Slide 1

Earnings ForecastJune 21, 2012Group E:Arjun ArulambalamEmily CrawfordRajesh KhullarKira HataleyYun ShimAgendaIntroductionCase Study: SportsGoodStop External StudyCICA Handbook: Section 4250Future-Oriented Financial InformationConclusionClass Activity

Has anyone used forecasts in the workplace?SportsGoodStop Company - BackgroundDerek Jeffries is the owner Selling brand name sports jerseys, ball caps, and golf equipmentOperated 15 retail outlets throughout Western Canada5 franchises have already been approved 10 more requests for franchise stores are waiting to be approved by the board of directorsGoal: Expand into Toronto and then into eastern Canada with a combination of company owned and franchise outlets

4SportsGoodStop Company - IssuesBetter share price would be obtained for the IPO if potential investors were aware of the forecasted earningsDebt to total assets ratio is already near the limit of 80% that his banker had set out several years agoForecasted budget may adopt accounting practices to increase assets

5SportsGoodStop Company Auditor Steven Snipes is a senior manager at Sloan and Travis a CA firmSmaller 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

6SportsGoodStop Company-

SportsGoodStop Income Projections 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 franchisesSportsGoodStop - Growth Rate

In 2001, they are awaiting another 10 franchises to be approved by the BOD. But should the forecast really include this7SportsGoodStop - 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 franchisees sales

http://www.dlapiper.com/files/upload/Franchise_Lawyer_Wells_Article_May06.pdf

8PWC Study PWC StudyIncrease in demand for trends and drivers of performances To maintain investors confidenceKPMG Study Organizations need to improve quality, reliability and insightfulness in the data they use to produce forecastsLook beyond internal data sources to forecast performance Scenario planning is a useful tool address uncertainty

http://www.kpmg.com/Ca/en/WhatWeDo/Advisory/PerformanceTechnology/Documents/Forecasting%20with%20confidence.pdf9Handbook Section 4250Who would be the users of financial forecasts?Lenders OwnersInvestorsManagement Auditors Analysts Employees and Suppliers11Purpose and ScopeEstablishes standards For the measurement, presentation and disclosure of future-oriented financial informationDoes not apply to historical pro-forma statements issued.

Introduction to Section 4250 - ObjectiveObjective: 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.

13Section 4250 - DefinitionsFuture-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?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 conditionsProjection: 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 - AssumptionsManagement is responsible for the process of developing assumptions and for ensuring that the assumptions developed are appropriate in the circumstancesOne assumption may affect many parts of a business and lead to the formulation of other assumptionsMust be internally consistent

Measurement - AssumptionsA 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 circumstancesConsider time period (.12)

Measurement - AssumptionsHypotheses: 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 circumstancesNeed not be supportable

.13 & say .1418Time PeriodThe period covered by future-oriented financial information should not extend beyond the point in time for which such information can be reasonably estimatedDepends on:Needs of usersAbility to make appropriate assumptionsNature of the industryOperating cycle of the entity

.15 .1619Time PeriodForecasts 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 periodProjections 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

.1720Accounting PoliciesFuture-oriented financial information should be prepared in accordance with the accounting policies expected to be used in presenting historical financial statements for the future periodFacilitates comparisons with the actual results

PresentationGeneral purpose future-oriented financial information should be presented in the format of historical financial statements and include at least an income statementMay 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.20 &.21 KIRA22PresentationWhen 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 madePresented in single monetary unit or range of amountsMost useful presentationCare should be used to ensure that the range is not so broad it is rendered meaningless.22 & .23 KIRA 23General DisclosureFuture-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 materialBe clearly labelled as either a forecast or a projection

.24 .25 KIRA24General DisclosureAn entity presenting future-oriented financial information should disclose:the effective date of the underlying assumptionsthe extent to which actual financial results are incorporated and the period covered by those resultswhether or not the entity intends to update the future-oriented financial information subsequent to issue.26 KIRA25General DisclosureUsers of the handbook are instructed numerous times to remind users of the limitations and uncertainties inherent in predicting future conditions and actions

.27 KIRA26General DisclosureDisclosure of the effective dateEvents occurring subsequent to that date may affect the usefulness of the information presentedDisclosure of the extent to which actual results are incorporated and the period covered by those resultsProvides an indication of the degree of reliabilityDisclosure of intentions to revise future-oriented financial information and/or compare it to subsequent actual financial results.29 .30 .31 KIRA 27Disclosure of AssumptionsSignificant 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 assumptionsdisclose how assumptions are supported

.32 .33 .34 .3528AssumptionsAssumptions 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 variationA small change in the assumption would have a significant impact on the future-oriented financial informationHypotheses are considered significant and would be disclosed

.36 .37 .3829Common AssumptionsAll future-oriented financial information is premised on certain common assumptions about future conditions, including:government's courses of actionabsence of natural disasterscontinuation of peaceAssumptions 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

.4030Disclosure of Accounting PoliciesWhen the future-oriented financial information incorporates a change in accounting policy the change should be described and its effect disclosedWhen 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

.41 .42 31Other 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.

4232Other DisclosuresFor special Purpose future-orientated financial information, the following should be disclosed:Identity of the intended usersPurpose of the statementsA 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

43.4533Other 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".44/4634ConclusionIt is critical to ensure all forecasts follow the handbook as it provides reliability and transparency in the financial statements

Questions?