36 E-Overview of US GAAP Storyboard v14 Reviewed HIRES Printversion

e-Overview of U.S.
GAAP
Accounting & Reporting
COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED. CONFIDENTIAL. This material should not be shared nor distributed internally except to those employees of Philip Morris International Management SA or its affiliates, who need it, in order to perform their tasks on behalf of their employer. Without the prior written permission, no part of this material may be used, reproduced or transmitted in any form or by any means, by or to any party outside of Philip Morris International COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED. Management SA and its affiliates.
Welcome to the PMI Finance Academy!

The Finance Academy is a learning and development platform to
Improve awareness of key PMI Finance concepts
Exchange best practices
Increase your functional knowledge
Increase transparency across different Finance Functions
Learn new skills
Accelerate the integration of new employees
COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.
Welcome to the PMI Finance Academy!

The scope of the PMI Finance Academy is to cover the core PMI Finance skills of each functional area: The e-Overview of U.S. GAAP course provides you with Accounting & Reporting knowledge and skills.
Accounting & Accounting & Reporting Reporting
Corporate Audit
Financial Planning & Reporting
General
Global Financial Systems
Internal Controls
Investor Relations
M&A and Strategic Planning
Operations Finance
SEC Reporting
Tax
Treasury
Course Information
As you can see in the table of contents on the left, this course is structured in 5 modules. To complete this course successfully and obtain the certificate of completion you need to work through the modules and correctly answer at least 80% of questions in the assessment. You can repeat this assessment until you reach the minimum required score.
The course will take approximately 60 minutes.
Course Objectives
This course will provide you with an overview of the U.S. General Accepted Accounting Principles (GAAP). Upon completing this course you should be able to:
Provide an overview of U.S. GAAP and explain the Financial Accounting Standards Board (FASB) Codification
Explain the standard setting process for U.S. GAAP
Describe the FASB Conceptual Framework
Define the basic elements of U.S. GAAP financial statements
Explain how to report other comprehensive income
Explain presentation of income statement items
U.S. GAAP Overview and FASB Codification

This module will give you an introduction to U.S. GAAP
U.S. GAAP Introduction

What does it really mean
present fairly in conformity with accounting principles generally accepted in the United States?
Principlesbased or rules-based?
Rules-based vs. principles-based
U.S. GAAP has often been accused of being rules-based, rather than principles-based. However, U.S. GAAP is driven by very similar principles as those set out in the International Financial Reporting Standards (IFRS) Framework.
Legal influences and the demand for sometimes quite narrow interpretation of these principles, whether from lawyers, regulators or auditors, have caused several areas where bright lines have developed in certain areas of U.S. GAAP.
Overview of Accounting Standards Codification (ASC)

The ASC officially became the single source of authoritative nongovernmental U.S. GAAP in July 2009 and was first applied for interim and annual periods ending after September 15, 2009. Applicable to all nongovernmental entities i.e. applies to both public and nonpublic entities applying U.S. GAAP
ASC is the single source of authoritative GAAP Reorganized into 90 accounting topics within a consistent structure Its purpose is not to create new accounting and reporting guidance
ASC included essential content from the old standards, while removing the nonessential content Nonessential content may include redundant summaries, historical content, discussions of previous practice and constituent feedback summaries (all of which are usually contained in the standards summary, basis for conclusions, or appendices sections) However, material within these sections that the FASB deemed essential was incorporated into the ASC
How is the ASC Organized?

Main Areas Financial Statement Accounts Broad Transactions
General principles
Presentation
Relate to broad conceptual matters
Relate only to presentation
Assets Liabilities Equity Revenue Expense
Usually transaction oriented Relate to multiple f/s accounts
Subtopic
Topics
Subsets of a topic and are generally distinguished by type or scope (For example, Operating Leases and Capital Leases are two Subtopics of the Leases Topic. Every Topic has at least one Subtopic.)
Section
Sections are standard across each Topic or Subtopic
Sections
All Sub-topics are organized into these sections. This ensures consistency throughout the Codification. XXX-YY-00- Status XXX-YY-05- Overview and Background XXX-YY-10- Objectives XXX-YY-15- Scope and Scope Exceptions XXX-YY-20- Glossary XXX-YY-25- Recognition XXX-YY-30- Initial Measurement XXX-YY-35- Subsequent Measurement XXX-YY-40- Derecognition XXX-YY-45- Other Presentation Matters XXX-YY-50- Disclosure XXX-YY-55- Implementation Guidance XXX-YY-60- Relationships XXX-YY-65- Transition and Open Effective Date Information XXX-YY-70- Grandfathered Guidance XXX-YY-75- XBRL Definitions
Where XXX represents the Topic and YY represents Sub-Topic
ASC Structure Class Example

