unit 1 | introduction to accounting for public companies

Question 1

define privately held companies

Answer 1

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

Question 2

define publicly held companies

Answer 2

• 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

Question 3

similarities between private & public companies

Answer 3

• bank financing
• bond issuance
• internal reporting
• external reporting

Question 4

differences in accounting standards between private & public companies

Answer 4

private: can choose to follow ASPE or IFRS
public: must follow IFRS

Question 5

differences in audited financial statements between private & public companies

Answer 5

private: not required (yes - to get financing or has major shareholder)
public: required

Question 6

differences in investors/owners between private & public companies

Answer 6

private: founder, angel investors, venture capital, & private equity firms
public: public shareholders

Question 7

differences in financing between private & public companies

Answer 7

private: cannot obtain financing (cash) from public financial markets (stock exchange)
public: can obtain financing (cash) from public financial markets (stock exchange)

Question 8

differences in the availability of information between private & public companies

Answer 8

private: not publicly available
public: publicly available

Question 9

differences in BOD between private & public companies

Answer 9

private: can choose to have
public: must have

Question 10

describe the conceptual framework of accounting

Answer 10

• 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

Question 11

list the 3 accounting assumptions

Answer 11

1. Going concern → The business will continue to operate in the foreseeable future & has no intentions to terminate its operations
2. 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
3. Historical cost → Business transactions are recorded at cost

Question 12

define the Qualitative Characteristics of Useful Financial Information

Answer 12

Fundamental:
- Relevance
- Faithful representation (reliability)
Enhancing:
- Comparability
- Understandability
- Verifiability (reliability) → audit requirements
- Timeliness (relevance) → reporting requirements

Question 13

Define Verifiability

Answer 13

The information disclosed should result in a consensus among various knowledgeable & independent observers

Question 14

Define Timeliness

Answer 14

Financial information available to decision-makers in time to be capable of influencing their decisions (more up-to-date information → useful)

Question 15

Describe moving from ASPE to IFRS

Answer 15

• 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)

Question 16

describe the components of how standards are organized

Answer 16

1. Recognition → Provides guidance as to when a specific accounting event should be recorded
2. Measurement → Provides guidance as to the amount a specific accounting event should be recorded at
3. Disclosure → Provides guidance as to what information about a specific accounting event should be explicitly presented to users

Question 17

IFRS name for Balance Sheet

Answer 17

Statement of Financial Position

Question 18

IFRS changes in BS presentation

Answer 18

• Liquidity-based presentation if more reliable & relevant
• Assets & liabilities not necessarily classified between current & non-current

Question 19

What is IFRS 16?

Answer 19

Leases > 12 months are classified as (capital) financing leases (IFRS name)

Question 20

What is the most common difference in asset’s section of BS?

Answer 20

PP&E

Question 21

Define Revaluation & describe the difference

Answer 21

• 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

Question 22

Describe the difference in Depreciable amount

Answer 22

• 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]

Question 23

Describe the difference in Component separation & depreciation

Answer 23

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

Question 24

Describe the difference in Incidental revenues & expenses

Answer 24

• 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

Question 25

IFRS name for Income Statement

Answer 25

Statement of profit & loss (P&L) & other comprehensive income (OCI)

Alternatives: Statement of operations + Statement of other comprehensive income beside

Question 26

Biggest IFRS difference on IS

Answer 26

Recognition criteria

Question 27

IFRS revenue recognition criteria

Answer 27

1. 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)
2. Identify performance obligations
   - Entity must identify distinct performance obligations part of the contract
3. Determine transaction price
   - Entity must identify the amount of consideration promised by a customer
4. 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
5. Recognize revenue in accordance with performance
   - Revenue recognized when the entity satisfies the performance obligation or transfers a good to a customer

Question 28

Difference in expense classification

Answer 28

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)

Question 29

IFRS difference on SoRE

Answer 29

• IFRS does not require a separate SoR
• IFRS requires a Statement of Changes in Equity (shows changes in all equity components throughout the year)

Question 30

IFRS difference on CFS

Answer 30

IFRS: Statement of Cash Flows
- Main difference: interest & dividends treatment

Question 31

IFRS Approach 1 to SoCF

Answer 31

Interest paid: Operating
Interest received: Operating
Dividend paid: Operating
Dividend received: Operating

Question 32

IFRS Approach 2 to SoCF

Answer 32

Interest paid: Financing
Interest received: Investing
Dividend paid: Financing
Dividend received: Investing

Question 33

Other notable comparisons

Answer 33

1. Comparative information
   - IFRS always requires comparable information, ASPE does not (if not meaningful)
   - IFRS has a day 1 vs now comparison
2. 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)
3. ESG & sustainability reporting
   - Public companies show greater concern for & interest in ESG reporting
   - Required by securities law to disclose non-financial information

Question 34

Benefits of IFRS

Answer 34

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