Critical and Significant Accounting Policies

Critical and Significant Accounting Policies subsequently Enrons scandal, method of report world underwent dramatic changes. Lots of acts were proposed or released. On may 10, 2002, the Securities and Exchange Commission (which is endorsement) proposed a document, that revelation in solicitudes Discussion and abbreviation most the Application of Critical Accounting Policies. One division later, SEC released final rule No.72, Interpretation Commission Guidance Regarding Managements Discussion and outline of Financial Condition and Results of Operations. First one introduces the framework for little history policies second one describes how to genuinely interpret little bill policies in the section off Managements Discussion and Analysis (MDA). However, even till now, muckle ar still in confusion of the differences between those news report policies precise account statement policies or estimates and probative score policies, a way to actually and precisely releg ate these dickens.In a more efficient way, I will go by means of the definition of these two accountancy policies first. afterward that, I will introduce the aim of these two, why we use them. The belong but not least, I will use a 10-K assortment from apple Inc. to make an example, how we present their contents and formats appropriately.DefinitionsIn the accounting metre codification, Financial Accounting Standards Board (which is FASB) has a definition to meaning(a) accounting policies, which is Accounting principles and methods be judged by the appropriate circumstances to present jolly fiscal position, according to GAAP make mo displaceary statement. (Codification, 235-10-05-3) This is very full general presentation of financial statement.While, in contrast to strong accounting policies, the faultfinding accounting policies and estimates ar defined by SEC, which is Critical accounting create on impudence about equivocal matters, including period and affect Co mp some(prenominal)s financial condition (SEC, 2002).It is very obvious, that just from the definition of latter the decisive accounting policies and estimates describe only uncertainties of future changes that also have material impacts.The Differences of Disclosure IntentThe schooling of authoritative accounting policies is important and essential for entities financial statement users. The significant accounting policies and estimates, which is vital part of the entities financial statements, disclose fairly financial position, etc. (Codification, 235-10-50-1). Meanwhile, they are a major cistron of the financial statements as well. They interpret what accounting policies the entity is currently adopting. FASB also states that, the significant accounting policies can affect entitys financial position, and can be utilise for making economic decisions (Codification, 235-10-05-4).Because of Enron scandal, Securities and Exchange Commission intends to give more reading of the en tity to investors. The quality of corporate disclosures needs to be improved. I believe the intent of critical accounting policies is to disclose the accounting policies needed management judgments and estimations with the uncertainties. The critical accounting policies are the vital components in note of the managements discussion and analysis. SECs FR-60 discover as followedFinancial position may imply precisions, continuities and certainties that can be rapid changed in the financial status and operating environment. Thus, even general accepted accounting principles (GAAP) maybe more or less fall apart to present important teaching if it is not appropriate accompanied or clear analytic disclosed to facilitate an investors understanding of the follows financial condition, and the affirm adapted changes in the operating condition (SEC, 2001).According to above information, we should be alert of that, not only the definitions are different, but also the intents of using thes e two accounting policies are substantially distinct from each other. FASBs purpose of significant accounting policies cannot be served for SECs critical accounting policies and vice versa.Contents demonstrationThe significant accounting policies defined by FASB for the applications of accounting principles and methods have a wide range of general description. In contrast of that, critical accounting policies and estimates that proposed by SEC only estimate some of the substantially uncertain and material accounting policies.FASB specifies the disclosure of significant accounting policies should identify the accounting principles and the methods that will materially affect the financial position, and results in different operations, or cash flow. They include judgments, whether principle appropriate between revenue and asset cost during current or future period (Codification, 235-10-50-3).In this paper, I used orchard apple tree annual report as an example. In the phase 10-K/A of apple Inc. (filed in Jan 25, 2010) include presentation and preparation, fair observe measurements, financial instruments, inventories, property plant and equipment, asset retirement obligations, goodwill, foreign capital translation and remeasurement, revenue recognition, shipping costs, payment for indeterminate account, warranty expense, software development cost, income taxes, stock-establish compensation, advertising costs, earnings per common share, comprehensive income, segment information. For example, Apple disclosed inventories item at (LCM) lower the of cost, or market, calculated with first in first out (first-in, first-out) method. In recognition item, the society recognizes revenue when delivery has occurred or any persuasive evidence of an agreement exists. Moreover, in revenue recognition item, for multiple-element arrangements which may include tangible yields that contain software that is essential to the tangible products functionality and undelivered