ASC 235, Notes to Financial Statements, contains one Subtopic:
The topic does not address specific disclosures. Those are addressed in the related topics. The topic does, however, list accounting policy disclosures commonly required:
Disclosures have drawn the attention of both the FASB and the SEC. As the disclosure requirements have accumulated over the years, there has been a growing concern about information overload and whether more is necessarily better.
The FASB has a project to develop a framework to increase the effectiveness of disclosures. The framework will address the process for establishing disclosure and for determining which disclosures to make. More information can be found on the FASB's website.
The SEC is reviewing specific sections of regulations S-K and S-X, with a goal of updating requirements and eliminating duplicate disclosures. The Commission also wants to continue to provide material information and reduce cost burdens on companies. There are several suggestions for decreasing disclosure overload. Here are some excerpts from an April 2014 speech by Keith Higgins, SEC Division of Corporation Finance Director. The full speech is available on sec.gov.
Turning to a different example, the transparency of our review and comment process has had a generally salutary effect, which has been far reaching. One effect that may not be as salutary is the tendency for companies to simply follow what others have done when making disclosure decisions or to include disclosures because a client alert says that it is a “hot button” issue for the staff. However, the first question should be “does this issue apply to the company?” And when the answer is no, it should be the last question as well.
For those interested in the SEC's disclosure project, a staff report to Congress was issued in December 2013 and is also available on the SEC site at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf. This report was mandated by the Jumpstart Our Business Startups (JOBS) Act. It provides the staff's preliminary conclusions and recommendations about disclosure reform.
See Appendix A, Definitions of Terms, for definitions of terms related to this Topic: Contract, Customer, and Revenue.
The reporting entity's management is responsible for adopting and adhering to the highest quality accounting policies possible. ASC 235 requires management, in discharging this responsibility, to adopt accounting principles and methods of applying them that are “the most appropriate in the circumstances to present fairly financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.”
There are many different methods of valuing assets, recognizing revenues, and assigning costs. Financial statement users must be aware of the accounting policies used by an entity so that sound economic decisions can be made. Per ASC 235, financial statement disclosures should identify and describe:
This requirement applies even in reporting situations where one or more of the basic financial statements have been omitted. However, it does not apply to unaudited interim statements where the accounting policies have not changed since the issuance of the last annual statements. (ASC 275-10-50-2)
The accounting policies disclosure should encompass those accounting principles and methods that involve the following:
In theory, if only one method of accounting for a type of transaction is acceptable under GAAP, it is not necessary to explicitly cite it in the accounting policies note, although many entities do routinely identify all accounting policies affecting the major financial statement captions.
In the accounting policy disclosure, it is not necessary to repeat details that are provided in other disclosures. Many preparers simply cross-reference accounting policy disclosures to relevant details provided in other notes to the financial statements.
The “summary of significant accounting policies” is customarily, but not necessarily, the first note disclosure included in the financial statements. A more all-encompassing title such as “Nature of business and summary of significant accounting policies” is frequently used.
A listing of accounting policies commonly disclosed by reporting entities follows (the listing is not intended to be all-inclusive):
Upon formation of a business or nonprofit organization, management makes decisions regarding the adoption of accounting policies, based on the types of activities in which the entity engages and the industry and environment in which it operates. Certain ASC Topics permit choices to be made from among alternative, acceptable accounting treatments. The principles selected from among the available alternatives and the methods of applying those principles constitute the reporting entity's accounting policies.
Management initially adopts accounting principles at two distinct times:
Once the initial adoption decisions are made, the users of the financial statements expect a reporting entity's financial statements to be prepared consistently over time. This facilitates comparisons across periods and among different reporting entities.
The following five disclosure techniques are used in varying degrees in contemporary financial statements:
Information is sometimes disclosed by means of parenthetical explanations appended to the appropriate statement of financial position caption. For example:
Common stock ($10 par value, 200,000 shares authorized, 150,000 issued) | $1,500,000 |
Parenthetical explanations have an advantage over both notes to the financial statements and supporting schedules. Parenthetical explanations place the disclosure prominently in the body of the statement instead of in a note or schedule where it is more likely to be overlooked.
If the information cannot be disclosed in a relatively short and concise parenthetical explanation, a note disclosure is used. For example:
Inventories (see note 1) | $2,550,000 |
The notes to the financial statements would contain the following:
Cross-referencing is used when there is a direct relationship between two accounts on the statement of financial position. For example, among the current assets, the following might be shown if $1,500,000 of accounts receivable were pledged as collateral for a $1,200,000 bank loan:
Accounts receivable pledged as collateral on bank loan payable | $1,500,000 |
Included in the current liabilities would be the following:
Bank loan payable—collateralized by accounts receivable | $1,200,000 |
Valuation allowances are used to reduce or increase the carrying amounts of certain assets and liabilities. Accumulated depreciation reduces the carrying value of property, plant, and equipment, and a bond premium (discount) increases (decreases) the face value of a bond payable as shown in the following illustrations:
Equipment | $18,000,000 | |
Less accumulated depreciation | (1,625,000) | $16,375,000 |
Bonds payable | $20,000,000 | |
Less discount on bonds payable | (1,300,000) | $18,700,000 |
Bonds payable | $20,000,000 | |
Add premium on bonds payable | 1,300,000 | $21,300,000 |
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