Chapter 1/2 Flashcards
Accounting Standards Board (AcSB)
the group primarily responsible for setting GAAP in Canada, which publishes the CPA Canada Handbook and other authoritative documents
Accounting Standards Oversight Council (AcSOC)
the group that provides oversight to AcSB activities such as setting the agenda, reporting to the public, and raising funds for standard setting
Adverse Selection
a result of information asymmetry whereby the capital marketplace may attract the wrong types of companies (such that companies with higher-quality products may choose not to enter the market)
Canadian Public Accountability Board (CPAB)
the regulatory oversight body that oversees audit quality for Canadian firms performing auditing work
Chartered Professional Accountants of Canada (CPA Canada)
the main professional accounting body for profeessional accountants in Canada that also has primary responsibility for setting GAAP in Canada through the Accounting Standards Board
Entity Perspective
the viewpoint that companies are viewed as separate and distinct from their owners and therefore financial reporting should focus on the needs of the main users and not just the owners
Financial Accounting Standards Board
the major standard-setting body in the United States; final authority rests with the Securities and Exchange Commission (SEC)
GAAP Hierarchy
primary sources of GAAP should be used first, followed by other relevant and reliable sources, including the conceptual framework and professional judgment; finally, industry standards may be considered
Moral Hazard
a risk that certain parties who have additional information not accessible to others will act in their own self-interest
International Accounting Standards Board (IASB)
the group responsible for setting IFRS with the goal of increasing the transparency of financial reporting by achieveing a single, global method of accounting
Ontario Securities Commission (OSC)
regulatory body of companies listed on the TSX that reviews and monitors their financial statements with a view to assessing whether the statements present fairly the financial position and result of operations
Securities and Exchange Commission (SEC)
the US counterpart of the Ontario Securities Commission, which regulates the US capital markets and supports the FASB by indication that financial statements conforming with FASB standards will be presumed to have substantial authoritative support
Stakeholders
parties who rely on and use financial documents to make decisions
Fundamental Characteristics
these are the two main qualitative characteristics of financial reporting; they are relevance and representational faithfulness; these characteristics must always be present in financial reporting
Enhancing Characteristics
characteristics that enhance the fundamental qualitative characteristics of relevance and representational faithfulness:
(1) comparability or consistency
(2) verifiability
(3) timeliness
(4) understandability
trade-offs must be made between enhancing characteristics
Comprehensive Income
a measure of income under IFRS that includes net income plus other comprehensive income
Conceptual Framework
the framework is structured as a pyramid whereby (1) the first level is the objective of financial accounting (2) the second level is the qualitative characteristics and elements of financial accounting (3) the third level is the foundational principles
*built on an established body of concepts and objectives, leading to consistent standards
*assists with solving new and emerging practical problems more quicly
*increases financial statement users’ understanding of and confidence in financial reporting
Control
a foundational principle of financial reporting; under ASPE, the continuing power to determine the strategic operating, financing, and investing policies of another entity without the co-operation of others; under IFRS, the power to direct the activities of another entity to generate returns or losses for the investor
Economic Entity Assumption
a foundational principle of financial reporting; an assumption that a business activity can be kept separate and distinct from its owners and any other business units; economic activity can therefore be identified with a particular degree of accountability
Equity
the residual interest in the assets of a company that remains after deducting its liabilities
Objectives of Financial Reporting
the ‘top’ of the conceptual framework pyramid: to provide information useful in investment and credit decisions; and, useful in making resource allocation decisions including assessing management stewardship
Verifiability
an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; the quality of information that demonstrates that independent measurers, using the same measurement methods, obtain similar results
Timeliness
an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; a characteristic of relevance that states that information should be available for decision-makers before it loses its capacity to influence their decisions
Understandability
an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; the quality of information that permits reasonably informed users to perceive its significance
Revenue Recognition and Realization
a foundational principle of financial reporting; the accounting principle that sets guidelines as to when something should be included in the entity’s income statement
Matching
a foundational principle of financial reporting; the accounting principle that dictates that efforts (expenses) be matched with accomplishments (revenues) whenever reasonable and practicable
Periodicity
a foundational principle of financial reporting; the accounting assumption that implies that a company’s economic activities can be divided into artificial time periods
Monetary Unit
a foundational principle of financial reporting; the assumption (principle) that money is the common denominator of economic activity and provides an appropriate and stable basis for accounting measurement and analysis
Going Concern
a foundational principle of financial reporting; the assumption that the entity will continue to operate and meet all of its obligations for at least twelve months
Historical Cost
a foundational principle of financial reporting; measurement of transactions and balances are made on the basis of acquisition price
Fair Value
a foundational principle of financial reporting; an estimate of the price a company would receive if it had sold the asset or would have paid, if it had been relieved of the liability, on the measurement date in an arm’s-length exchange motivated by normal business considerations
Full Disclosure
a foundational principle of financial reporting; financial reporting of information significant enough to influnce the judgement of an informed reader
Foundational Principles
the ‘base’ of the conceptual framework pyramid, including the following principles:
1. economic entity
2. control
3. revenue recognition and realization
4, matching
5. periodicity
6. monetary unit
7. going concern
8. historical cost
9. fair value
10. full disclosure
Predictive Value
an element of relevance; a characteristic of accounting information that helps users make predictions about the ultimate outcome of past, present, and future events
Neutrality
the quality of accounting information that ensures faithful representation by being factual, truthful, and unbiased; is not selected to favour one set of parties over another
Freedom From Error
an element of representational faithfulness; a measure of the reliability of reported information, assuring that the relevant information is accurate and unaffected by the opinions of stakeholders
Relevance
one of the fundamental qualitative characteristics of financial reporting; it should have predictive value, feedback value, and materiality
Representational Faithfulness
one of the fundamental qualitative characteristics of financial reporting; it is transparent, complete, neutral, and free from material error and bias
Value in Use
the present value of future cash flows expected to be derived from an asset’s use and subsequent disposal; it is an entity-specific measure
Gains
increases in equity (net assets) from a company’s peripheral or incidental transactions and from all other transactions and other events and circumstances affecting the company during a period, except those that result from revenues or investments by owners
Liabilities
duties or responsibilities (to transfer economic resources) resulting from a past transaction or event
Objective of Financial Reporting
the goal “to communicate information that is useful to investors, members, contributors, creditors, and other users in making their resource allocation decisions and/or assessing management stewardship” per CPA Canada Handbook
Feedback/Confirmatory Value
an element of relevance; the notion that relevant information helps users confirm or correct prior expectations
Materiality
an element of relevance; the concept that relates to an item’s impact on a company’s overall financial operations; an item is material if its inclusion or omission would influence or change the judgement of a reasonable person
Comparability
an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; information that is comparable is measured and reported in a similar manner for different companies and time periods
Information Assymetry
When investors do not have access to the same information as other users of financial information, such as insiders, they are unable to analyze securities with the same degree of accuracy as those users. There is a moral hazard that agents such as managers will act in their own best interests instead of those of the principal (investory). If asymmetric information in capital markets is widespread, this could result in adverse selection, whereby investors place lower values on securities due to the information asymmetry and therefore only companies who know that they deserve lower valuations are willing to raise funds in capital markets. The result is a “market for lemons” where low-quality investments are traded cheaply, which hurts high quality companies and investors alike.
Sarbanes-Oxley Act
(1) requires disclosure that a code of ethics exists for senior financial officers
(2) requires CEOs and CFOs to forfeit bonuses if there is a restatement of accounting disclosures
(3) requires independence and financial expertise for auditors
