Chapter 1: Introduction to Accounting for Public Companies Flashcards
Summarize the importance of the conceptual framework and how it applies to public companies, Explain why accounting standards differ between private and public companies, Explain the major similarities and differences between the two main sets of accounting standards used in Canada
what are privately held companies
Companies in which a small group of private investors provide capital in return for private stock to start-up and grow a company
what are publicly held companies
Companies that can sell their stock to public investors in exchange for cash. (Must have outstanding shares listed on a stock exchange to be able to sell stocks)
what are the similarities between private and public companies
- Bank financing
- Both can borrow money from a bank
- Bond issuance
- Both can issue bonds
- More common for public companies to
- Internal reporting
- Both can prepare internal reports for their internal stakeholders
- External reporting
- Both can prepare external reports for their external stakeholders
- External reports from a private company is only done with a specific purpose (ex. for a bank)
What are the differences between private and public companies
- Accounting Standards
- Audited Financial Statements
- Investors/Owners
- Financing
- Availability of Information
- Board of Directors (BOD)
what is the difference in accounting standards for private and public companies
private companies: can CHOOSE to use APSE or IFRS
public companies: MUST follow IFRS
what is the difference in audited financial statements for private and public companies
private companies: NOT REQUIRED to prepare audited financial statements
public companies: ARE REQUIRED to prepare audited financial statements
what is the difference in investors/owners for private and public companies
private companies: Include founders, angel investors, venture capital, & private equity firms
public companies: Include public shareholders
what is the difference in board of directors for private and public companies
private companies: Can CHOOSE to have a BOD
public companies: MUST have a BOD
what is the difference in availability of information for private and public companies
private companies: Information is NOT publicly available
public companies: Information IS publicly available
what is the difference in financing for private and public companies
private companies: CAN’T obtain financing from public financial markets (stock exchange)
public companies: CAN obtain financing from public financial markets
what are the assumptions that apply under both ASPE & IFRS conceptual framework
- going concern
- Separate entity
- historical cost
what is the going concern assumption
The assumption that the company will continue to operate in future years, and has no intention of shutting down
What is the point of having conceptual framework for accounting standards
- In place to ensure consistent and logical formulation of standards
- Allows for the use of professional judgment to ensure that accounting issues can be resolved
- When a standard is open to interpretation or silent on an issue, the framework provides guidance
- IFRS and ASPE have their own conceptual framework that is used to resolve issues that are not explicitly covered by the standards
what is the separate entity assumption
- The assumption that transactions that occur in the company, relate only to the business it operates in
- Personal transactions of the owners are kept separate from the company’s accounting records
what are the fundamental qualitative characteristics of ASPE conceptual framework
- Understandability
- Relevance
- Reliability
- Comparability
what is the historical cost assumption
Assumption that business transactions are recorded at a cost
what are the fundamental qualitative characteristics of IFRS conceptual framework
- Relevance
- Faithful representation (reliability under ASPE)
what are the enhancing qualitative characteristics of IFRS conceptual framework
- Verifiably
- Timeliness
- Comparability
- Understandability
what are the enhancing qualitative characteristics of ASPE conceptual framework
ASPE doesn’t separate the characteristics this way
what is the verifiably qualitative characteristic under IFRS
- The information shown should be able to be verified by various knowledgeable and independent observers
- Auditors validate this characteristic
what is the timeliness qualitative characteristic under IFRS
- Providing the financial information to decision-makers in time to help with their decisions
- More recent information is more useful
- Older information can be used for historical analysis and predicting trends
what does the conceptual framework of both standards do
ensures financial information is useful to stakeholders
why is ASPE for private companies
- private companies are usually smaller companies
- using ASPE makes it easier to interpret financial statements (user-friendly)
- less resource intensive
what was IFRS designed to be & what is the result of it
- designed to be applicable to a broad, international, business community
- Standards are much stricter
- More disclosure requirements, makes statements more comparable, enhancing the accounting information
- But since different countries have different tax laws and legal systems, ensuring statements are truly comparable requires considerable effort
When do Canadian private companies need to follow IFRS
if they are non-public financial institutions
why would a Canadian private company choose to use IFRS
- May use it because their parent company is using it
- May use it if their competition is using it
- May use it if they want to go public in the future
why do many private companies use APSE
ASPE requirements are less strict
what is the recognition universal component
Provides guidance as to when a specific accounting event should be recorded
what do public companies need to do when using IFRS