This slide gives an example of how the ASC is organized. Topic (360) Subtopics PP&E 360
Topic 360 - Property, Plant and Equipment
Overall
Real Estate Sales
Sections
Scope
Derecognition
Scope
Derecognition
General
General
General
General
Subsections
Impairment or Disposal of LLAs
Impairment or Disposal of LLAs
LLAs = Long Lived Assets
U.S. GAAP Hierarchy
Apply the guidance from the FASB Codification for the specific transaction/ event in question.
If no specific guidance is available, apply other guidance from the Codification by analogy (exception: except when other guidance specifically prohibits the guidance to that particular transaction or states that the guidance may not be applied by analogy).
If neither 1 or 2 are possible, consider non-authoritative guidance (examples include: widely recognized industry practice, FASB Concept Statements, American Institute of Certified Public Accountants (AICPA) Issue Papers, IFRS, AICPA Technical Practice Aids (TPAs), pronouncements by professional associations or regulatory agencies, and accounting textbooks, handbooks and articles.
The appropriateness of non-authoritative guidance depends on its relevance to particular circumstances, the specificity of the guidance, the general recognition of the issuer or author as an authority and the extent of its use in practice!
Standard Setting
This module will help you to understand how the Accounting Standards Codification is set and amended
FASB Accounting Standards Codification Tools and Resources
Information to / by developers
Slide code: Images code:
How Is the ASC Amended?

FASB Chairman decides whether or not to add an issue to the Boards Technical agenda. Decision based on consideration of:
Additional Information
The ASC is available free to the public on-line at: http://asc.fasb.org/
FASB tutorials are available to assist with familiarizing accountants with the Codification and how to use it for accounting research
Board Decision Proposals Proposals
How widespread the issue is

Alternative solutions Technical feasibility Practical consequences Convergence possibilities
Discussion Paper (DP) (Optional)
Exposure Draft (ED)
Cooperative opportunities
Resources
Accounting Standards Update issued

Two opportunities for public consultation (if DP has been issued)
Amendments made to ASC
FASB Conceptual Framework

This module will help you to understand the purpose of the FASB Conceptual Framework
Overview of FASB Conceptual Framework

Statement of Financial Accounting Concepts (SFAC) No. 8: Conceptual Framework for Financial Reporting
Chapter 1: The objective of general purpose financial reporting
Chapter 2: The Reporting Entity
Chapter 3: Qualitative characteristics of useful financial information
No. 1
No. 2
No. 3
No. 4
No. 5
No. 6
No. 7
Financial Reporting for Non Businesses (not covered in course)
Recognition and Measurement
Elements of Financial Statements
Using Cash Flow (CF) information and Present Value (PV) (not covered in module)
Overview of FASB Conceptual Framework

Statement of Financial Accounting Concepts (SFAC) No. 8: Conceptual Framework for Financial Reporting
Chapter 1: The objective of general purpose financial reporting
Chapter 2: The Reporting Entity
Chapter 3: Qualitative characteristics of useful financial information
No. 1
No. 2
No. 3
No. 4
No. 5
No. 6
No. 7
Financial Reporting for Non Businesses (not covered in course)
Recognition and Measurement
Using Cash Flow (CF) information and Present Value (PV) (not covered in module)
SFAC 8: Objective of Financial Reporting

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.
Who are the users of general purpose financial reporting?
What kind of information does general purpose financial reporting provide them with?
SFAC 8: Types of Financial Information

The types of financial information that a user needs in order to make resource allocation decisions:
Buy? Sell? Hold?
Resources of entity
Claims against the entity
How efficiently and effectively management and the board have discharged their responsibilities
SFAC 8: Qualitative Characteristics of Useful Financial Information

The Framework introduces the 2 fundamental characteristics as being:
Materiality Relevance
Faithful representation
Predictive Value
Confirmatory Value
Complete
Neutral
Free from error
If there are two ways of presenting information, both of which are considered relevant and faithfully represented, then the enhancing characteristics may help determine which way should be used:
Comparability
Timeliness
Verifiability
Understandability
Case Study: Prevention of Earnings Management

Case description
On February 3, 20X1 an employee filed a USD 2 million lawsuit against Stain Co. for damages suffered after one of Stains plants exploded on December 29, 20X0.
Stains lawyers expect the company will have to pay an amount between USD 500,000 and USD 1 million, however no amount within that range appears to be a better estimate than any other.
The employee has offered to settle the lawsuit for USD 900,000, but Stain will not agree to the settlement. The financial statements are authorized for issue on February 17, 20X1.
What amount of liability, if any, should be recorded in the Companys balance sheet at December 31, 20X0?
Solution: Prevention of Earnings Management

What amount of liability, if any, should be recorded in the Companys balance sheet at December 31, 20X0? Solution
USD 500,000 if no amount within the range is more likely!
Elements of U.S. GAAP Financial Statements

