Acct Theory- Mod 1 Flashcards
What is the main concept of Module 1
Accounting under ideal conditions
What was the first company with limited liability shares that were transferable and traded?
Dutch East India Company
Why do we use the term “Generally Accepted” in GAAP?
Because not everyone will agree 100% but in general everyone can get behind them
What is the difference between relevant and reliable?
Relevant means that it is more likely to sway a decision. Reliable means that it is more accurate
What is representational faithfullness?
Verifiable
Neutral
Faithfully Represented
What is the CBCA act?
Canadian Business Corporations Act
Describe in general terms what happened during the 1990’s high tech collapse
Financial reporting irregularities
Premature recognition of revenue
Describe in general terms what happened to Enron
They used SPE’s to hide debt off balance sheet
Enron didn’t control SPE’s but their senior management did
Describe in general terms what happened to Worldcom
Overstated earnings by capitalizing maintenance costs that should have been expensed when incurred
What is the SOX act and what did it do?
Sarbanes-Oxley act
Tightened the functions of auditors and what non-audit services that they can perform
Off balance sheet items must be disclosed
SPE’s must be consolidated
What is the CPAB in Canada?
Canadian Public Audit Board
Describe in general terms what happened during the 2008 financial meltdown
ABS’s were used to package normal mortgages with risky mortgages to hide the risk. These ABS’s were then insured. Once people started to default, they couldn’t figure out a value for the ABS’s and the losses were so large that the insurance companies couldn’t pay out
What is an ABS
Asset Backed Security
What is an Expected Loss Note?
Essentially the insurance taken out on the ABS’s
What is value in use and when is it used?
It is the NPV of cash flows of the item. It is used when there isn’t an available market to determine value
What type of accounting measurement system does Canada currently use? Describe it.
Mixed Measurement System
Primarily historical cost but impairment tests are generally done at current value.
So it is basically some historical cost and some fair value
Is historical cost reliable or relevant?
Reliable
Is Fair Value reliable or relevant?
Relevant
What is another term for Relevant?
Representational Faithfullness
Describe the current value measurement system
Uses value in use and fair value
Usually uses discounted cash flows
What is the concept of Fair Value?
The amount that would be received or paid if the item was disposed of
What is Decision Useful?
Information should be useful in decision making
What is Efficient Contracting?
Contracts that firms enter into that create demand for accounting information. Ex. Debt Covenants
Describe the concept of conservatism
Recognize unrealized loss immediately
Don’t recognize un-realized gains until realized
Which is more rules based: IFRS/ASPE or US GAAP?
US GAAP is more rule based
IFRS/ASPE is more principle based
What does AcSB stand for? And what do they do?
The Canadian Accounting Standards Board
The “Canadianize” IASB rules
What do we mean by Relevant information?
Information helps users make predictions about the outcome of events
Also helps to confirm expectations
What are some risks associated with Current Value Accounting?
When markets are not readily available, current values are subject to bias and manipulation from managers
What are some examples of compromise between relevance and Representational Faithfulness?
OCI
ASPE
Pension Accounting in NFP
What is information Asymmetry?
Some parties have an information advantage over others or may take actions that are unobservable to others
What are the 2 types of Information Asymmetry? Describe each
Adverse Selection
Insiders making decisions that will benefit them at the expense of outsiders
Moral Hazard
One party takes actions that are unobservable to other parties (what happens when no one is looking)
What is meant by Ideal Conditions?
Perfect and complete markets
No information asymmetry
No barriers to fair and effecient market operation
What is Estimation Risk?
The difference between the truth and the available truth
Under ideal conditions, how many interest rates does an economy have?
One
What is an asset worth in Ideal Conditions?
What people will pay for it
What is “Ideal Conditions Under UNCertainty”
Given a fixed interest rate
All possible states are known
Probablilities of states are known
Everyone knows which state has occured
What must probabilities always add up to?
1
What is RRA?
Reserve Recognition Accounting
“How much oil is in the ground”
What are the 4 Generally Accepted Frameworks for Accounting?
IFRS
ASPE
Accounting Standards for NFP
Pension Plans
Generally speaking, who are the main users of financial statements?
Investors
What are investors looking for in financial statements?
They want to see relevant information that allows them to predict future earnings. They want to know when is the best time to sell to earn a profit.
Who are the primary users of financial statements using IFRS?
Shareholders
Who are the primary users of financial statements using ASPE?
Owners/Managers
Banks (to know if they will get their money back)
Under which framework does OCI appear?
It appears in IFRS
It is not used in ASPE
What are the 5 main concepts covered in modules 1 to 5?
Accounting Under Ideal Conditions
Decision Usefulness
Information Approach
Measurement Approach
Efficient Securities Markets