They have to put considerable additional effort to ensure they comply with all of the requirements
what are universal components that is data is organized into (the same for both standards)
- recognition
- measurement
- disclosure
what is the disclosure universal component
- Provides guidance as to what information about a specific accounting event should be explicitly presented to users
- Disclosure requirements under IFRS are much more demanding and involved than under ASPE
what is the measurement universal component
Provides guidance as to the amount a specific accounting event should be recorded at
what are the differences in balance sheet presentation between IFRS & ASPE
- Name of financial statement
- Line item presentation
what is the IFRS name of the financial statement for a balance sheet
Statement of Financial Position
what is the ASPE name of the financial statement for a balance sheet
balance sheet
what is the line item presentation for IFRS balance sheet like
- DOES require to be ordered based on liquidity IF it would be more reliable and relevant
- Doesn’t need to be separated by current and non-current
- Would need a note disclosure for items like long-term loans where a portion is payable within 12 months, and a portion after 12 months
what is the line item presentation for ASPE balance sheet like
- Does NOT require to be ordered based on liquidity
- Needs to be separated by current and non-current
what are the differences in the assets section of a balance sheet between ASPE & IFRS
- Revaluation
- Depreciable amount
- Component separation & depreciation
- Incidental revenues & expenses
what is revaluation like for IFRS
- PP&E is reported at the historical cost minus amortization (= net book value) (cost model) OR
- at a revalued (based on current fair market value) amount minus amortization (= nbv) (revaluation model)
**If an asset is revalued, the entire class of assets the asset belongs to also needs to be revalued
what is revaluation like for ASPE
PP&E is reported at the historical cost minus amortization (= net book value)
what is depreciable amount calculated for IFRS
= asset cost - residual value
**depreciable amount changes every time the asset is revalued
what is depreciable amount calculated for ASPE
= asset cost - residual value
OR
= asset cost - salvage value
Whichever is higher
what is component separation & depreciation like for IFRS
- Components of PP&E that represents a significant cost relative to the total is depreciated separately (one asset can be depreciated into different components)
- Ex. airplane; engine & interior depreciate at different rates, and are depreciated separately
what is component separation & depreciation like for ASPE
- Components of PP&E that represents a significant cost relative to the total is depreciated separately (one asset can be depreciated into different components)
- **done only if it is practical to separate; otherwise just depreciate asset as one
what are incidental revenues & expenses
- Revenue/costs that are not related to the assets actual cost
- Are from the process of getting an asset to its intended location & condition for it to be used
- Ex. Company purchases land to build a factory
- Factory is the intended PP&E asset
- Delays move back the factory construction by 3 months
- If the company temporarily repurposes the land to be used as a paid parking lot, they would be generating incidental revenue
- Considered incidental because the land isn’t meant to be used as a parking lot
how are incidental revenues & expenses treated for IFRS
Revenues & expenses from incidental operations is recognized on the income statement
how are incidental revenues & expenses treated for ASPE
Revenues & expenses from incidental operations is recognized in the asset’s cost (balance sheet)
what are the differences in the liabilities section of a balance sheet between ASPE & IFRS
lease classification
how are leases classified in IFRS
Similar criteria to ASPE, but new lease standard (IFRS 16) that classifies most leases > 12 months as capital (financing) leases
how are leases classified in ASPE
Classified based on 4 criteria to determine if a lease is an operating or capital lease
what are the 4 criteria to classify a capital lease under ASPE
- At the end of the lease term, ownership transfers to the lessee
- Lessee has the option to purchase asset for < it’s fair market value throughout its lease term (based on the lease contract)
- Lease term spans 75% or more of the assets’ expected useful life
- Present value of lease payments is 90% or more of fair market value of the asset when contract is signed
what are the differences in income statement presentation between IFRS & ASPE
- Name of financial statement
- Information presented
what is the IFRS name of the financial statement for an income statement
- Statement of Profit or Loss & Other Comprehensive Income
- Statement of Operations & Statement of Other Comprehensive Income
- Also referred as Statement of Profit or Loss / The P&L
what is the ASPE name of the financial statement for an income statement
income statement
what is the information presented for IFRS income statement like
- Requires certain information to be presented in other comprehensive income (OCI)
- items that are not included as part of net income
what is the information presented for ASPE income statement like
Concept of other comprehensive income (OCI) does not exist under ASPE
what are revenue recognition steps for IFRS
- identify contract
- identify performance obligations
- determine transaction price
- allocate the transaction price to performance obligations
- recognize revenue in accordance with performance
what is done in the first step of the IFRS revenue recognition
Identify contract
- Determine if they engaged in a contract with the customer
- Ex. legal document signed by seller & customer outlining rights of each party, payment terms, etc.
