PORTFOLIO

Financial Statement Analysis: Qualitative Techniques (Portfolio 5122)

Bloomberg BNA Tax and Accounting Portfolio 5122-3rd, Financial Statement Analysis: Qualitative Techniques, explains how analysts and other users of financial statements employ various qualitative techniques to improve the usefulness of the information contained in those statements. 

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DESCRIPTION

Bloomberg BNA Tax and Accounting Portfolio 5122-3rd, Financial Statement Analysis: Qualitative Techniques, explains how analysts and other users of financial statements employ various qualitative techniques to improve the usefulness of the information contained in those statements. A wide range of recognition, measurement, and disclosure principles used in preparing financial statements are described and illustrated. This work complements other Portfolios in the Accounting Policy and Practice Series that focus on specific accounting subjects.
This Portfolio is organized as follows. After introducing in Sections I, II, and III financial statement analysis and the system of financial reporting used by U.S.-based organizations, Section IV describes five steps typically involved in qualitative analyses. Sections V, VI, and VII illustrate how those steps are employed to analyze items reported in general-purpose external financial statements—balance sheets, income statements, and statements of cash flows. Sections VIII and IX address additional information reported in financial statement notes, SEC filings, press releases, and other sources that help users of financial statements better understand organizations and the environments in which they operate. Section VIII addresses qualitative analyses of related party transactions, executive and board compensation, and corporate governance; Section IX covers risk management and hedging activities, off balance sheet financing, acquisitions and divestitures, consolidation policy, subsequent events, international operations, and auditors' reports and management certifications. The Portfolio's Worksheets illustrate the types of information commonly used in qualitative financial statement analyses of U.S. public companies, including sample disclosures taken from companies' financial statements, notes to the financial statements, Management's Discussion and Analysis (MD&A), regulatory filings and other sources.
Qualitative financial statement analyses involve examining financial statement information and related disclosures to improve their usefulness in assessing organizations' financial circumstances and performance. Complete financial statement analyses, however, include using various quantitative techniques, such as ratio analyses, to measure various aspects of the organizations' financial condition and performance. Companion APP 5133-2nd, Financial Statement Analysis: Quantitative Techniques—Analyzing Liquidity, Profitability, and Asset Utilization and APP 5134-2nd, Financial Statement Analysis: Quantitative Techniques—Analyzing Solvency, Price Multiples, and Cash Flow describe and illustrate quantitative financial statement analyses.
This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5122-3rd, Glazer and Stevens, Financial Statement Analysis: Qualitative Techniques (Accounting Policy and Practice Series).


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AUTHORS

ALAN S. GLAZER
Alan S. Glazer, A.B., Franklin & Marshall College; M.A. and Ph.D., University of Pennsylvania, served as associate director of the Independence Standards Board's conceptual framework project and has written several articles on auditor independence and accounting ethics. Dr. Glazer is the co-author (with Martha L. Benson) of APP 5133-2nd, Financial Statement Analysis: Quantitative Techniques Analyzing Liquidity, Profitability, and Asset Utilization, and APP 5134-2nd, Financial Statement Analysis: Quantitative Techniques Analyzing Solvency, Price Multiples, and Cash Flow. He has been teaching financial accounting at Franklin & Marshall College, Lancaster, Pennsylvania, since 1975, where he is the Henry P. and Mary B. Stager Professor of Business. Dr. Glazer's book, Accounting for Museum Collections and Contributions of Collection Items, co-authored with Dr. Henry Jaenicke, Drexel University, was published by the American Association of Museums. Dr. Glazer also assisted in drafting the audit and accounting guide, Not-for-Profit Organizations, for the American Institute of Certified Public Accountants. Dr. Glazer is a member of the American Association of University Professors, the American Accounting Association, and the American Institutes of Certified Public Accountants. He serves on the editorial board of the Journal of Accountancy.

GLENN L. STEVENS
Glenn L. Stevens, B.A. in Economics, Lycoming College; MBA in Management and Masters in Finance, Loyola College (Baltimore, MD); Ph.D., Pennsylvania State University, taught finance courses at Franklin & Marshall College, Lancaster, Pennsylvania, from 1995, through his retirement in June 2007. Before serving on the Franklin & Marshall College faculty, Dr. Stevens spent a career in agricultural banking with the Farm Credit Bank of Baltimore. He served as chief financial officer and held other executive positions. He retired from the bank as executive vice president and chief operating officer following its merger with Agfirst Farm Credit Bank.

