
3. Opinion paragraph
5. Alternative presentation—combining the financial statements audit opinion and the
internal controls audit opinion
B. Departures from the standard audit report and qualified opinions
VI. Financial Statement Compilations
TEACHING/LEARNING OBJECTIVES:
Principal:
1. To have students obtain a sense of the current regulatory environment and the issues of
corporate governance.
3. To have students understand that the notes to the financial statements must be reviewed if the
numbers in the financial statements are to be understood.
4. To have students understand the significance and meaning of the independent auditors’
report, and that it is not a guarantee of company profitability or absolute accuracy of the
Instructor’s Manual / Solutions Manual
Supporting:
6. To explain the general content of the notes to the financial statements, so that the notes will
become less formidable to students than they seem to be at first glance.
7. To review and clarify the student’s understanding of some of the more challenging facets of
8. To emphasize to the student that the financial statements reflect management’s assertions,
9. To have the student understand the process of adjusting per share data for stock dividends
and stock splits.
TEACHING OBSERVATIONS/ASSIGNMENT SUGGESTIONS:
1. This chapter, like Chapters 9 and 11, helps students to build on their understanding of many
3. Emphasize the nature of management’s responsibilities, and clearly separate them from the
auditors’ responsibilities.
5. Review the significance of trends in financial ratios, and illustrate how the summary financial
data are used to identify trends.
Chapter 10 Corporate Governance, Notes to the Financial Statements, and Other Disclosures
ASSIGNMENT OVERVIEW:
NO.
LEARNING
OBJECTIVES
DIFFICULTY
& TIME
ESTIMATE
OTHER
COMMENTS
M10.1.
9
Easy, 2-3 min.
Basic EPS restatement demo.
M10.2.
9
Easy, 2-3 min.
Basic EPS restatement demo, working backwards.
E10.3.
1, 2
Easy, 5-10 min.
consistent with their expectations and useful to them as investors.
Comment on what is and is not included in Campbell’s corporate
E10.4.
2, 3
Easy, 5-10 min.
Give students a guided tour of Campbell’s 2014 Annual Report.
E10.5.
10
Easy, 3-5 min.
Use as a discussion starter: “What is the role of the auditor?”
E10.6.
Easy, 3-5 min.
An alternative to E10.5.
E10.7.
9
Med., 7-10 min.
Good in-class demonstration of the EPS restatement process.
E10.8.
9
Med., 7-10 min.
E10.9.
9
Med., 7–10 min.
Some students may get hung up on the math. Remind them that
they are working backwards to find the originally reported EPS.
E10.10.
Med., 7-10 min.
P10.11.
2, 4, 9
Med., 15-20 min.
Straight-forward problem using Campbell’s financial statement
data. Have students verify the answers provided.
P10.12.
Med., 15-20 min.
Straight-forward. Good homework assignment.
C10.13.
4
Med., 20–30 min.
Focus company case, provided for instructors wishing to follow
up on E1.1.
C10.14.
5
Med.-Hard, 20–
25 min.
Group learning case. Provides an opportunity to explain how to
read and interpret segment data. Students appreciate the
importance of note disclosures as they see their “value added”
beyond the financial statements. Consider giving a guided tour
through the solutions to save class time.
SOLUTIONS:
EPS for 2016, as restated in 2017 annual report ……. ……….. ……….. ……….. ……….. $1.35
Policies, Guidelines, Standards, Codes, etc:
Campbell’s provides the full text of its “Corporate Governance Standards”, the
company’s “Environmental Sustainability Policy,” “Political Accountability Guidelines,”
“Code of Business Conduct and Ethics,” “Water Policy,” “Guidelines for Responsible
Advertising to Children,” “Commitment Concerning Advertising to Children,” and
“Human Rights Principles,” all of which emphasize the company’s commitment to
ethical and legal business practices on a worldwide basis.
Information related to the Board and executive officers:
Campbell’s also provides biographical information about members of the Board of
operations, and cash flows). Campbell’s financial disclosures certainly appear to be
adequate.
Class discussion can focus on the importance of these items to a reader’s full
flows in conformity with U.S. generally accepted accounting principles. Thus, the
are free of material errors) or that the statements present the financial position, results of
operations, and cash flows perfectly (only that they present the statements fairly).
The auditors’ opinion is that the identified financial statements present fairly, in all
explanatory paragraph to that effect.
The standard four-paragraph independent auditors’ report is not at all an indicator of a
Original earnings per share is $1.56. To reflect a 3 for 1 stock split, divide by 3.
Net income for 2016 (as reported in the 2017 annual report) = $925,980. Stock dividends
and stock splits that occur subsequently do not cause changes to reported earnings
Earnings per share, as restated ……….. ……….. ……….. ……….. ……….. ……….. $1.20
E10.10.
a.
Earnings per share for 2015:
E10.10.
(continued)
b.
Dividends per share for 2015:
P10.11.
13)
c.
Difference between operating income and net income (net earnings) in 2012 =
$1,155 – $764 = $391 million (table, p. 13)
and 2013 (table, p. 13)
P10.12.
a.
Dividends per share declared in 2014 = $1.248 (table, p. 13)
Capital expenditures in 2013 = $336 million (table, p. 13)
P10.12.
(continued)
46)
C10.13.
a.– h.
Answers will vary based on the annual report of the focus company selected.
C10.14.
a. Significant trends in consolidated totals and specific business segments:
Revenues increased in 2013 (relative to 2012) within each of the three separately
identifiable segments and for the company in total. However, the opposite results
occurred in 2014 (relative to 2013) as revenues declined within each segment and for
in 2014, highlighted by the poor performance in the APMEA segment.
Depreciation and amortization expense increased for each of the three separately
identifiable segments from year to year, with a more pronounced growth rate by all
segments in 2013 than in 2014, particularly in Europe.
The asset growth patterns vary widely from segment to segment for McDonald’s.
C10.14. (continued)
b. McDonald’s Corp.
2014 ROI by Primary Geographic Segment
(Dollar amounts in millions)
U.S. Europe APMEA
strongest in this segment, reflecting the fact that McDonald’s has been in operation for
a substantially longer period of time in the U.S. than in other geographic areas in the
world. Although the fast food service industry in the U.S. is highly saturated for
McDonald’s and thus does not offer as many growth opportunities as can be found
elsewhere, the U.S. operations are much more cost effective due to McDonald’s
that earned in the U.S.
It should be noted that the reported margins for the U.S. and Europe segments in
particular are actually quite strong relative to the level of performance you would
expect from an average company. This may well be reflective of the relatively mature
consumer markets for fast food services on a global basis, which further suggests that
C10.14. (continued)
d. The “Corporate” column shown in the segment disclosures provided by most
companies is intended to display the overall level of assets and expenses that cannot
be meaningfully assigned to any one particular operating segment—such as the assets
and expenses associated with global corporate headquarters. The “Corporate”
segment. The operating results of the U.S., Canada and Latin America could be
combined as the “Americas” segment (covering both North America and South
America), or possibly Canada and Latin America could be reported as a separate
segment (or segments).
Another possibility would be to create separate columns for Asia/Pacific, Middle East