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<ul><ul><li>Prepared by:  </li></ul></ul><ul><ul><li>Dragan Stojanovic, CA </li></ul></ul><ul><ul><li>Rotman School of Man...
The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements an...
The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements an...
<ul><li>Accounting  identifies, measures, analyses, and communicates  financial information  to various users (decision ma...
Characteristics of Accounting <ul><li>Identification, measurement, and communication of financial information about; </li>...
Financial Reporting <ul><li>Financial accounting  provides  historical   information </li></ul><ul><li>Financial reporting...
Financial Statements and Other Means of Financial Reporting <ul><li>Major financial statements include: </li></ul><ul><ul>...
Financial Reporting <ul><li>Other forms of financial reporting include: </li></ul><ul><ul><ul><li>President’s letter </li>...
Flow of Information through the Financial Statements Income Statement Statement of Equity Balance Sheet Statement of Cash ...
Accounting and Capital Allocation Financial reporting  aids users in the allocation of   scarce resources  (capital)
Accounting and Capital Allocation <ul><li>The accounting profession has the responsibility of  measuring a company’s perfo...
Capital Allocation Process
Accounting and Capital Allocation Financial Reporting aids Users (present and potential) Capital Allocation decisions Fina...
Accounting and Capital Allocation <ul><li>In Canada, the primary exchange mechanisms for allocating resources are: </li></...
Sources of Capital
Accounting and Capital Allocation <ul><li>An effective process of capital allocation is critical to a healthy economy </li...
Stakeholders in Financial Reporting <ul><li>Stakeholders:  parties who have something at risk (stake) in the financial rep...
Stakeholders in Financial Reporting <ul><li>Broader definition of  users  is: anyone who  prepares, relies on, reviews, au...
Stakeholders in Financial Accounting <ul><li>Investors and creditors  rely on  the financial statements to make decisions ...
What is at Stake for Each Stakeholder <ul><li>Stakeholder </li></ul><ul><li>Investors & creditors </li></ul><ul><li>Manage...
What is at Stake for Each Stakeholder <ul><li>Stakeholder </li></ul><ul><li>Analysts & credit rating agencies </li></ul><u...
The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements an...
<ul><li>The  overall objective  of financial reporting is to provide information that is: </li></ul><ul><ul><li>useful  to...
Objectives of Financial Reporting Yes Resource Allocation Decisions Assess Management Stewardship Yes Was income earned to...
Management Bias <ul><li>Preparation of the financial statements are the responsibility of internal management </li></ul><u...
Understanding User Needs in the Financial Reporting Process Management Users Financial Statements Prepare the reports Use ...
The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements an...
The Need to Develop Standards <ul><li>Standards are set to aid preparers and users of financial statements </li></ul><ul><...
The   Standard Setting Process in Canada – Parties Involved <ul><li>Canadian Accounting Standards Board  (AcSB) </li></ul>...
The   Standard Setting Process in Canada – Parties Involved <ul><li>International Accounting Standards Board  (IASB) </li>...
The   Standard Setting Process in Canada — Parties Involved <ul><li>Financial Accounting Standards Board  (FASB)  and  the...
The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements an...
Generally Accepted Accounting Principles (GAAP) <ul><li>For private companies, pension plans, and not-for-profit entities,...
Generally Accepted Accounting Principles (GAAP) <ul><li>For public companies (reporting under IFRS), GAAP includes: </li><...
Professional Judgement <ul><li>There cannot be a rule for every situation </li></ul><ul><li>Standards in Canada   are base...
Role of Ethics <ul><li>Ethical dilemmas  are common in accounting and other areas of business </li></ul><ul><li>It is not ...
The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements an...
Sarbanes-Oxley Act (SOX) <ul><li>The  Sarbanes-Oxley Act  (SOX) was enacted in 2002 (in the United States) </li></ul><ul><...
Canadian Response <ul><li>The  Canadian Public Accountability Board  (CPAB) </li></ul><ul><li>Additional rules issued by  ...
Challenges Facing Accounting Globalization Technology New economy Accountability Need for international harmonization of s...
COPYRIGHT Copyright © 2010 John Wiley & Sons Canada, Ltd.  All rights reserved.  Reproduction or translation of this work ...