what is done in the second step of the IFRS revenue recognition
Identify performance obligations
- Distinct performance obligations are identified in the contract
what is done in the third step of the IFRS revenue recognition
Determine transaction price
- Identify the amount of consideration promised by a customer
what is done in the fourth step of the IFRS revenue recognition
Allocate the transaction price to performance obligations
- Each performance obligation should have its own transaction price
- If it doesn’t in the contract, a price is allocated to it based on the “stand-alone” price if it was sold separately
what is done in the fifth step of the IFRS revenue recognition
Recognize revenue in accordance with performance
- Revenue only recognized if performance is delivered as promised
what are revenue recognition steps for ASPE
RCMP
1. Seller has transferred significant risk and rewards to the buyer (only if its a good)
2. Collection of payment is reasonably assured
3. Amount of consideration derived from the scale can be measured
4. Delivery of goods and/or services has been performed
what is the expense classification like for IFRS
- Requires classification either “by nature” or “by function”
- “By function” organizes by specific functions of the business (ex. Selling & distribution, administrative, other expenses)
- Would track expenses by nature, then group them by function for presentation on the statement
- Ex. if a PP&E is used by multiple departments, would need note disclosures to state how much depreciation is attributed to each department
what is the expense classification like for ASPE
- No specific presentation requirement
- Usually classified “by nature”
- Disclosure based on the categories of expenses incurred
- Simple way to organize expense for smaller organizations
what are the differences in presentation for statement of retained earnings between ASPE & IFRS
- if it is required
- name of financial statement
is the statement of retained earnings required under IFRS
- No requirement to present a separate statement of retained earnings
- Requires statement of changes in equity
is the statement of retained earnings required under ASPE
yes
what is the required statement of retained earnings called for IFRS
Statement of Changes in Equity
what is the required statement of retained earnings called for ASPE
Statement of Retained Earnings
what is the statement of retained earnings
just a statement that displays more detail about the “retained earnings” line item that is on the balance sheet
what is the statement of changes in equity
- shows details about changes in all equity components throughout the year
- Shows major activity for the equity line items (from the balance sheet) for the relevant period as at the reporting date
- Accumulated OCI (only under IFRS), shows the running total of all changes in OCI
what are the differences in presentation for cash flow statement between ASPE & IFRS
name of financial statement
what is the cash flow statement called under IFRS
Statement of cash flows
what is the cash flow statement called under ASPE
cash flow statement
what are the 3 types of activities cash flows are organized into
- operating
- investing
- financing
what are the different methods cash flows can be presented in
- direct method
- indirect method
what is the first option IFRS can categorize interest paid, interest received, dividends paid, and dividends received
all under operating cash flow
what is the second option IFRS can categorize interest paid, interest received, dividends paid, and dividends received (AFM 182 default)
- interest paid = financing cash flow
- interest received = investing cash flow
- dividends paid = financing cash flow
- dividends received = investing cash flow
how does ASPE categorize interest paid, interest received, dividends paid, and dividends received
- interest paid = operating cash flow
- interest received = operating cash flow
- dividends paid = financing cash flow
- dividends received = operating cash flow
what is something to note regarding which cash flow categorizing public companies use
Whichever option the company chooses to use under IFRS, they must continue to use it in the future
what are other notable comparisons between ASPE & IFRS
- comparative information
- ESG & sustainability reporting
what is the difference in comparative information between ASPE & IFRS
- There can be rare times when presenting comparative information is not meaningful
- Ex. if a business starts in December and decides to make December 31, 202X the year-end date, comparing this year with the next fiscal year has no meaning because this year contains only a month of information
ASPE: If comparative information is not meaningful, companies companies can omit the information
IFRS: always requires comparative information, even if it’s not meaningful
what is the difference in ESG & sustainability reporting between public & private companies
- Public companies are required by securities law to disclose non-financial information
- Private companies are not required to disclose that information
- larger businesses think more reporting should be done beyond financial information and shareholder return
- ESG and sustainability reporting is much more prevalent in public companies compared to private companies
what is a capital lease
- Most of the risk & rewards of ownership are transferred to the lessee, even though the formal legal title remains with the lessor
- Lessee accounts for the lease as an asset and a corresponding lease liability on the balance sheet
- Depreciation expense is recorded on the income statement
- Accumulated depreciation is recorded on the balance sheet
- Like a long-term asset (PP&E)
- Interest expense corresponding to the liability is recorded on the income statement
- When the asset is bought, it then becomes PP&E, and you credit the lease liability
- Would then depreciate based on the actual estimated useful life and not by the lease term (because it is now bought)
what is an operating lease
- Most of the risks & rewards of ownership remains with the lessor
- Better in the perspective of the lessee
- Lessee accounts for the lease payments like a rent expense on the income statement (should not be called a rent expense!)
- Not recorded as an asset or liability on the balance sheet
- Will only affect retained earnings on the balance sheet
