Reference no: EM131132981

Concepts of disclosure and materiality- Discuss this view point that the article below is about

Materiality, according to the Sustainability Accounting Standards Board (SASB) is a "...fundamental principle of mandated disclosure" because there is information pertinent to the informed decision making of investors. (www.sasb.org)

Disclosure means "...that financial statements should be accompanied by any information necessary for the statements to be interpreted properly." (Williams) This is generally an explanation with the financial statement of activities that have influenced the finances of a company, giving investors, creditors and analysts an overview of the company's financial health so they may make an informed decision. Examples of events/transactions to which full disclosure applies are changes to accounting methods, pending lawsuits, cash and investments held by foreign subsidiaries, and acquisitions or plant closings, etc.

"According to the U.S. Supreme Court, information is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix' of information made available."[1]"(www.sasb.org) An accounting professional would need to exercise sound, professional judgment in deeming what would be material or immaterial, as well as providing disclosure, in financial reports.

Retained Earnings are the net profit a company has reinvested in the business since its inception; the portion of profit not distributed to shareholders. These retained earnings are generally reinvested into the business in areas that would help to grow the business, for example investing in machinery or equipment, expansion, or research and development.

I looked at the Financial Statement of CVS Health. Included in the report is a ‘Financial Highlight' on the first page. At a glance, the Net Revenues, Operating Profit, Net Income, Diluted EPS from Continuing Operation, Free Cash Flow, Stock Price at Year End, and Market Capitalization at Year End may be seen. (Free Cash Flow is defined as net cash provided by operating activities less net additions to properties and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions) (2015 Annual Report).

There are pages of prose within the charts of ‘Management's Discussion and Analysis of Financial Condition and Results of Operations" that clearly discuss the activities of the company.

There is a letter from the President and CEO with an overview explanation of the year's transactions and highlights. There is also a letter from Ernst & Young LLP, Independent Registered Public Accounting Firm on p52 highlighting the standards by which their audit was done and the outcome. ("In our opinion, CVS Health Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.")(2015 Annual Report)

For Retained Earnings, CVS posted $31,849 in 2015. By 12/31 of 2015, Retained Earnings were $35,506. CVS showed an increase of close to $4,000 Retained Earnings each year (2013-2015) on this annual report.

Regarding permanent and temporary accounts, permanent accounts exist throughout the life of a business, or for a long duration. Temporary (or nominal) accounts are in use for quarter, or a set (shorter) amount of time. For an example, an expense account is temporary and will ‘reset' at the end of a quarter. There would be no use for the expenses for 2015 to carry over into the expense report of 2016.

The balances of these temporary accounts (revenue or expense, dividends declared) are transferred to Income Summary accounts, thus providing net income or net loss for that period.

From the Annual Report of CVS Health, the company looks to be profiting and growing, proving lucrative for investors.

References:

https://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/reports/2015-annual-report.pdf

https://www.sasb.org/materiality/important/

Why is it important? (2012). Retrieved July 10, 2016, from https://www.sasb.org/materiality/important/

Williams, J. (2016). Financial & managerial accounting. Place of publication not identified: Mcgraw-Hill Irwin.