Accounting Transparency – Disclosure, Contingencies, and Error Correction

Accounting Transparency – Disclosure, Contingencies, and Error Correction

Disclosure

The full disclosure principle is important in accounting and financial reporting, particularly because any material fact concerning the company must be revealed. According to Guttman & Meng (2021), this transparency helps investors to be assured and make correct decisions without the possibility of deceitful or incorrect information being fed to them. When companies act on this principle, they avoid giving their stakeholders a distorted representation of their financial situation and thus avoid possible legal sanctions and non–compliance with various regulations. Further, compliance with the rule of full disclosure also improves the general standard of financial statements, making it easier to judge the company’s financial health. Internal stakeholders use it to assess risk, evaluate performance, and understand the context under which the company operates. Notably, this principle also works as a guard to ethical practices while enhancing management accountability. Lastly, keeping with the entire disclosure principle is crucial for investor confidence, capital mobilization, and survival of a competitive, honest, and healthy market.

Disclosure of financial information in various reporting situations is vital to create credibility for the various stakeholders in the organization. First, it enables investors to avail themselves of the requisite information that will assist them in making appropriate decisions on investments, risks, and returns. For accurate disclosures to be made, which enable the market to be efficient, sit will enable the market to place the right price on the security. Also, the financial statement provision is significant for legal reasons because it fulfills legal registration and hails off legal claims. It also assists the organization’s creditors assess its credit position, which is useful for financing. Consequently, comprehensive disclosures can improve stakeholder relations because such relation depicts that management is receptive to ethical issues. In events such as mergers, acquisitions, or any drastic operational transformations, the users get the complete financial statements. Full disclosure makes better decisions possible and fosters a desirable, clean financial climate.

Specific Financials of a Given Company

For the assignment questions, the Coca-Cola 1o-K statement is used. The disclosures required for related-party dealings include information about the related party’s and the company’s nature, an explanation of the transactions—including those that lack an amount for each fiscal period with an accompanying statement of financial performance—the remaining balances of those transactions between the parties involved and any changes that affected the subsequent period, and the requirements of the transactions, which include any related indemnifications or guarantees. ASC 850-10-50-1 is the FASB code section pertaining to related-party transactions.

Items that must be disclosed for contingent liabilities include the nature of the contingency, a projection of the likely loss if it is likely and reasonably estimated, the estimated timing of future events that may influence the contingency and the probability of a loss, and any reserves or accruals associated with the contingency. If a gain is reported for a contingency, the company has to make sure that it discloses accurate and non-misleading information while giving enough information. The FASB has codified contingent liability in two parts: ASC 450-20-50-4 and ASC 450-30-50-1.

Suppose the business is not an SEC filer. In that case, the following information about subsequent events must be disclosed: the financial impact and nature of any material events that have taken place between the financial statement issuance date and balance sheet date and the date it evaluated the events, and any modifications that were made to the accounting records as a result of the events. ASC 855-10-50-1 is the FASB code section covering subsequent events.

The following items must be disclosed by major business segments: an analysis of the firm’s business divisions, including intersegment balances and transaction information, as well as details on each segment’s income, profit or loss, liabilities, assets, and other related financial details. The FASB codification section for major business segments is noted as ASC 280-10-50-1.

The gross or sales revenues, comprehensive income, net income, diluted and basic earnings per share for each period, seasonal revenue, expenditures, or expenses, and any concrete adjustments to the forecast for income taxes, odd or sporadic events, the disposal of an entity’s component, contingent items, adjustments to accounting doctrines or estimates, and significant changes to the company’s financial position should all be taken into account. ASC 270-10-50-1 is the FASB code section for intermediate reporting.

Accounting Change and Error Correction

Contrasts between the two periods would be more challenging if Coca-Cola adopted the FIFO accounting method as compared to the LIFO approach. As a measure to make the new statement more consistent, an adjustment to the approach used in the earlier statement to reflect the current one has to be made, which would prompt them to retroactively report the modifications (Tanaka & Respati, 2021). A change in accounting procedures would also affect some of their accounts, like net income and inventories. Additionally, the business would need to disclose this shift in the financial records’ footnote section.

