unit 1 | introduction to accounting for public companies Flashcards
define privately held companies
companies in which a small group of private investors provide capital (eg. cash) in return for private stock (eg. shares) to startups and grow a company
define publicly held companies
- companies that can sell stock to investors (anyone) in exchange for cash
- must have outstanding shares listed on a stock exchange (TSX) to be able to sell stocks
similarities between private & public companies
- bank financing
- bond issuance
- internal reporting
- external reporting
differences in accounting standards between private & public companies
private: can choose to follow ASPE or IFRS
public: must follow IFRS
differences in audited financial statements between private & public companies
private: not required (yes - to get financing or has major shareholder)
public: required
differences in investors/owners between private & public companies
private: founder, angel investors, venture capital, & private equity firms
public: public shareholders
differences in financing between private & public companies
private: cannot obtain financing (cash) from public financial markets (stock exchange)
public: can obtain financing (cash) from public financial markets (stock exchange)
differences in the availability of information between private & public companies
private: not publicly available
public: publicly available
differences in BOD between private & public companies
private: can choose to have
public: must have
describe the conceptual framework of accounting
- The conceptual framework serves as a guide in developing new accounting standards and revising existing ones
- When standard is open to interpretation or silent on an issue, the framework provides guidance
list the 3 accounting assumptions
- Going concern → The business will continue to operate in the foreseeable future & has no intentions to terminate its operations
- Separate-entity → Transactions occurring in the company must relate to the business it operates, personal transactions of the owners must be kept separate from the company’s accounting records
- Historical cost → Business transactions are recorded at cost
define the Qualitative Characteristics of Useful Financial Information
Fundamental:
- Relevance
- Faithful representation (reliability)
Enhancing:
- Comparability
- Understandability
- Verifiability (reliability) → audit requirements
- Timeliness (relevance) → reporting requirements
Define Verifiability
The information disclosed should result in a consensus among various knowledgeable & independent observers
Define Timeliness
Financial information available to decision-makers in time to be capable of influencing their decisions (more up-to-date information → useful)
Describe moving from ASPE to IFRS
- ASPE initially created for relatively smaller companies (easier to interpret & less resource-intensive)
- IFRS designed to be applicable to an international business community (more stringent & require more disclosure)
describe the components of how standards are organized
- Recognition → Provides guidance as to when a specific accounting event should be recorded
- Measurement → Provides guidance as to the amount a specific accounting event should be recorded at
- Disclosure → Provides guidance as to what information about a specific accounting event should be explicitly presented to users
IFRS name for Balance Sheet
Statement of Financial Position
IFRS changes in BS presentation
- Liquidity-based presentation if more reliable & relevant
- Assets & liabilities not necessarily classified between current & non-current
What is IFRS 16?
Leases > 12 months are classified as (capital) financing leases (IFRS name)
What is the most common difference in asset’s section of BS?
PP&E
Define Revaluation & describe the difference
- The exception to the historical cost assumption
IFRS: At amortized cost or at a revalued amount (based on fair market value - write up or down)
ASPE: Cost - depreciation & impairment
Describe the difference in Depreciable amount
- May change every time the asset is revalued
IFRS: Asset cost - residual value
ASPE: The greater of [asset cost - residual value] or [asset cost - salvage value]
Describe the difference in Component separation & depreciation
IFRS: Components of PP&E that represent a significant cost relative to the total must be depreciated separately
ASPE: Components of PP&E should be depreciated separately when it is practicable to separate the components
Describe the difference in Incidental revenues & expenses
- Not part of the asset’s cost
IFRS: Revenues or expenses from incidental operations should be recognized in the “statement of comprehensive income”
ASPE: Revenues or expenses from incidental operations should be recognized in the asset’s cost
IFRS name for Income Statement
Statement of profit & loss (P&L) & other comprehensive income (OCI)
Alternatives: Statement of operations + Statement of other comprehensive income beside
Biggest IFRS difference on IS
Recognition criteria
IFRS revenue recognition criteria
- Identify contract
- Entity must determine whether it has engaged in a contract with a customer (ex. Legal document signed by seller & customer outlining the rights of each party, payment terms) - Identify performance obligations
- Entity must identify distinct performance obligations part of the contract - Determine transaction price
- Entity must identify the amount of consideration promised by a customer - Allocate the transaction price to performance obligations
- Each performance obligation should have its own transaction price
- If not, the entity must allocate a price to each performance obligation based on the “stand-alone” price if good or service was sold separately - Recognize revenue in accordance with performance
- Revenue recognized when the entity satisfies the performance obligation or transfers a good to a customer
Difference in expense classification
ASPE: no specific requirements
- Default presentation is “by nature” (based on categories)
IFRS specifically requires presentation “by nature” or “by function”
- By function: specific functions of the business → 1. selling & distribution, 2. administrative, 3. other expenses
- The business track expenses by nature then group by function (additional layer of classification → multi-step format IS)
IFRS difference on SoRE
- IFRS does not require a separate SoR
- IFRS requires a Statement of Changes in Equity (shows changes in all equity components throughout the year)
IFRS difference on CFS
IFRS: Statement of Cash Flows
- Main difference: interest & dividends treatment
IFRS Approach 1 to SoCF
Interest paid: Operating
Interest received: Operating
Dividend paid: Operating
Dividend received: Operating
IFRS Approach 2 to SoCF
Interest paid: Financing
Interest received: Investing
Dividend paid: Financing
Dividend received: Investing
Other notable comparisons
- Comparative information
- IFRS always requires comparable information, ASPE does not (if not meaningful)
- IFRS has a day 1 vs now comparison - Prior period restatements
- Correcting errors on FS from prior periods based on “impracticality” (IFRS)
- Some accounting policy choices that requires retroactive restatement only allowed if result in more relevant & reliable information (IFRS) - ESG & sustainability reporting
- Public companies show greater concern for & interest in ESG reporting
- Required by securities law to disclose non-financial information
Benefits of IFRS
Following IFRS can help to enhance the comparability and quality of a company’s financial information, which enables investors and other market participants to make informed economic decisions