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Intermediate Accounting 9th Canada Edition

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Transcript of "Intermediate Accounting 9th Canada Edition"

  1. 1. <ul><ul><li>Prepared by: </li></ul></ul><ul><ul><li>Dragan Stojanovic, CA </li></ul></ul><ul><ul><li>Rotman School of Management, University of Toronto </li></ul></ul>Chapter 1 The Canadian Financial Reporting Environment
  2. 2. The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements and financial reporting </li></ul><ul><li>Accounting and capital allocation </li></ul><ul><li>Stakeholders </li></ul><ul><li>Objective of Financial Reporting </li></ul><ul><li>Management bias </li></ul><ul><li>Users’ needs </li></ul><ul><li>Standard Setting </li></ul><ul><li>Need to develop standards </li></ul><ul><li>Parties involved in standard setting </li></ul><ul><li>Standard setting in a political environment </li></ul><ul><li>GAAP </li></ul><ul><li>GAAP hierarchy </li></ul><ul><li>Professional judgement </li></ul><ul><li>Role of ethics </li></ul><ul><li>Challenges Facing Financial Reporting </li></ul><ul><li>Globalization of companies and capital markets </li></ul><ul><li>Impact of technology </li></ul><ul><li>Changing nature of the economy </li></ul><ul><li>Increased requirement for accountability </li></ul>
  3. 3. The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements and financial reporting </li></ul><ul><li>Accounting and capital allocation </li></ul><ul><li>Stakeholders </li></ul><ul><li>Objective of Financial Reporting </li></ul><ul><li>Management bias </li></ul><ul><li>Users’ needs </li></ul><ul><li>Standard Setting </li></ul><ul><li>Need to develop standards </li></ul><ul><li>Parties involved in standard setting </li></ul><ul><li>Standard setting in a political environment </li></ul><ul><li>GAAP </li></ul><ul><li>GAAP hierarchy </li></ul><ul><li>Professional judgement </li></ul><ul><li>Role of ethics </li></ul><ul><li>Challenges Facing Financial Reporting </li></ul><ul><li>Globalization of companies and capital markets </li></ul><ul><li>Impact of technology </li></ul><ul><li>Changing nature of the economy </li></ul><ul><li>Increased requirement for accountability </li></ul>
  4. 4. <ul><li>Accounting identifies, measures, analyses, and communicates financial information to various users (decision makers) </li></ul><ul><li>Accounting has two broad classifications: </li></ul><ul><ul><li>Financial accounting </li></ul></ul><ul><ul><li>Managerial accounting </li></ul></ul><ul><li>Accounting theory and practice have evolved and will continue to evolve to meet changing demands and influences </li></ul>Characteristics of Accounting
  5. 5. Characteristics of Accounting <ul><li>Identification, measurement, and communication of financial information about; </li></ul><ul><li>Economic entities to; </li></ul><ul><li>Interested persons. </li></ul>
  6. 6. Financial Reporting <ul><li>Financial accounting provides historical information </li></ul><ul><li>Financial reporting is used by both internal and external users </li></ul><ul><li>External users include such decision makers as investors, creditors, unions, and government agencies </li></ul><ul><li>Managerial accounting provides both historical and forecast information </li></ul><ul><li>Managerial reporting information is used by management (internal users only) </li></ul>
  7. 7. Financial Statements and Other Means of Financial Reporting <ul><li>Major financial statements include: </li></ul><ul><ul><ul><li>Balance Sheet </li></ul></ul></ul><ul><ul><ul><li>Income Statement </li></ul></ul></ul><ul><ul><ul><li>Statement of Cash Flows </li></ul></ul></ul><ul><ul><ul><li>Statement of Shareholders’ (Owners’) Equity </li></ul></ul></ul><ul><ul><ul><li>+ Note Disclosures </li></ul></ul></ul>
  8. 8. Financial Reporting <ul><li>Other forms of financial reporting include: </li></ul><ul><ul><ul><li>President’s letter </li></ul></ul></ul><ul><ul><ul><li>Prospectuses </li></ul></ul></ul><ul><ul><ul><li>Government reporting </li></ul></ul></ul><ul><ul><ul><li>News releases </li></ul></ul></ul><ul><ul><ul><li>Management forecasts </li></ul></ul></ul>
  9. 9. Flow of Information through the Financial Statements Income Statement Statement of Equity Balance Sheet Statement of Cash Flows Reports Net Income Ending balance reported Change in cash as reported displays the change in cash position
  10. 10. Accounting and Capital Allocation Financial reporting aids users in the allocation of scarce resources (capital)
  11. 11. Accounting and Capital Allocation <ul><li>The accounting profession has the responsibility of measuring a company’s performance accurately, fairly, and on a timely basis </li></ul><ul><li>These measurements enable investors and creditors to compare the income and assets employed by companies </li></ul><ul><li>Investors can then assess the relative risks and returns associated with companies </li></ul>
