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AFM 182 > Chapter 1: Introduction to Accounting for Public Companies > Flashcards

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

1
Q

what are privately held companies

A

Companies in which a small group of private investors provide capital in return for private stock to start-up and grow a company

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2
Q

what are publicly held companies

A

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)

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3
Q

what are the similarities between private and public companies

A
  • 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)
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4
Q

What are the differences between private and public companies

A
  • Accounting Standards
  • Audited Financial Statements
  • Investors/Owners
  • Financing
  • Availability of Information
  • Board of Directors (BOD)
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5
Q

what is the difference in accounting standards for private and public companies

A

private companies: can CHOOSE to use APSE or IFRS
public companies: MUST follow IFRS

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6
Q

what is the difference in audited financial statements for private and public companies

A

private companies: NOT REQUIRED to prepare audited financial statements
public companies: ARE REQUIRED to prepare audited financial statements

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7
Q

what is the difference in investors/owners for private and public companies

A

private companies: Include founders, angel investors, venture capital, & private equity firms
public companies: Include public shareholders

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8
Q

what is the difference in board of directors for private and public companies

A

private companies: Can CHOOSE to have a BOD
public companies: MUST have a BOD

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9
Q

what is the difference in availability of information for private and public companies

A

private companies: Information is NOT publicly available
public companies: Information IS publicly available

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9
Q

what is the difference in financing for private and public companies

A

private companies: CAN’T obtain financing from public financial markets (stock exchange)
public companies: CAN obtain financing from public financial markets

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10
Q

what are the assumptions that apply under both ASPE & IFRS conceptual framework

A
  • going concern
  • Separate entity
  • historical cost
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10
Q

what is the going concern assumption

A

The assumption that the company will continue to operate in future years, and has no intention of shutting down

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10
Q

What is the point of having conceptual framework for accounting standards

A
  • 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
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11
Q

what is the separate entity assumption

A
  • 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
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11
Q

what are the fundamental qualitative characteristics of ASPE conceptual framework

A
  • Understandability
  • Relevance
  • Reliability
  • Comparability
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11
Q

what is the historical cost assumption

A

Assumption that business transactions are recorded at a cost

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11
Q

what are the fundamental qualitative characteristics of IFRS conceptual framework

A
  • Relevance
  • Faithful representation (reliability under ASPE)
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12
Q

what are the enhancing qualitative characteristics of IFRS conceptual framework

A
  • Verifiably
  • Timeliness
  • Comparability
  • Understandability
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13
Q

what are the enhancing qualitative characteristics of ASPE conceptual framework

A

ASPE doesn’t separate the characteristics this way

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13
Q

what is the verifiably qualitative characteristic under IFRS

A
  • The information shown should be able to be verified by various knowledgeable and independent observers
  • Auditors validate this characteristic
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14
Q

what is the timeliness qualitative characteristic under IFRS

A
  • 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
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14
Q

what does the conceptual framework of both standards do

A

ensures financial information is useful to stakeholders

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15
Q

why is ASPE for private companies

A
  • private companies are usually smaller companies
  • using ASPE makes it easier to interpret financial statements (user-friendly)
  • less resource intensive
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15
Q

what was IFRS designed to be & what is the result of it

A
  • 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
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16
Q

When do Canadian private companies need to follow IFRS

A

if they are non-public financial institutions

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16
Q

why would a Canadian private company choose to use IFRS

A
  • 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
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17
Q

why do many private companies use APSE

A

ASPE requirements are less strict

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17
Q

what is the recognition universal component

A

Provides guidance as to when a specific accounting event should be recorded

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18
Q

what do public companies need to do when using IFRS

A

They have to put considerable additional effort to ensure they comply with all of the requirements

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19
Q

what are universal components that is data is organized into (the same for both standards)

A
  1. recognition
  2. measurement
  3. disclosure
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19
Q

what is the disclosure universal component

A
  • 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
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20
Q

what is the measurement universal component

A

Provides guidance as to the amount a specific accounting event should be recorded at

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20
Q

what are the differences in balance sheet presentation between IFRS & ASPE

A
  • Name of financial statement
  • Line item presentation
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21
Q

what is the IFRS name of the financial statement for a balance sheet

A

Statement of Financial Position

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21
Q

what is the ASPE name of the financial statement for a balance sheet

A

balance sheet

21
Q

what is the line item presentation for IFRS balance sheet like

A
  • 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
22
Q

what is the line item presentation for ASPE balance sheet like

A
  • Does NOT require to be ordered based on liquidity
  • Needs to be separated by current and non-current
22
Q

what are the differences in the assets section of a balance sheet between ASPE & IFRS

A
  • Revaluation
  • Depreciable amount
  • Component separation & depreciation
  • Incidental revenues & expenses
23
Q

what is revaluation like for IFRS

A
  • 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
23
Q

what is revaluation like for ASPE

A

PP&E is reported at the historical cost minus amortization (= net book value)

24
Q

what is depreciable amount calculated for IFRS

A

= asset cost - residual value
**depreciable amount changes every time the asset is revalued