TABLE OF CONTENTS

Detailed Analysis

I. Scope and Purposes of Portfolio

II. Uses of Financial Statement Analysis

Introductory Material

A. Financial Statement Analysts and Their Objectives

B. Techniques and Emphases Depend on Objectives

1. Credit Analysis

2. Equity Analysis

3. Independent Auditors' Analytical Procedures

4. Managers' Analyses

5. Analyses by Governing Bodies

6. Other Analyses of Financial Statements

C. Sources of Information

III. The U.S. Financial Reporting System

Introductory Material

A. Objectives of Financial Reporting in the United States

B. Requirements for Financial Reporting by U.S. Public Companies

1. Audited Financial Statements

a. Annual Reporting

b. Other Statutory Reporting Requirements

c. Fair Disclosure Required

2. Generally Accepted Accounting Principles

3. Accrual Accounting Concepts

4. Independent Audits of Annual Financial Statements

5. Sarbanes-Oxley Act of 2002

a. Major Provisions Influencing Financial Reporting

b. Mandated Assessments of Internal Controls

c. Officer Certifications of Annual Reports

d. Other Ramifications

C. Requirements of Financial Reporting by Non-public Organizations

D. Limitations of Financial Statement Information

1. Use of Conventions

a. Reliability

b. Historical Focus

c. Use of Multiple Attributes

d. Stable Monetary Unit

e. Aggregation

f. Accounting Entity

g. Conservatism

h. Summary of Conventions' Effects

2. Compromises Inherent in the Accounting Standard-Setting Process

3. Acceptability of Alternative Accounting Principles and Estimates

IV. Steps in Qualitative Financial Statement Analysis

Introductory Material

A. Objectives

B. Five Typical Steps in Qualitative Analysis

C. Step 1: Define the Objectives

D. Step 2: Review Financial Statements and Related Disclosures

1. Increasing Complexity of the Financial Reporting Environment

2. Business and Economic Pressures and Accounting Factors

3. Aggregation and Classification Issues

E. Step 3: Evaluate Significant Accounting Methods, Estimates, and Assumptions

1. Disclosures of Significant Accounting Policies

2. Tone at the Top

3. Internal Controls

F. Step 4: Follow-Up

G. Step 5: Adjust Reported Information

H. Cross References

V. Qualitative Balance Sheet Analysis

A. Introduction and Focus

B. Balance Sheet Reporting

1. Classifications

2. Benefits and Uses of Qualitative Balance Sheet Analyses

3. Adjustments to Reported Balance Sheet Amounts

C. Assets

1. Nature of Assets

a. Characteristics

b. Examples

c. Resources Not Recognized as Assets

2. Analyzing Assets and Related Accounting Policies

a. General Approach

b. Measurement

3. Asset-Related Issues Requiring Follow-Up

4. Adjustments to Reported Asset Amounts

a. Adjustments to Fair Value

b. Other Adjustments

D. Liabilities

1. Nature of Liabilities

a. Characteristics

b. Examples

c. Obligations Not Recognized as Liabilities

2. Analyzing Liabilities and Related Accounting Policies

a. General Approach

b. Measurement

c. Scope of Assessments

d. Sources of Information

3. Liability-Related Issues Requiring Follow-Up

4. Adjustments to Reported Liability Amounts

a. Adjustments to Fair Value

b. Other Adjustments

E. Equity

1. Nature of Equity

a. Definition

b. Examples

2. Analyzing Equities and Related Accounting Policies

3. Equity-Related Issues Requiring Follow-Up

4. Adjustments to Reported Equity Amounts

VI. Qualitative Income Statement Analysis

A. Introduction and Focus

B. Income Statement Reporting

1. Classifications

2. Benefits and Uses of Qualitative Income Statement Analyses

3. Limitations on Usefulness of Information

C. Potential for Earnings Management

1. Concept

2. Techniques

3. Limitations

4. Qualitative Assessments

D. Earnings Quality

1. Concept

2. Qualitative Assessments

E. Adjustments to Reported Income Statement Amounts

F. Revenues

1. Nature of Revenues

a. Definition and Measurement

b. Application of Measurement Criteria

c. Classifications of Revenues

2. Analyzing Revenues and Related Accounting Policies

3. Revenue-Related Issues Requiring Follow-Up

a. Overall Approach

b. Specific Questions

c. Red Flags

4. Adjustments to Reported Revenue Amounts

a. Objectives

b. Examples

G. Expenses

1. Nature of Expenses

a. Measurement and Timing

b. Classifications

2. Analyzing Expenses and Related Accounting Policies

a. Sources of Information

b. Examples

3. Expense-Related Issues Requiring Follow-Up

a. Overall Approach

b. Specific Questions

c. Red Flags

4. Adjustments to Reported Expense Amounts

a. Objectives

b. Examples

H. Gains, Losses, and "Other Income" Items

1. Nature of Items

2. Objectives

3. Specific Questions

I. Discontinued Operations and Extraordinary Items

1. Discontinued Operations

2. Extraordinary Gains and Losses

J. Earnings Per Share

K. Pro Forma Earnings

VII. Qualitative Analysis of Statements of Cash Flows

A. Introduction and Focus

B. Cash Flow Reporting

C. Benefits and Uses of Cash Flow Analyses

1. Analysis of Credit Risk

2. Other Purposes

D. Cash Flows From Operating Activities

