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Earnings Forecast. June 21, 2012 Group E: Arjun Arulambalam Emily Crawford Rajesh Khullar Kira Hataley Yun Shim. Agenda. Introduction Case Study: SportsGoodStop External Study CICA Handbook: Section 4250 Future-Oriented Financial Information Conclusion Class Activity.

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earnings forecast

Earnings Forecast

June 21, 2012

Group E:

ArjunArulambalam

Emily Crawford

Rajesh Khullar

KiraHataley

Yun Shim

agenda
Agenda
  • Introduction
  • Case Study: SportsGoodStop
  • External Study
  • CICA Handbook: Section 4250
    • Future-Oriented Financial Information
  • Conclusion
  • Class Activity
sportsgoodstop company background
SportsGoodStop Company - Background
  • Derek Jeffries is the owner
    • Selling brand name sports jerseys, ball caps, and golf equipment
  • Operated 15 retail outlets throughout Western Canada
  • 5 franchises have already been approved
  • 10 more requests for franchise stores are waiting to be approved by the board of directors
  • Goal: Expand into Toronto and then into eastern Canada with a combination of company owned and franchise outlets
sportsgoodstop company issues
SportsGoodStop Company - Issues
  • Better share price would be obtained for the IPO if potential investors were aware of the forecasted earnings
  • Debt to total assets ratio is already near the limit of 80% that his banker had set out several years ago
    • Forecasted budget may adopt accounting practices to increase assets
sportsgoodstop company auditor
SportsGoodStop Company – Auditor
  • Steven Snipes is a senior manager at Sloan and Travis a CA firm
    • Smaller firm with only one other public company
  • Derek Jeffries is a long time friend and client
  • Confrontation: Whether Derek could provide audit assurance of the forecasted earnings in four days
    • Derek has threaten to switch to the Big5 if S and T cannot complete the task
slide7

SportsGoodStop Company- SportsGoodStop Income Projections

SportsGoodStop - Growth Rate

  • In 2000, the company reduced is expenses more than the revenue fell therefore the net income still increased
  • In 2001 is it practical to have an increase of 3246% from the addition of a guaranteed 5 franchises
sportsgoodstop forecasted revenue
SportsGoodStop - Forecasted Revenue
  • Initial franchise fees are a one time payment
      • Does it make sense to include as income?
      • Franchisee must capitalized the initial franchise fee rather than expensing it
  • Royalties are included as revenue
    • The income is incurred yearly and as percent of franchisee’s sales
pwc study
PWC Study
  • PWC Study
    • Increase in demand for trends and drivers of performances
      • To maintain investors confidence
  • KPMG Study
    • Organizations need to improve quality, reliability and insightfulness in the data they use to produce forecasts
    • Look beyond internal data sources to forecast performance
    • Scenario planning is a useful tool address uncertainty
purpose and scope
Purpose and Scope
  • Establishes standards
    • For the measurement, presentation and disclosure of future-oriented financial information
  • Does not apply to historical pro-forma statements issued.
introduction to section 4250 objective
Introduction to Section 4250 - Objective
  • Objective: The objective of presenting future-oriented financial information is to provide external users with information that assists them in evaluating any entity\'s financial prospects.
section 4250 definitions
Section 4250 - Definitions
  • Future-oriented financial information is information about prospective results of operations, financial position and/or cash flows, based on assumptions about future economic conditions and courses of action. Future-oriented financial information is presented as either a forecast or a projection.
  • General purpose future-oriented financial information prepared for external users with whom the entity is not negotiating or dealing directly.
  • Special purpose future-oriented financial information prepared for external users with whom the entity is negotiating or dealing directly.
what is the difference between a forecast a projection
What is the difference between a forecast & a projection?
  • Forecast: prepared using assumptions which reflect the entity\'s planned courses of action for the period covered given management\'s judgment as to the most probable set of economic conditions
  • Projection: prepared using assumptions that reflect the entity\'s planned courses of action for the period covered given management\'s judgment as to the most probable set of economic conditions, together with one or more hypotheses that are assumptions which are consistent with the purpose of the information but are not necessarily the most probable in management\'s judgment.
measurement assumptions
Measurement - Assumptions
  • Management is responsible for the process of developing assumptions and for ensuring that the assumptions developed are appropriate in the circumstances
  • One assumption may affect many parts of a business and lead to the formulation of other assumptions
    • Must be internally consistent
measurement assumptions1
Measurement - Assumptions
  • A forecast is based on reasonable and supportable assumptions that management believes reflect the most probable set of economic conditions and planned courses of action (.11 & .12)
    • Can vary according to circumstances
    • Consider time period (.12)
measurement assumptions2
Measurement - Assumptions
  • Hypotheses: assumptions that assume a set of economic conditions or courses of action that are not necessarily the most probable in management\'s judgment, but are consistent with the purpose of the projection.
  • To be reasonable, hypotheses must be:
    • Consistent with the purpose of the projection
    • Represent plausible circumstances
    • Need not be supportable
time period
Time Period
  • The period covered by future-oriented financial information should not extend beyond the point in time for which such information can be reasonably estimated
  • Depends on:
    • Needs of users
    • Ability to make appropriate assumptions
    • Nature of the industry
    • Operating cycle of the entity
time period1
Time Period
  • Forecasts would not normally be prepared for periods beyond the following fiscal year except when there is reasonable assurance as to the operations in the forecast period
  • Projections may be presented for periods extending beyond the following fiscal year when there is a reasonable basis for making estimates, although the degree of uncertainty normally increases with the length of the future period covered
accounting policies
Accounting Policies
  • Future-oriented financial information should be prepared in accordance with the accounting policies expected to be used in presenting historical financial statements for the future period
    • Facilitates comparisons with the actual results
presentation
Presentation
  • General purpose future-oriented financial information should be presented in the format of historical financial statements and include at least an income statement
    • May want to present a balance sheet, a statement of retained earnings, and/or a cash flow statement
  • Special purpose future-oriented financial information should be presented in the level of detail and the format of presentation agreed between the parties
presentation1
Presentation
  • When future-oriented financial information is presented together with historical financial statements:
    • Notes to the future-oriented financial information need not include disclosures that would be repetitive of those in the historical financial statements, provided appropriate cross-reference is made
  • Presented in single monetary unit or range of amounts
    • Most useful presentation
  • Care should be used to ensure that the range is not so broad it is rendered meaningless
general disclosure
General Disclosure
  • Future-oriented financial information should:
    • Include a cautionary note to the effect that actual results achieved for the period covered will vary from the information presented and that the variations may be material
    • Be clearly labelled as either a forecast or a projection
general disclosure1
General Disclosure
  • An entity presenting future-oriented financial information should disclose:
    • the effective date of the underlying assumptions
    • the extent to which actual financial results are incorporated and the period covered by those results
    • whether or not the entity intends to update the future-oriented financial information subsequent to issue
general disclosure2
General Disclosure
  • Users of the handbook are instructed numerous times to remind users of the limitations and uncertainties inherent in predicting future conditions and actions
general disclosure3
General Disclosure
  • Disclosure of the effective date
    • Events occurring subsequent to that date may affect the usefulness of the information presented
  • Disclosure of the extent to which actual results are incorporated and the period covered by those results
    • Provides an indication of the degree of reliability
  • Disclosure of intentions to revise future-oriented financial information and/or compare it to subsequent actual financial results
disclosure of assumptions
Disclosure of Assumptions
  • Significant assumptions underlying future-oriented financial information should be disclosed
  • Hypotheses should be separately disclosed and identified
  • When a forecast is presented, the entity should:
    • disclose that the projection has been prepared using assumptions
    • disclose how assumptions are supported
assumptions
Assumptions
  • Assumptions vary in both their nature and significance. They are considered significant when:
    • Reflects an expectation of economic conditions significantly different from those currently prevailing,
    • Relatively high probability of a sizeable variation
    • Asmall change in the assumption would have a significant impact on the future-oriented financial information
  • Hypotheses are considered significant and would be disclosed
common assumptions
Common Assumptions
  • All future-oriented financial information is premised on certain common assumptions about future conditions, including:
    • government\'s courses of action
    • absence of natural disasters
    • continuation of peace
  • Assumptions of this type are so general to the whole economy that they need not be disclosed unless an assumption has been made that is in conflict with conditions that are generally understood to exist
disclosure of accounting policies
Disclosure of Accounting Policies
  • When the future-oriented financial information incorporates a change in accounting policy the change should be described and its effect disclosed
  • When the entity intends to change an accounting policy, a description of the change and disclosure of its effect enables the user to understand the nature of the change and its impact and to compare future-oriented financial information with historical financial statements
other disclosures
Other Disclosures
  • When there is a change in accounting policy in future orientated financial statements that is different from previously released financial statements, these changes should be disclosed.
  • The discloser should enable users to understand the impact and nature of these changes, and also enable comparisons between future-orientated and previous financial statements.
other disclosures1
Other Disclosures
  • For special Purpose future-orientated financial information, the following should be disclosed:
    • Identity of the intended users
    • Purpose of the statements
    • A cautionary note on the appropriateness of statements (should only be used for purpose intended)
    • Cannot be presented in a format that allows direct comparison with actual results
other disclosures2
Other Disclosures
  • Projections should likewise state the purpose and a cautionary note.
  • For example, an introduction to a projection might read, "This projection is designed to demonstrate the earnings expected if the operating capacity were increased fifty percent, and it may not be appropriate for other purposes".
conclusion
Conclusion
  • It is critical to ensure all forecasts follow the handbook as it provides reliability and transparency in the financial statements
  • Questions?
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