Chapter 2 - Conceptual Framework Underlying Financial Reporting

Question 1

What are the 4 enhancing qualitative characteristics of useful financial information?

Answer 1

Comparability, Understandability, Timeliness, Verifiability

Question 2

What are the fundamental characteristics of useful financial information?

Answer 2

1) Relevance
2) Faithful representation.

Question 3

What are the three sub-branches of relevance?

Answer 3

1) Predictive
2) Confirmatory
3) Free of Material Error

Question 4

What are the three sub-branches of faithful representation?

Answer 4

1) Complete
2) Neutral
3) Free of Material Error

Question 5

What are the two objectives of financial reporting?

Answer 5

1) Provide information useful for credit and investment decisions.
2) Provide information useful for making resource allocation decisions, which includes management stewardship.

Question 6

What is the constraint of useful financial information?

Answer 6

Cost

Question 7

What are the 6 elements?

Answer 7

1) Assets
2) Liabilities
3) Revenues
4) Expenses
5) Gains and Losses
6) Equity

Question 8

What are the 2 measurements of the elements?

Answer 8

Historical Cost and Fair Value

Question 9

What does material mean?

Answer 9

If you omitted, misstated, or obscured information than it is expected that those primary uses who rely on the financial information will change their decision making.

Question 10

What does complete mean?

Answer 10

The depiction includes all information necessary for the user to understand the phenomena being depicted, like descriptions and explanations.

Question 11

What does neutral mean?

Answer 11

The depiction is without bias in the selection or presentation of financial statements.

Question 12

What does free of error mean?

Answer 12

1) No errors or omissions in the description of the phenomena.
2) The process used to produce the information has been selected and applied with no errors.

Question 13

What is comparability?

Answer 13

Enables users to identify and understand similarities in, and among differences, in items

Question 14

What is verifiability?

Answer 14

Assures users that information faithfully represents the economic phenomena it purports to represent.

Question 15

What is timeliness?

Answer 15

Having information available to decision makers in time to be capable of influencing their decisions.

Question 16

What is understandability?

Answer 16

The financial information is created for individuals who are quite knowledgable about the company. However, at times there will be situations where they must seek more professional advice. The goal is to make it as as possible the economic phenomena that it purports to represent.

Question 17

What is predictive value?

Answer 17

It can be used as an input to processes employed by users to predict future outcomes.

Question 18

What is confirmatory value?

Answer 18

It provides feedback, confirming or changing previous evaluations

Question 19

What is prudence?

Answer 19

The exercise of caution when making judgements under conditions of uncertainty. Prudence guides neutrality.

Question 20

Describe faithful representation

Answer 20

Faithfully representation does not mean accurate in all respects. If estimates are used it must be described clearly and accurately, nature and limitations are explained, no errors made in the selection and application of the estimate.

Question 21

What are the differences in terms between IFRS and ASPE

Answer 21

Statement of financial position vs balance sheet
Depreciation vs amortization

Question 22

What are the differences in OCI between IFRS and ASPE

Answer 22

Reports OCI vs does not report OCI

Question 23

What are the differences in comprehensive income between IFRS and ASPE

Answer 23

Reports comprehensive income (net income + other comprehensive income) vs reports net income only.

Question 24

What are the differences closing out OCI between IFRS and ASPE

Answer 24

Closes out the OCI to the accumulated other comprehensive income vs does not reported other comprehensive income.

Question 25

What are the differences in equity reporting between IFRS and ASPE

Answer 25

Uses the statement of changes in equity to track the changes in all equity accounts vs uses a statement of retained earnings which only tracks changes in the retained earnings account.

Question 26

What are the differences reporting value between IFRS and ASPE

Answer 26

Allows us to report more items at the fair value vs prefers cost / amortized cost for more items.

Question 27

What are the differences in focus between IFRS and ASPE?

Answer 27

Focuses on asset and liability valuation and presentation as it originated in Europe with more debt financing vs tends to focus more on income measurement because it originated in Canada where there is more equity financing.

Question 28

What are the differences in impairment between IFRS and ASPE

Answer 28

Usually allows impairment loss reversals vs does not permit impairment loss reversals.

Question 29

What are the three items covered in IFRS that are not covered in ASPE?

Answer 29

1) Stresses neutrality not conservatism
2) Reports items not indicated under ASPE - Investment properties, earning per share, and segregated items.
3) Requires more disclosure vs ASPE.

Question 30

What is fair value?

Answer 30

The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

Question 31

What are the two measurement bases?

Answer 31

1. Historical Cost
2. Current Value

Question 32

What are historical cost measurements?

Answer 32

Provide monetary information about assets, liabilities, and related income and expenses, using information derived, at least in part, from the price of the transaction or event that gave rise to them.

Question 33

What are the three current value measurements?

Answer 33

1) Fair Value
2) Value in use (Assets) and Fulfillment Value (Liabilities)
3) Current Cost

Question 34

What is the current value measurements?

Answer 34

Provides monetary information about assets, liabilities, and related income and expenses using information updated to reflect conditions at the measurement date.

Question 35

What is the value in use?

Answer 35

Present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal.

Question 36

What is the fulfilment value?

Answer 36

Present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfills a liability.

Question 37

What is the current cost of an asset?

Answer 37

The cost of an equivalent asset at the measurement date, comprising of the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date.

Question 38

What is the current cost of a liability?

Answer 38

The consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be incurred on that date.

Question 39

What is an entry value? What cost is included?

Answer 39

Reflects prices in the market in which the entity would acquire the asset or would incur a liability. This includes current cost and historical cost.

Question 40

What are exit values? What costs are included?

Answer 40

Exit values are the prices that the entity would dispose of the asset or liability. This includes fair value, value in use, and fulfilment value.

Question 41

What is the MD&A? What should the MD&A disclose in accordance with the CPA Handbook?

Answer 41

The management discussion and analysis.
1) Allow the reader to view the company from the eyes of the management.
2) Complement and supplement the financial statements.
3)Reliable, complete, fair, and balanced.
4)Forward looking orientation
5) Focus on management strategy for generating value.
6) Plain language.

Question 42

What other details should be highlighted except those in the CPA handbook with respect to the MD&A?

Answer 42

Comments relating to:
1) The company’s vision
2) Core business operations and strategy
3) Performance drivers
4) Capabilities
5)Results
6) Risks

Question 43

What is the annual information form?

Answer 43

Provides more information about a company’s operations.

Question 44

What is the management information circular?

Answer 44

Provides more information about board and executive compensation.

Question 45

What are some common fraudulent reporting practices?

Answer 45

1) Recognize revenue prematurely
2) Records a cost as an asset rather than expense.
3) Failure to write down the asset to the fair value when the carrying amount is greater.
4)Lower the estimate for expenses and liabilities such as an estimate for legal damages.
5) Fails to record an expense and the related liability.
6) Treats a borrowed amount as revenue

Question 46

Describe the big bath cookie jar strategy

Answer 46

In the year that the company is experiencing deep financial loss, they can overstate the write down on assets or over estimate liabilities. Then in the subsequent year the depreciation of written down assets will be lower. Since none of this actually happened, in the subsequent year they can reverse everything to make it seem like they did far better than they actually did.

Question 47

What is relevance

Answer 47

It has the ability to make an impact on the decision making of the users of financial information.