When can financial statements be presented with a departure from GAAP?

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Publication date: 31 Dec 2021   

us Financial statement presentation guide 1.1

This chapter introduces the general concepts of financial statement presentation and disclosure that underlie the detailed guidance that is covered in the remaining chapters of this guide.

ASC 205, Presentation of Financial Statements, provides the baseline authoritative guidance for presentation of financial statements for all US GAAP reporting entities. ASC 205-10-45-1A lists the required financial statements under US GAAP.

ASC 205-10-45-1A

A full set of financial statements for a period shall show all of the following:

1. Financial position at the end of the period
2. Earnings (net income) for the period, (which may be presented as a separate statement or within a continuous statement of comprehensive income [see paragraph 220-10-45-1A])
3. Comprehensive income (total nonowner changes in equity) for the period in one statement or two separate but consecutive statements (if the reporting entity is required to report comprehensive income, see paragraph 220-10-15-3)
4. Cash flows during the period
5. Investments by and distributions to owners during the period.

The presentation rules in ASC 205 closely align with SEC regulations, except for certain circumstances in which the SEC may prescribe incremental requirements.

The presentation and disclosure requirements discussed in this guide presume that the related accounting topics are considered to be material and applicable to the reporting entity. That assumption applies throughout the guide and will not be restated in every instance. Accounting topics or transactions that are not material or not applicable to a reporting entity generally do not require separate presentation or disclosure, unless otherwise indicated.

This guide details the required presentation and disclosures for each topical area. In addition, S-X 4-01 requires that financial statements not be misleading. As a result, reporting entities may need to supplement required disclosures with additional information to provide context or further clarification that they believe would be meaningful to users.

1.1.1 Reporting periods

Comparative financial statements provide historical context for a reporting entity's financial performance and enable users to identify trends or other relationships. Comparative periods should be presented on a consistent basis with any changes disclosed as a change in accounting policy or correction of an error (see FSP 30).

Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies.

Figure FSP 1-1
Audited financial statement requirements for public companies

Qualifying Emerging Growth Companies, as defined in the Jumpstart Our Business Startups (JOBS) Act, and Smaller Reporting Companies, as defined in S-K 10(f), are permitted to omit the earliest year income statement and statements of comprehensive income, cash flows, and changes in stockholders’ equity in an initial public offering. Additionally, S-X, Article 8 notes that for annual financial statements, a Smaller Reporting Company should file an audited balance sheet as of the end of each of the two most recent fiscal years, and audited statements of income, cash flows, and changes in stockholders’ equity for each of the last two fiscal years.

In addition, although not required for private companies, ASC 205-10-45-2 encourages comparative statements for all entities.

ASC 205-10-45-2

In any one year it is ordinarily desirable that the statement of financial position, the income statement, and the statement of changes in equity be presented for one or more preceding years, as well as for the current year.

ASC 205-10-45-4 indicates that footnote disclosures should be repeated in the next period’s comparative statements if they continue to be of significance.

1.1.2 Chronological ordering of data

The SEC staff has indicated no preference as to the order in which data is presented in the financial statements (e.g., whether the most current fiscal period should be displayed as the first or last column in the income statement). However, it has stated that data presented in tabular form should read consistently from left to right in the same chronological order throughout the filing. Numerical data included in the footnotes should also follow the same ordering pattern (see SAB Topic 11.E).

1.1.3 Basis of presentation

S-X 4-01(a)(1) requires financial statements filed with the SEC to be presented in accordance with US GAAP, unless the SEC has indicated otherwise (e.g., foreign private issuers are permitted to use IFRS as issued by the IASB). Regulation S-K Item 10(e) prohibits the inclusion of non-GAAP information in financial statements filed with the SEC.

In practice, some reporting entities choose to provide a "Basis of Presentation," or similarly-titled footnote to disclose that the financial statements are presented in accordance with US GAAP. Other reporting entities choose to include this information in a "Significant Accounting Policies" footnote, as described in FSP 1.1.4.

1.1.4 Disclosure of accounting policies

ASC 235, Notes to Financial Statements, states the following regarding accounting policy disclosures:

ASC 235-10-50-3

Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following:

1. A selection from existing acceptable alternatives
2. Principles and methods peculiar to the industry in which the entity operates, even if such principles and methods are predominantly followed in that industry
3. Unusual or innovative applications of GAAP.

Reporting entities are required to describe all significant accounting policies in the financial statements. Determining which accounting policies are considered “significant” is a matter of management judgment. Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents.

ASC 235 permits flexibility in matters of format (including the location) of the policy footnote, as long as it is an integral part of the financial statements.

1.1.5 Use of estimates

ASC 275, Risks and Uncertainties, requires reporting entities to disclose that the preparation of financial statements in accordance with US GAAP requires the use of management's estimates.

ASC 275-10-50-4

Financial statements shall include an explanation that the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires the use of management's estimates.

Refer to FSP 24 for further discussion.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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