1. Definition

2. Alternative Reporting Methods

3. Analytical Uses of Information

a. Perceived Benefit

b. Challenges

4. Specific Questions

E. Cash Flows From Investing Activities

1. Definition and Examples

2. Analytical Uses of Information

3. Specific Questions

F. Cash Flows From Financing Activities

1. Definition and Examples

2. Analytical Uses of Information

3. Specific Questions

G. Supplemental Cash Related Disclosures

1. Definition and Examples

2. Analytical Uses of Information

3. Specific Questions

H. Cash Flow Issues Requiring Follow-Up

I. Adjustments to Reported Cash Flow Amounts

1. Concerns

2. Examples of Adjustments

3. Other Pertinent Factors

VIII. Qualitative Analysis of Related Party Transactions, Corporate Governance and Compensation Issues

A. Scope

B. Transactions With Related Parties

C. Corporate Governance

1. Concepts

2. Reforms

a. Statutory and Regulatory Actions

b. Other Responses

3. Analytical Objectives

D. Director and Management Compensation

1. Concerns

2. Responses to Concerns

a. Voluntary

b. Regulatory

3. Issues Addressed in Qualitative Analyses

IX. Other Areas for Qualitative Analyses

Introductory Material

A. Risk Management and Hedging Activities

1. Risk Assessment

a. Nature of Risks

b. Sources of Information

2. Risk Management

a. Historical Perspectives

b. Objectives

c. Opportunities to Alter Risk Profiles

B. Hedging Activities

1. Accounting Treatment

2. Disclosures

3. Qualitative Assessments

C. Accounting Issues for Particular Industries and Sectors

D. Operating Segments, Major Customers, and Geographical Areas

1. Nature of Information

2. Qualitative Analysis

E. Loan, Bond, and Other Debt Covenants

F. Commitments, Guarantees, Other Contingencies, and Backup Sources of Liquidity

1. Accounting Treatment

2. Disclosures

3. Analytical Uses of Information

G. Off-Balance-Sheet Financing

1. Omission From Balance Sheets

2. Statutory and Regulatory Responses

3. Analytical Uses of Information

4. Specific Questions

H. Acquisitions and Divestitures

1. Objectives

2. Areas of Concern

a. Cash Flows

b. Goodwill

3. Sources of Information

I. Consolidation Policy

1. Accounting Requirements

2. Analytical Adjustments

J. Subsequent Events

1. Definition

2. Recognition and Disclosure

3. Sources of Information

4. Qualitative Assessments

K. International Operations

1. Significance

2. Objectives of Qualitative Assessments

3. Sources of Information

4. Accounting Principles

5. Issues Addressed in Qualitative Analyses

6. Specific Questions

L. Auditors' Reports and Management Certifications

1. Perspectives

2. Analytical Uses of Information

a. Auditors' Reports

b. Regulatory Filings

c. Assessments of Internal Control

X. Summary and Conclusions

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Glossary of Abbreviations and Acronyms

Worksheet 2 Information Sources for Qualitative Analyses

Worksheet 3 Annual Report Information

Worksheet 4 Hierarchy of U.S. Generally Accepted Accounting Principles (GAAP)

Worksheet 5 Accounting Changes

Worksheet 6 Significant Accounting Policies and Estimates

Worksheet 7 Balance Sheets

Worksheet 8 Assets

Worksheet 9 Liabilities

Worksheet 10 Stockholders' Equity

Worksheet 11 Income Statements

Worksheet 12 Revenues

Worksheet 13 Expenses

Worksheet 14 Other Income

Worksheet 15 Restructuring

Worksheet 16 Extraordinary Items

Worksheet 17 EPS Disclosures

Worksheet 18 Non-GAAP Disclosures

Worksheet 19 Statements of Cash Flows

Worksheet 20 Risk Management

Worksheet 21 Industry Sector Disclosures

Worksheet 22 Segments

Worksheet 23 Covenants

Worksheet 24 Commitments

Worksheet 25 Off-Balance-Sheet Financing

Worksheet 26 Acquisitions

Worksheet 27 Consolidated Policy and Equity Method Investments

Worksheet 28 Related Party Transactions

Worksheet 29 Subsequent Events

Worksheet 30 Corporate Governance

Worksheet 31 Compensation

Worksheet 32 International Operations

Worksheet 33 Auditor's Report

Worksheet 34 Management Internal Control and Certification

Bibliography

OFFICIAL

Statutes:

Congressional Materials:

Securities and Exchange Commission:

Regulations

Forms

Final Rules

Interpretive Releases

Accounting Series Releases

Accounting and Auditing Enforcement Releases

Financial Reporting Release

Policy Statement

Orders, Notices, and Information

Proposed Rules and Concept Releases

Staff Accounting Bulletins

Reports

Other

PCAOB:

Government Accounting Standards Board:

International Accounting Standards:

Office of Federal Housing Enterprise Oversight:

Government Accountability Office:

American Institute of Certified Public Accountants:

Accounting Principles Board Opinions

Accounting Research Bulletins

Statements on Auditing Standards (SAS)

Statements of Position

Other

Financial Accounting Standards Board:

Statements of Financial Accounting Standards

Interpretations

Emerging Issues Task Force

Concepts Statements

Other

Independence Standards Board:

UNOFFICIAL

Articles and Books:

BNA Portfolios:

Internet Sources: