Chapter 1 Flashcards
Financial accounting/reporting
process of preparing financial reports for external and internal users
Primary objective of financial reporting
Aid current and potential users in their decision making, when lending money or investing in company
financial reporting is mainly geared towards
external users
Public Canadian companies use
IFRS, but if they traded on US exchange then they can use US GAAP or IFRS
Non-public Canadian companies but with fiduciary responsibility (pension fund, mutual fund) must use
IFRS
In Canada, private companies may apply
IFRS or ASPE
ASPE
Accounting standards for private enterprises
ASPE reports
- Balance Sheet
- Income Statement
- Cash flows
- Statement of retained earnings
IFRS reports
- Balance Sheet
- Statement of Comprehensive income (NI + OCI)
- Cash flows
- Statement of changes in equity
- Notes on financial statements
Statement of changes in equity
Reconciliation of beginning and ending balances for all shareholder equity amounts – not just Retained Earnings
Stakeholders that may have interest in statements
Investors, management, Securities commission, stock exchange, analysts, auditors, standard setters
Accountant serious responsibility
provide relevant and reliable information + stewardship obligation + may have fiduciary responsibility
stewardship obligation
they must ensure that company assets are safeguarded and put to the best possible use
Auditors
add credibility to financial statements with independent verification of records and practices
Audit risk
auditors cannot verify every single transaction
Stakeholder of the company
someone who stands to lose something if company performs badly
Limitations of financial statements
- Based on information from the past
2. not geared toward a specific stakeholder
Based on information of the past
past information may or may not be indicative of future events (may or may not be relevant)
entity approach
A company’s assets are seen as separate and distinct from those of the stakeholders
proprietary perspective
gear the financial statements towards a specific group
Problems with proprietary perspective
unethical and unfair to the other stakeholders and may introduce bias in forming accounting policies
Information asymmetry
not the same information for all investors
efficient market hypothesis says
the price of a share reveals all the available information (not true usually)
Theory of adverse selection
where information asymmetry exists, capital markets will attract companies that stand to gain by hiding information. Companies that fully disclose all information may have their share prices discounted and may thus be discouraged from entering the capital markets in the first place.
Theory of moral hazard
People will do whatever is in their best interests regardless of the harm it can cause others
management bias
may result in overstating assets and revenues if a manager’s bonus is at stake by adopting aggressive accounting policies.
Management bias can result from
use of financial statements to:
- evaluate manager’s performance
- evaluate compensation
- influence stock price
- determine if debt covenants were violated
Standard Setting
GAAP (Generally Accepted Accounting principles) come about due to authoritative/pronouncements/standards OR commonly accepted practices
Standard setting in Canada
- Canadian Accounting Standards Board (AcSB)
2. International Accounting Standards Board (IASB)
International Accounting Standards Board (IASB)
Responsible for IFRS: Public companies in Canada have adopted IFRS since January 1, 2011.
Canadian Accounting Standards Board (AcSB)
Responsible for ASPE, to set standards they seek to be responsive to the needs of the community and operate in full public view throughout due process
Mission of IASB
to bring transparency, accountability and efficiency to financial markets around the world by developing IFRS Standards. Our work serves the public interest by fostering trust, growth and long-term financial stability in the global economy
US accounting standards
FASB: Federal Accounting standards board, Note that U.S. GAAP standards are already converged with IFRS
Securities and exchanges commissions
These are provincial bodies in Canada with the largest being the Ontario Securities & Exchange Commission. In the U.S., the Securities & Exchange Commission (SEC) is a federal body.
Will comment on standards but cannot make them
US GAAP based on
rules for every situation, if IFRS cannot guide on what to do many will rely on US GAAP
IFRS and ASPE based on
general principles, allowing more leeway for interpretation
Hierarchy to GAAP
Under IFRS and ASPE, there is a hierarchy: primary or other
For AcSB primary sources
- CPA handbook
2. Accounting Guidelines and Appendices
For IASB, primary sources are
- IFRS standards
- IAS (pre-IFRS) standards
- IFRIC : International Financial Reporting Interpretations Committee
Some other sources for IFRS and ASPE
- Background information on AcSb or IASB
- Pronouncements by other standard setting bodies
- Draft primary sources
- Research studies
- Textbooks
- Industry Practice
If there is no guidance for a certain issue then
professional judgement is applied
Market oversight
Sarbanes Oxley (SOX) Act was passed in the U.S. in 2002, giving much more policing authority to the SEC for public companies.
Key elements of SOX are
- Stronger independent rules for auditors
- Creation of oversight board (CPAOB)
- CEOS and CFOs must sign off on the statements or they risk losing their bonuses.
- Audit committees must have independent members with financial expertise
- companies must disclose their codes of ethics
the Canadian Public Accountability Board (CPAB)
Canada’s version of SOX, but Canadian companies that issue shares in the US are bound by SOX
Politics of Standard setting
- Standard-setting bodies like the IASB have an obligation to remain impartial and do what’s best for the economy, and be ethical and unbiased.
- funding it receives is broad-based, “strings-free” and from multiple nations to minimize the likelihood of favouring any one user group.
Ethics
Accountants are entrusted by the public and expected to be ethical –> ignore biases and pressures
Impact of technology
quick access to information, but not everyone can have the same information bc there is so much,
Often unaudited so is it reliable.
Integrated reporting
Not just financial reporting but (IIRC) more comprehensive model of reporting: management information, sustainability, governance and compensation with it. The idea is to see financial information as part of a bigger picture.
