ppt01.pptx

Intermediate Accounting, Eighth Canadian Edition

TENTH CANADIAN EDITIONINTERMEDIATE ACCOUNTINGPrepared by:Dragan Stojanovic, CARotman School of Management, University of TorontoCHAPTER 1The Canadian Financial Reporting EnvironmentKieso Weygandt Warfield Young Wiecek McConomy11After studying this chapter, you should be able to:Explain how accounting makes it possible to use scarce resources more efficiently.Explain the meaning of stakeholder and identify key stakeholders in financial reporting, explaining what is at stake for each one.Identify the objective of financial reporting.Explain how information asymmetry and bias interfere with the objective of financial reporting.Explain the need for accounting standards.Identify the major entities that influence the standard-setting process and explain how they influence financial reporting.Explain the meaning of generally accepted accounting principles (GAAP).Explain the significance of professional judgement in applying GAAP.Discuss some of the challenges and opportunities for accounting.The Canadian Financial Reporting Environment2CHAPTER Copyright John Wiley & Sons Canada, Ltd.2The Canadian Financial Reporting EnvironmentFinancial Statements and Financial ReportingAccounting and capital allocationStakeholdersObjective of financial reportingInformation asymmetryStandard Setting Need for standards Parties involved in standard settingGAAP GAAP hierarchy Professional judgementChallenges and Opportunities for the Accounting ProfessionOversight in the capital marketplaceCentrality of ethicsStandard setting in a political environmentPrinciples versus rulesImpact of technologyIntegrated reporting#Copyright John Wiley & Sons Canada, Ltd.3Characteristics of AccountingAccounting identifies, measures, and communicates financial information to various users (decision makers)Accounting has two broad classifications:Financial accountingManagerial accountingAccounting theory and practice have evolved and will continue to evolve to meet changing demands and influences#Copyright John Wiley & Sons Canada, Ltd.4LO1 Characteristics of AccountingIdentification, measurement, and communication of financial information about;Economic entities to;Interested persons.5#Copyright John Wiley & Sons Canada, Ltd.5L01Financial ReportingFinancial accounting results in preparation of financial reports about business activitiesFinancial reporting is used by both internal and external usersExternal users include such decision makers as investors, creditors, unions, and government agenciesManagerial accounting is used by management (internal users only)#Copyright John Wiley & Sons Canada, Ltd.6L01

Financial Statements and Other Means of Financial ReportingMajor financial statements include:Balance SheetIncome StatementCash Flow StatementStatement of Retained Earnings+Note Disclosures

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Financial ReportingOther forms of financial reporting include:Presidents letterProspectusesGovernment reportingNews releasesManagement forecasts#Copyright John Wiley & Sons Canada, Ltd.8L01

Accounting and Capital AllocationFinancial reporting aids users in the allocation of scarce resources (capital)


Accounting and Capital AllocationThe accounting profession has the responsibility of measuring a companys performance accurately, fairly, and on a timely basisThese measurements enable investors and creditors to compare the income and assets employed by companiesInvestors can then assess the relative risks and returns associated with companies#Copyright John Wiley & Sons Canada, Ltd.10Capital Allocation Process


Accounting and Capital AllocationIn Canada, the primary exchange mechanisms for allocating resources are:Debt and equity markets (e.g. TSX)Financial institutions (e.g. banks)#Copyright John Wiley & Sons Canada, Ltd.12L01

Sources of Capital


Accounting and Capital AllocationAn effective process of capital allocation is critical to a healthy economyUnreliable and irrelevant information leads to poor capital allocationCredit rating agencies use accounting to rate companies financial stabilityThis gives investors and creditors additional independent information


Stakeholders in Financial ReportingStakeholders: parties who have something at risk (stake) in the financial reporting environmentKey stakeholders include traditional users of financial information#Copyright John Wiley & Sons Canada, Ltd.15L02Stakeholders in Financial ReportingBroader definition of users is: anyone who prepares, relies on, reviews, audits, or monitors financial informationIncludes both internal and external partiesKey stakeholders include:investors, creditors, auditors, employees, regulators, analysts, management, standard setters, and others#Copyright John Wiley & Sons Canada, Ltd.16L02

Stakeholders in Financial AccountingInvestors and creditors rely on the financial statements to make decisionsStandard setters set Generally Accepted Accounting Principles (GAAP) for direction on accounting#Copyright John Wiley & Sons Canada, Ltd.17L02

What is at Stake for Each StakeholderStakeholderWhat is at Stake?Investors & creditorsInvestment / loan

ManagementJob, bonus, reputation, salary increase, access to capital markets by company