  12. 12. Capital Allocation Process
  13. 13. Accounting and Capital Allocation Financial Reporting aids Users (present and potential) Capital Allocation decisions Financial statements and other forms of financial reporting Users include: investors, creditors, unions, government agencies, and other Involves determining how funds are allocated among competing interests
  14. 14. Accounting and Capital Allocation <ul><li>In Canada, the primary exchange mechanisms for allocating resources are: </li></ul><ul><ul><li>Debt and equity markets (e.g. TSX) </li></ul></ul><ul><ul><li>Financial institutions (e.g. banks) </li></ul></ul>
  15. 15. Sources of Capital
  16. 16. Accounting and Capital Allocation <ul><li>An effective process of capital allocation is critical to a healthy economy </li></ul><ul><li>Unreliable information leads to poor capital allocation </li></ul><ul><li>Credit rating agencies use accounting to rate companies’ financial stability </li></ul><ul><li>This gives investors and creditors additional independent information </li></ul>
  17. 17. Stakeholders in Financial Reporting <ul><li>Stakeholders: parties who have something at risk (stake) in the financial reporting environment </li></ul><ul><li>Key stakeholders include traditional users of financial information </li></ul>
  18. 18. Stakeholders in Financial Reporting <ul><li>Broader definition of users is: anyone who prepares, relies on, reviews, audits, or monitors financial information </li></ul><ul><li>Includes both internal and external parties </li></ul><ul><li>Key stakeholders include: </li></ul><ul><ul><li>investors, creditors, auditors, regulators, analysts, management, standard setters, and others </li></ul></ul>
  19. 19. Stakeholders in Financial Accounting <ul><li>Investors and creditors rely on the financial statements to make decisions </li></ul><ul><li>Standard setters set Generally Accepted Accounting Principles (GAAP) for direction on accounting </li></ul><ul><li>GAAP is used to help reduce management bias and to ensure the information is useful to users </li></ul>
  20. 20. What is at Stake for Each Stakeholder <ul><li>Stakeholder </li></ul><ul><li>Investors & creditors </li></ul><ul><li>Management </li></ul><ul><li>Securities commissions and stock exchanges </li></ul><ul><li>What is at Stake? </li></ul><ul><li>Investment / loan </li></ul><ul><li>Job, bonus, reputation, salary increase, access to capital markets by company </li></ul><ul><li>Reputation, effective and efficient capital marketplace </li></ul>
  21. 21. What is at Stake for Each Stakeholder <ul><li>Stakeholder </li></ul><ul><li>Analysts & credit rating agencies </li></ul><ul><li>Auditors </li></ul><ul><li>Standard setters </li></ul><ul><li>What is at Stake? </li></ul><ul><li>Reputation and profits </li></ul><ul><li>Reputation and profits (companies are their clients) </li></ul><ul><li>Reputation </li></ul>
  22. 22.
  23. 23. The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements and financial reporting </li></ul><ul><li>Accounting and capital allocation </li></ul><ul><li>Stakeholders </li></ul><ul><li>Objective of Financial Reporting </li></ul><ul><li>Management bias </li></ul><ul><li>Users’ needs </li></ul><ul><li>Standard Setting </li></ul><ul><li>Need to develop standards </li></ul><ul><li>Parties involved in standard setting </li></ul><ul><li>Standard setting in a political environment </li></ul><ul><li>GAAP </li></ul><ul><li>GAAP hierarchy </li></ul><ul><li>Professional judgement </li></ul><ul><li>Role of ethics </li></ul><ul><li>Challenges Facing Financial Reporting </li></ul><ul><li>Globalization of companies and capital markets </li></ul><ul><li>Impact of technology </li></ul><ul><li>Changing nature of the economy </li></ul><ul><li>Increased requirement for accountability </li></ul>
  24. 24. <ul><li>The overall objective of financial reporting is to provide information that is: </li></ul><ul><ul><li>useful to users, and </li></ul></ul><ul><ul><li>decision relevant </li></ul></ul><ul><li>Financial statements should provide information about: </li></ul><ul><ul><li>the entity’s economic resources and claims to those resources, and </li></ul></ul><ul><ul><li>changes in those resources and claims </li></ul></ul><ul><li>Resource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value) </li></ul>Objective of Financial Reporting
  25. 25. Objectives of Financial Reporting Yes Resource Allocation Decisions Assess Management Stewardship Yes Was income earned to generate future cash? Able to meet obligations and pay a return on investment Did management’s decisions on resource acquisition and allocation increase shareholder wealth? Investor and creditor confidence continues Capital continues to be available