This module will help you to define the elements of the U.S. GAAP Financial Statement

(per Statement of Financial Accounting Concepts No. 6)
Revenues
Equity
Expenses
Investment by owners
Gains Distributions to owners Losses Comprehensive income Assets
Liabilities
What is this?
PMI Internal and External Reporting Basic Structure Income Statement

Above OCI: Underlying business (revenues, cost of sales, etc.)
Above OCI (non-recurring): Reporting adjustments: Accounts # 6491 6496, such as exit and impairment costs
= Operating Companies Income (OCI)(a) by segment
Below OCI: Amortization, corporate expenses/assessment
= Operating income
Interest, income taxes, minority interest
= Net earnings
(a) Note: In U.S. GAAP and in the course of this training the abbreviation OCI stands for Other Comprehensive Income which is a part of equity.
Components of Other Comprehensive Income (OCI)(1)

Unamortized actuarial gains or losses, past service cost, and transition amount (for defined benefit pension plans)
Unrealized gains/losses on available-for-sale securities
Currency Translation Adjustments (CTA) to reporting currency
Effective portion of gains/losses on derivative instrument that qualifies as a cash flow hedge
Effective portion of gains/losses on hedging instrument in hedge of net investment in a foreign operation (included in CTA)
All these items may be shown either gross, or net of income tax (PMI method)
1. Note: OCI is the U.S. GAAP term. PMI uses the abbreviation OCE (Other Comprehensive Earnings)
Comprehensive Earnings
Excerpt from PMIs Statements of Comprehensive Earnings for the six month period ended June 30, 2012 (in millions of dollars).
For the Six Months Ended June 30
2012 Net Earnings Other comprehensive earnings (losses), net of income taxes: Currency translation adjustments, net of income taxes of ($33) in 2012 and $93 in 2011 Change in net loss and prior service cost: Net losses and prior services costs, net of income taxes of $- in 2012 and ($2) in 2011 Less amortization of net losses, prior service costs and net transition costs, net of income taxes of ($21) in 2012 and ($12) in 2011 Change in fair value of derivatives accounted for as hedges: (Gains)/losses transferred to earnings, net of income taxes of $1 in 2012 and ($2) in 2011 (12) (1) 78 (566) $4,639
2011 $4,472
828
8 44
14
Gains recognized, net of income taxes of ($1) in 2012 and $- in 2011

Change in fair value of equity securities Total other comprehensive (losses) earnings Total comprehensive earnings Less comprehensive earnings attributable to: Noncontrolling interests Redeemable noncontrolling interests Comprehensive earnings attributable to PMI
12
(489) 4,150
5
(1) 898 5,370
86 99 $3,965
112 52 $5,206
Required U.S. GAAP Financial Statements

How many years are required for each statement for Securities and Exchange Commission (SEC) registrants?
Balance sheet (statement of financial position)
Income statement (statement of earnings) Statement of comprehensive income (two alternative presentation formats) Changes in shareholders equity (may be presented as a statement or in the notes) Statement of cash flows
Notes to the financial statements
Case Study: Current vs. Non-current

Case description
Wall Worthy began operations on January 1, 20X0. At this date they took out a EUR 10 million loan with a one-time principal repayment due on June 30, 20X5.
Management of Wall Worthy has informed you that they have refinanced this debt on February 10, 20X5 for a further five years and would like to continue to classify this debt as non-current on their balance sheet at December 31, 20X4. Financial statements are authorized for issue on February 15, 20X5.
Is the classification of this liability as non-current at December 31, 20X4 proper under U.S. GAAP?
Solution: Current vs. Non-current

Is the classification of this liability as non-current at December 31, 20X4 proper under U.S. GAAP? Solution
Yes, It is.
Definitions: Operating Income and Expense
Operating Expense Expenses associated with running a business but not considered directly applicable to the current line of goods & services being sold. These include sales and marketing, R&D, general and administrative.
Presentation of the Financial Statements

This module will help you to understand the presentation of financial statements
Income Statement Presentation
Income statement presentation issues are often times a policy election by companies that require disclosure.
G. Anthony Lopez, SEC, 2005 AICPA National Conference on SEC Developments
Income Statement Requirements

(SEC Rule S-X 210.5-03)
Net sales and gross revenues

Net sales of tangible products (gross sales less discounts, returns and allowances)
Costs and expenses applicable to sales and revenues

Cost of tangible goods sold
Other operating costs and expenses Selling, general and administrative expenses Provision for doubtful accounts Other general expenses
Income Statement Requirements

(SEC Rule S-X 210.5-03)
Non-operating income Interest and amortization of debt discount and expense Non-operating expenses
Income or loss before income tax expense and appropriate items below
Income tax expense Equity in earnings of unconsolidated subsidiaries