24
Q

what is depreciable amount calculated for ASPE

A

= asset cost - residual value
OR
= asset cost - salvage value
Whichever is higher

25
Q

what is component separation & depreciation like for IFRS

A
  • 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
25
Q

what is component separation & depreciation like for ASPE

A
  • 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
26
Q

what are incidental revenues & expenses

A
  • 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
27
Q

how are incidental revenues & expenses treated for IFRS

A

Revenues & expenses from incidental operations is recognized on the income statement

28
Q

how are incidental revenues & expenses treated for ASPE

A

Revenues & expenses from incidental operations is recognized in the asset’s cost (balance sheet)

28
Q

what are the differences in the liabilities section of a balance sheet between ASPE & IFRS

A

lease classification

28
Q

how are leases classified in IFRS

A

Similar criteria to ASPE, but new lease standard (IFRS 16) that classifies most leases > 12 months as capital (financing) leases

29
Q

how are leases classified in ASPE

A

Classified based on 4 criteria to determine if a lease is an operating or capital lease

29
Q

what are the 4 criteria to classify a capital lease under ASPE

A
  • 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
30
Q

what are the differences in income statement presentation between IFRS & ASPE

A
  • Name of financial statement
  • Information presented
30
Q

what is the IFRS name of the financial statement for an income statement

A
  • 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
30
Q

what is the ASPE name of the financial statement for an income statement

A

income statement

30
Q

what is the information presented for IFRS income statement like

A
  • Requires certain information to be presented in other comprehensive income (OCI)
  • items that are not included as part of net income
31
Q

what is the information presented for ASPE income statement like

A

Concept of other comprehensive income (OCI) does not exist under ASPE

31
Q

what are revenue recognition steps for IFRS

A
  1. identify contract
  2. identify performance obligations
  3. determine transaction price
  4. allocate the transaction price to performance obligations
  5. recognize revenue in accordance with performance
31
Q

what is done in the first step of the IFRS revenue recognition

A

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.

31
Q

what is done in the second step of the IFRS revenue recognition

A

Identify performance obligations
- Distinct performance obligations are identified in the contract

32
Q

what is done in the third step of the IFRS revenue recognition

A

Determine transaction price
- Identify the amount of consideration promised by a customer

32
Q

what is done in the fourth step of the IFRS revenue recognition

A

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

33
Q

what is done in the fifth step of the IFRS revenue recognition

A

Recognize revenue in accordance with performance
- Revenue only recognized if performance is delivered as promised

34
Q

what are revenue recognition steps for ASPE

A

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

34
Q

what is the expense classification like for IFRS

A
  • 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
35
Q

what is the expense classification like for ASPE

A
  • No specific presentation requirement
  • Usually classified “by nature”
  • Disclosure based on the categories of expenses incurred
  • Simple way to organize expense for smaller organizations
35
Q

what are the differences in presentation for statement of retained earnings between ASPE & IFRS

A
  • if it is required
  • name of financial statement
36
Q

is the statement of retained earnings required under IFRS

A
  • No requirement to present a separate statement of retained earnings
  • Requires statement of changes in equity
37
Q

is the statement of retained earnings required under ASPE

A

yes

38
Q

what is the required statement of retained earnings called for IFRS

A

Statement of Changes in Equity

39
Q

what is the required statement of retained earnings called for ASPE

A

Statement of Retained Earnings

40
Q

what is the statement of retained earnings

A

just a statement that displays more detail about the “retained earnings” line item that is on the balance sheet

41
Q

what is the statement of changes in equity

A
  • 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
42
Q

what are the differences in presentation for cash flow statement between ASPE & IFRS

A

name of financial statement

43
Q

what is the cash flow statement called under IFRS

A

Statement of cash flows

44
Q

what is the cash flow statement called under ASPE

A

cash flow statement

45
Q

what are the 3 types of activities cash flows are organized into

A
  • operating
  • investing
  • financing
46
Q

what are the different methods cash flows can be presented in

A
  • direct method
  • indirect method
47
Q

what is the first option IFRS can categorize interest paid, interest received, dividends paid, and dividends received

A

all under operating cash flow

48
Q

what is the second option IFRS can categorize interest paid, interest received, dividends paid, and dividends received (AFM 182 default)

A
  • interest paid = financing cash flow
  • interest received = investing cash flow
  • dividends paid = financing cash flow
  • dividends received = investing cash flow
49
Q

how does ASPE categorize interest paid, interest received, dividends paid, and dividends received

A
  • interest paid = operating cash flow
  • interest received = operating cash flow
  • dividends paid = financing cash flow
  • dividends received = operating cash flow
50
Q

what is something to note regarding which cash flow categorizing public companies use

A

Whichever option the company chooses to use under IFRS, they must continue to use it in the future

51
Q

what are other notable comparisons between ASPE & IFRS

A
  • comparative information
  • ESG & sustainability reporting
52
Q

what is the difference in comparative information between ASPE & IFRS

A
  • 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
53
Q

what is the difference in ESG & sustainability reporting between public & private companies

A
  • 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
54
Q

what is a capital lease

A
  • 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)
55
Q

what is an operating lease

A
  • 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

AFM 182 (11 decks)

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