  26. 26. Management Bias <ul><li>Preparation of the financial statements are the responsibility of internal management </li></ul><ul><li>May lead to preparing statements that report the enterprise in its best light </li></ul><ul><li>Motives include: </li></ul><ul><ul><li>to reflect positive management stewardship (job, compensation) </li></ul></ul><ul><ul><li>meet financial analysts’ expectations , resulting in a positive reaction in the capital markets </li></ul></ul><ul><li>What safeguards are in place to protect financial users from management bias? </li></ul>
  27. 27. Understanding User Needs in the Financial Reporting Process Management Users Financial Statements Prepare the reports Use the reports for investment/lending decisions Use the reports to acquire capital Aggressive financial reporting has a direct impact on the user’s decision-making process
  28. 28. The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements and financial reporting </li></ul><ul><li>Accounting and capital allocation </li></ul><ul><li>Stakeholders </li></ul><ul><li>Objective of Financial Reporting </li></ul><ul><li>Management bias </li></ul><ul><li>Users’ needs </li></ul><ul><li>Standard Setting </li></ul><ul><li>Need to develop standards </li></ul><ul><li>Parties involved in standard setting </li></ul><ul><li>Standard setting in a political environment </li></ul><ul><li>GAAP </li></ul><ul><li>GAAP hierarchy </li></ul><ul><li>Professional judgement </li></ul><ul><li>Role of ethics </li></ul><ul><li>Challenges Facing Financial Reporting </li></ul><ul><li>Globalization of companies and capital markets </li></ul><ul><li>Impact of technology </li></ul><ul><li>Changing nature of the economy </li></ul><ul><li>Increased requirement for accountability </li></ul>
  29. 29. The Need to Develop Standards <ul><li>Standards are set to aid preparers and users of financial statements </li></ul><ul><li>They allow the preparers of the financial statements to present fairly the operations of the company </li></ul><ul><li>A single set of financial statements is prepared to meet the majority of the users’ needs </li></ul><ul><li>Standards are not rules, regulations, or laws </li></ul><ul><li>Standards are intended to be generally accepted and universally practised </li></ul>
  30. 30. The Standard Setting Process in Canada – Parties Involved <ul><li>Canadian Accounting Standards Board (AcSB) </li></ul><ul><ul><li>Primarily responsible for setting GAAP in Canada </li></ul></ul><ul><ul><ul><li>From 2011, this will be limited to standards for private enterprises, not-for-profit entities, and pension plans only (standards for publicly accountable entities will be set by the International Accounting Standards Board) </li></ul></ul></ul><ul><ul><li>Two underlying premises for development of standards </li></ul></ul><ul><ul><ul><li>Be responsive to the needs and viewpoints of the entire economic community </li></ul></ul></ul><ul><ul><ul><li>Operate in full public view through due process </li></ul></ul></ul>
  31. 31. The Standard Setting Process in Canada – Parties Involved <ul><li>International Accounting Standards Board (IASB) </li></ul><ul><ul><li>Major international standard setting body </li></ul></ul><ul><ul><li>Mission “to develop, in the public interest, a single set of high quality, understandable and international reporting standards (IFRSs) for general purpose financial statements” </li></ul></ul>
  32. 32. The Standard Setting Process in Canada — Parties Involved <ul><li>Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) </li></ul><ul><ul><li>FASB is the major standard setting body in the U.S. </li></ul></ul><ul><ul><li>SEC has the final authority over accounting standards in the U.S </li></ul></ul><ul><li>Provincial Securities Commission (e.g. Ontario Securities Commission) </li></ul><ul><ul><li>To oversee and monitor capital marketplace </li></ul></ul><ul><ul><li>Ensure strict adherence to securities law/legislation </li></ul></ul>
  33. 33. The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements and financial reporting </li></ul><ul><li>Accounting and capital allocation </li></ul><ul><li>Stakeholders </li></ul><ul><li>Objective of Financial Reporting </li></ul><ul><li>Management bias </li></ul><ul><li>Users’ needs </li></ul><ul><li>Standard Setting </li></ul><ul><li>Need to develop standards </li></ul><ul><li>Parties involved in standard setting </li></ul><ul><li>Standard setting in a political environment </li></ul><ul><li>GAAP </li></ul><ul><li>GAAP hierarchy </li></ul><ul><li>Professional judgement </li></ul><ul><li>Role of ethics </li></ul><ul><li>Challenges Facing Financial Reporting </li></ul><ul><li>Globalization of companies and capital markets </li></ul><ul><li>Impact of technology </li></ul><ul><li>Changing nature of the economy </li></ul><ul><li>Increased requirement for accountability </li></ul>