Income or loss from continuing operations
Discontinued operations
Income or loss before extraordinary items and cumulative effects of changes in accounting
principles
Extraordinary items, less applicable tax (hardly ever used!) Net income or loss
Net income attributable to the noncontrolling interest Net income attributable to the controlling interest Earnings per share data
Basic Earnings Per Share
Net profit or loss attributable to ordinary shareholders after deducting preference dividends (numerator)
Basic Earnings Per Share

Weighted average number of ordinary shares outstanding during the period (denominator)
Case Study: Change in Accounting Principles and Estimates

Case description
Donuts-R-Us Inc. (DRU) has a three-year profit-sharing plan for its top executives. The executives get up to 40% of their base salary if net income under U.S. GAAP exceeds EUR 150 million in any given year.
In 20X1, DRU only had net income of EUR 120 million and fell short of the top target. In 20X2, DRU changed its depreciation method from the usage method (based on number of donuts made) to the straight-line method. DRU applied this change retrospectively and, on a restated basis, had EUR 150 million in net income for 20X1. Therefore, DRU also restated its 20X1 financial statements for the effect of the additional bonus compensation expense.
Please advise Donuts-R-Us.
Solution: Change in Accounting Principles and Estimates

Please advise Donuts-R-Us.
Solution
This treatment is incorrect! Donuts-R-Us must follow the requirements of FASB ASC Topic 250- Accounting Changes and error corrections. Remarks A change in the depreciation method is a change in estimate. It is not a change in accounting principle. A change in estimate must be accounted for prospectively. For changes in depreciation method, the change must be preferable and disclosure about the preferability is required.
Accounting Changes and Error Corrections

Voluntary changes in accounting principle
Retrospective application unless impracticable Impracticable Requires significant estimates and impossible to objectively distinguish information about circumstances at that time and that would have been available when financial statements for that period were issued
After every reasonable effort, unable to apply requirement
Assumptions about managements intent in prior period cannot be independently substantiated
Exclude indirect effects of retrospective application to the prior periods
Applies to new pronouncements if no specific guidance given
Change in depreciation method = change in estimate

Change must be preferable and disclosure about the preferability of change is required
Congratulations!
You have successfully completed the course!
The course has been produced in partnership with PMI Learning .

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Summary
After taking this course, you should be able to:
Provide an overview of U.S. GAAP and explain the Financial Accounting Standards Board (FASB) Codification
Explain the standard setting process for U.S. GAAP
Describe the FASB Conceptual Framework
Define the basic elements of U.S. GAAP financial statements
Explain how to report other comprehensive income
Explain presentation of income statement items
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e-Overview of U.S.

Welcome to the PMI Finance Academy!

Improve awareness of key PMI Finance concepts

Exchange best practices

Increase your functional knowledge

Increase transparency across different Finance Functions

Learn new skills

Accelerate the integration of new employees

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

Welcome to the PMI Finance Academy!

Accounting & Accounting & Reporting Reporting

Financial Planning & Reporting

Global Financial Systems

M&A and Strategic Planning

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

The course will take approximately 60 minutes.

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

Explain the standard setting process for U.S. GAAP

Describe the FASB Conceptual Framework

Define the basic elements of U.S. GAAP financial statements

Explain how to report other comprehensive income

Explain presentation of income statement items

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

U.S. GAAP Overview and FASB Codification

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

U.S. GAAP Introduction

Overview of Accounting Standards Codification (ASC)

How is the ASC Organized?

Relate to broad conceptual matters

Relate only to presentation

Assets Liabilities Equity Revenue Expense

Usually transaction oriented Relate to multiple f/s accounts

Sections are standard across each Topic or Subtopic

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

Where XXX represents the Topic and YY represents Sub-Topic

ASC Structure Class Example

Topic 360 - Property, Plant and Equipment

Real Estate Sales

Impairment or Disposal of LLAs

Impairment or Disposal of LLAs

LLAs = Long Lived Assets

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

U.S. GAAP Hierarchy

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

FASB Accounting Standards Codification Tools and Resources

How Is the ASC Amended?

The ASC is available free to the public on-line at: http://asc.fasb.org/

Board Decision Proposals Proposals

How widespread the issue is

Discussion Paper (DP) (Optional)

Exposure Draft (ED)

Accounting Standards Update issued

Amendments made to ASC

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

FASB Conceptual Framework

COPYRIGHT 2012 by Philip Morris International Management SA ALL RIGHTS RESERVED.

Overview of FASB Conceptual Framework

Chapter 1: The objective of general purpose financial reporting

Chapter 2: The Reporting Entity

Chapter 3: Qualitative characteristics of useful financial information

Financial Reporting for Non Businesses (not covered in course)

Recognition and Measurement

Elements of Financial Statements