so ftware elements that relate to the tangible products essential software, the Company allocates revenue to all deliverables based on their selling prices (Form 10K/A, 2009).Before application, there are requirements that the critical accounting estimates should meet at the make time of accounting estimates, the uncertain assumption another is, any kinds of estimates used during current period and changes made in the estimate should impact the financial condition materially. There three elements that are involved in the accounting estimation the first is to understand the accounting estimates the second is to give a clearer comprehending to the financial condition for normal investors the triad is to disclose management discussed development (SEC, 2002). Furthermore, the critical accounting policies and estimates should be as the supplements of notes of financial statements, but not duplicate any link up information that already presented. The critical accounting polices disclosure should provide relevance information deeply (SEC, 2003).From the secs intention, accountants should take strongly responsibility for the risk of estimates and changes. Moreover, accountants should be able to explain how they came out with the results and estimates. If last year a bank made a lot of relative new loans, so the report would witness good. But if many of those borrowers later failed to pay, then this years report would tone of voice very bad. So for the next year, the bank management will be required to estimate how many borrowers would fail to pay, maybe a percentage, and gift it in the notes of MDA.In the last years Form 10-K/A of Apple Inc. the critical accounting policies and estimates are related to scroll valuation and size up purchase commitments, revenue recognition, income taxes, valuation of marketable securities, warranty costs, allowance for doubtful accounts along with the legal and other contingencies. In the section of inventory valuation, Apple Inc. emphasize the critical accounting estimate as followThe Company must order components for its products and build inventory in advance of product shipments. The Company records a bring down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value.The Company records accruals for estimated cancellation fees related to component orders that have been cancelled or are expected to be cancelled. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. These commitments typically cover the Companys requirements for periods ranging from 30 to 150 days. (Form 10K/A, 2009The inventory item that disclosed in the significant accounting policies is very unsophisticated and simple, like lower cost or market cost. However, here the participation e stimates the future inventory by forecasting, and later, if the consumers or markets demand changed, which is unpredicted, the company would write-down the records, when it needed.Also, in revenue recognition section analyzes the possible reductions to revenueManagement was making estimates based on historical experience. If a greater parity of customers redeem the incentives other than estimated, the Company would record credits to revenue, which would have a decrease on revenue.Form 10K/A, 2009Although, the revenue reduction is estimated by historical records, the future market condition may change, for example, the incremental price apology obligations incur. The additional reduction to revenue would be resulted in. Additionally, the company gave an estimation of unspecified software upgrade revenue if the Companys ESP for the software upgrade rights related to iPhone would have been fluctuated either higher or lower, the Companys net sales of year 2009, would have decreased o r increased up to $50 cardinal as compared to that of last year (Form 10K/A, 2009).Furthermore, compare with just one reprove in significant accounting policies, the allowance for doubtful accounts section in the critical accounting and estimates presents the very detailed information. Besides the historical experience, the company also considers about the future economic environment, the financial condition. If there is a deterioration of financial condition, the company will have to adjust the allowance accounts, which means the adjustments are going to be made.The formatsThe formats of two accounting policies are significant different, because one is by FASB, and another is by SEC.The significant accounting policies are disclosed in the notes of the financial statement of item 8 in form 10-K. Under FASB codification the disclosure format of significant accounting policies is in a summary of significant accounting policies at the very beginning of the notes of the financial stat ements (Codification, 235-10-50-6). Normally, there is a boilerplate of the disclosure for the significant accounting policies.Compare to the boilerplate formatted significant accounting policies, the critical accounting policies and estimates are unremarkably presented in plain language. The disclosure format should be clear, that the investor could understand easily (SEC, 2002). With a different disclosure place, the critical accounting policies and estimates are only disclosed in MDA.ConclusionAfter studying both accounting policies, I find out the significant accounting policies and critical accounting policies and estimates are substantially generated by separate individuals with different disclosure purposes. Furthermore, as the supplementary of significant accounting policies, critical accounting policies and estimates normally describe some needed adjustments, if the future economic environment and customers or market financial conditions change. Post Enron period, SECs has taken a very discrete stand, for fear of more accounting scandals, by providing more contents about how the uncertainties, assumption, approximation and estimation would affect the companys financial statement in critical accounting policies.