  34. 34. Generally Accepted Accounting Principles (GAAP) <ul><li>For private companies, pension plans, and not-for-profit entities, GAAP consists of : </li></ul><ul><ul><li>Primary sources </li></ul></ul><ul><ul><ul><li>CICA Handbook Sections 1400 to 3870 </li></ul></ul></ul><ul><ul><ul><li>Accounting guidelines </li></ul></ul></ul><ul><ul><li>Other sources </li></ul></ul><ul><ul><ul><li>Background documents and implementation guidance issued by AcSB </li></ul></ul></ul><ul><ul><ul><li>Pronouncements in other jurisdictions </li></ul></ul></ul><ul><ul><ul><li>Research studies, accounting textbooks, journals, etc. </li></ul></ul></ul><ul><ul><li>Must be consistent with primary sources and in accordance with the conceptual framework (i.e. CICA Handbook Section 1000) </li></ul></ul>
  35. 35. Generally Accepted Accounting Principles (GAAP) <ul><li>For public companies (reporting under IFRS), GAAP includes: </li></ul><ul><ul><li>IFRS </li></ul></ul><ul><ul><li>International Accounting Standards (IAS) </li></ul></ul><ul><ul><li>Interpretations (IFRIC or SIC) </li></ul></ul><ul><ul><li>If above sources do not specifically apply, other sources may be considered: </li></ul></ul><ul><ul><ul><li>Pronouncements of other standard-setting bodies </li></ul></ul></ul><ul><ul><ul><li>Other accounting literature </li></ul></ul></ul><ul><ul><ul><li>Accepted industry practices </li></ul></ul></ul>
  36. 36. Professional Judgement <ul><li>There cannot be a rule for every situation </li></ul><ul><li>Standards in Canada are based primarily on principles rather than specific rules </li></ul><ul><li>Therefore, must use professional judgement </li></ul><ul><li>The United States uses a rules-based approach </li></ul>
  37. 37. Role of Ethics <ul><li>Ethical dilemmas are common in accounting and other areas of business </li></ul><ul><li>It is not always easy to do the right thing or make the right decision </li></ul><ul><li>Ethical decisions often go beyond applying GAAP or rules of the profession </li></ul>
  38. 38. The Canadian Financial Reporting Environment <ul><li>Role of Financial Reporting </li></ul><ul><li>Financial statements and financial reporting </li></ul><ul><li>Accounting and capital allocation </li></ul><ul><li>Stakeholders </li></ul><ul><li>Objective of Financial Reporting </li></ul><ul><li>Management bias </li></ul><ul><li>Users’ needs </li></ul><ul><li>Standard Setting </li></ul><ul><li>Need to develop standards </li></ul><ul><li>Parties involved in standard setting </li></ul><ul><li>Standard setting in a political environment </li></ul><ul><li>GAAP </li></ul><ul><li>GAAP hierarchy </li></ul><ul><li>Professional judgement </li></ul><ul><li>Role of ethics </li></ul><ul><li>Challenges Facing Financial Reporting </li></ul><ul><li>Globalization of companies and capital markets </li></ul><ul><li>Impact of technology </li></ul><ul><li>Changing nature of the economy </li></ul><ul><li>Increased requirement for accountability </li></ul>
  39. 39. Sarbanes-Oxley Act (SOX) <ul><li>The Sarbanes-Oxley Act (SOX) was enacted in 2002 (in the United States) </li></ul><ul><li>Some of the legislation’s key provisions: </li></ul><ul><ul><li>Public Company Accounting Oversight Board (PCAOB) </li></ul></ul><ul><ul><li>Independence rules </li></ul></ul><ul><ul><li>Bonus/profit forfeiture </li></ul></ul><ul><ul><li>CEO/CFO certification </li></ul></ul><ul><ul><li>Management report on effectiveness of internal controls over financial reporting </li></ul></ul><ul><ul><li>Independent audit committees </li></ul></ul><ul><ul><li>Codes of ethics </li></ul></ul>
  40. 40. Canadian Response <ul><li>The Canadian Public Accountability Board (CPAB) </li></ul><ul><li>Additional rules issued by Canadian Securities Administrators (CSA) including: </li></ul><ul><ul><li>Management responsibility for appropriateness and fairness of financial statements </li></ul></ul><ul><ul><li>Independent audit committees </li></ul></ul><ul><ul><li>Increased disclosures </li></ul></ul>
  41. 41. Challenges Facing Accounting Globalization Technology New economy Accountability Need for international harmonization of standards Ability to produce and access timely information A move from the traditional ‘resource-based’ to a ‘knowledge-based’ economy Driven by more sophisticated and varied investors
  42. 42. COPYRIGHT Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
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