Financial statement errors greatly influence a firm’s financial standing. Creditors, investors, and other stakeholders utilize the financial statements to decide how well the firm is performing financially. If there are errors in the financial statements, these stakeholders may be misled, and their judgments may change. Essentially, these errors may also result in a company’s noncompliance with accounting laws, which may have consequential financial and legal impacts.

The adjustment would rely on the period when the error was identified if an Excel spreadsheet computing the depreciation for all the equipment, plant, and property had a computation error that produced the expense to be abridged by $3 million. There could be various reasons as to why such errors might occur. For instance, formulas used in a previous task may affect the current calculations if not well-cleared. If discovered during the same accounting period, the error would be corrected by adding an adjustment element to the general ledger statement that would reduce net income by the same figure and increase depreciation expenditure by $3 million.

After that, the company will be required to release the adjusted accounting records and ensure they are accessible to all stakeholders. The company would have to file a previous period adjustment by reiterating the financial statements when the error took place to repair it if it was not identified until after the period closed. Further, the firm must disclose the nature of the error, its impact on the accounting statements, and the basis used to support the adjustment in the footnotes. In addition, stakeholders would need access to the restated financial statements, which must also be submitted to the Commission on Securities and Exchanges (SEC).

References

Guttman, I., & Meng, X. (2021). The effect of voluntary disclosure on investment inefficiency. The Accounting Review, 96(1), 199-223.

Tanaka, G. M. P., & Respati, H. (2021). Cost of inventory calculation analysis using the FIFO And LIFO methods. Journal of Business Management and Economic Research, 5(4), 109-120.

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Competency

In this project, you will demonstrate your mastery of the following competency:

• Apply accounting principles and methods to a variety of financial reporting situations
  

  Disclosure, Contingencies, and Error Correction

Overview

It is important for a company to disclose the quantitative information as well as the qualitative information. Transactions often occur over the period that may not have a direct financial impact, however, are still important to disclose to stakeholders.

Directions

For this assignment, you will choose to review the 10-K for either The Coca-Cola Company or PepsiCo, Inc., and use that company for this entire project. As you work through this project, you will be considering the necessity of full disclosures.

Specifically, you must address the following rubric criteria:

Disclosure

1. Explain the importanceof the full disclosure principle.
2. Provide a rationalefor disclosing financial information to stakeholders in a variety of financial reporting situations.

Specific Financials of a Given Company
Use the financials of either The Coca-Cola Company or PepsiCo, Inc. The company you choose should be used to address the following:

1. Explain the disclosure requirements for related-party transactions.Include the following details in your response:
   1. Cite the codification section applicable in your answer.
   2. Identify the type of information that is required or important to disclose for these types of common transactions.
2. Explain the disclosure requirements for contingent liabilities.Include the following details in your response:
   1. Cite the codification section applicable in your answer.
   2. Identify the type of information that is required or important to disclose for these types of common transactions.
3. Explain the disclosure requirements for subsequent events.Include the following details in your response:
   1. Cite the codification section applicable in your answer.
   2. Identify the type of information that is required or important to disclose for these types of common transactions.
4. Explain the disclosure requirements for major business segments.Include the following details in your response:
   1. Cite the codification section applicable in your answer.
   2. Identify the type of information that is required or important to disclose for these types of common transactions.
5. Explain the disclosure requirements for interim reporting.Include the following details in your response:
   1. Cite the codification section applicable in your answer.
   2. Identify the type of information that is required or important to disclose for these types of common transactions.

Accounting Change and Error Correction
Use the financials of either The Coca-Cola Company or Pepsi Co, Inc. The company you choose should be to address the following:

1. Determine the impact on a company for an accounting change.Consider the following question to guide your response:
   1. How do companies account for accounting changes? For example, if the company changed from one GAAP method to another (e.g., LIFO to FIFO for inventory valuation).
2. Determine the impact that an error correctioncan have on a company. Consider the following questions to guide your response:
   1. What are the effects of errors on the financial statements?
   2. If there was an Excel calculation error in a spreadsheet calculating the depreciation expense for all the property, plant and equipment that resulted in $3 million less expense, how would this be corrected?

What to Submit

Submit your project as a 3- to 5-page Microsoft Word document with double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style.