Securities commissions and stock exchangesReputation, effective and efficient capital marketplace#Copyright John Wiley & Sons Canada, Ltd.18L02

What is at Stake for Each StakeholderStakeholderWhat is at Stake?Analysts & credit rating agencies

Reputation and profits

AuditorsReputation and profits (companies are their clients)

Standard settersReputation#Copyright John Wiley & Sons Canada, Ltd.19L02

Objective of Financial ReportingThe overall objective of financial reporting is to provide information that is decision-useful.Financial statements should provide information about:the entitys economic resources and claims to those resources, and 2. changes in those resources and claimsResource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value)General-purpose financial statements are prepared for a wide variety of stakeholders#Copyright John Wiley & Sons Canada, Ltd.20L03Information AsymmetryIdeally, all stakeholders should have equal access to all relevant information (i.e. information symmetry) Managers have access to more information than other stakeholders (i.e. information asymmetry)Some reasons for information asymmetryCapital markets are not fully efficientHuman behaviour sometimes motivated by maximizing self-interest at the cost of others

#Copyright John Wiley & Sons Canada, Ltd.21L04Information Asymmetry ProblemsTwo types of information asymmetry problems: Adverse selection: knowing that there is an information asymmetry, capital markets may attract wrong kinds of companies Moral Hazard: knowing that there is information asymmetry, individuals may act in their own best interest at the expense of others (e.g. management bias)Some of the possible motivations for management bias include the following: Evaluation of management performanceCompensation structuresAccess to capital markets and meeting analyst expectationsMeeting contractual obligations


The Need to Develop StandardsAccounting standards help reduce information asymmetry problems in financial reportingStandards are not rules, regulations, or lawsStandards are intended to be generally accepted and universally practised#Copyright John Wiley & Sons Canada, Ltd.23L05The Standard Setting Process in Canada Parties InvolvedCanadian Accounting Standards Board (AcSB)Primarily responsible for setting GAAP for Canadian private enterprises (ASPE), not-for-profit entities, and pension plansTwo underlying premises for development of standardsBe responsive to the needs and viewpoints of the entire economic communityOperate in full public view through due process#Copyright John Wiley & Sons Canada, Ltd.24L06

25The Standard Setting Process in Canada Parties InvolvedInternational Accounting Standards Board (IASB)Major international standard setting bodyMission to develop, in the public interest, a single set of high quality, understandable and international reporting standards (IFRSs) for general purpose financial statementsIFRS must be used by public companies in CanadaPrivate enterprises have an option of using IFRS25L06

The Standard Setting Process in Canada Parties InvolvedFinancial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC)FASB is the major standard setting body in the U.S. SEC has the final authority over accounting standards in the U.SProvincial Securities Commission(e.g. Ontario Securities Commission)To oversee and monitor capital marketplaceEnsure strict adherence to securities law/legislation


Generally Accepted Accounting Principles (GAAP)Under ASPE, GAAP consists of :Primary sourcesCICA Handbook Sections 1400 to 3870Accounting guidelinesOther sourcesBackground documents and implementation guidance issued by AcSB Pronouncements in other jurisdictionsResearch studies, accounting textbooks, journals, etc.Must be consistent with primary sources and in accordance with the conceptual framework (i.e. CICA Handbook Section 1000)

#Copyright John Wiley & Sons Canada, Ltd.27L07Generally Accepted Accounting Principles (GAAP)Under IFRS, GAAP includes:IFRSInternational Accounting Standards (IAS)Interpretations (IFRIC or SIC)If above sources do not specifically apply, other sources may be considered:Pronouncements of other standard-setting bodiesOther accounting literatureAccepted industry practices


Professional JudgementThere cannot be a rule for every situationStandards in Canada are based primarily on principles rather than specific rulesTherefore, must use professional judgement The United States currently uses a rules-based approach

#Copyright John Wiley & Sons Canada, Ltd.29L08Sarbanes-Oxley Act (SOX)The Sarbanes-Oxley Act (SOX) was enacted in 2002 (in the United States)Some of the legislations key provisions:Public Company Accounting Oversight Board (PCAOB)Independence rulesBonus/profit forfeitureCEO/CFO certificationManagement report on effectiveness of internal controls over financial reportingIndependent audit committeesCodes of ethics#Copyright John Wiley & Sons Canada, Ltd.30L09

Canadian ResponseThe Canadian Public Accountability Board (CPAB)Additional rules issued by Canadian Securities Administrators (CSA) including:Management responsibility for appropriateness and fairness of financial statementsIndependent audit committeesIncreased disclosures#Copyright John Wiley & Sons Canada, Ltd.31L09

Centrality of EthicsEthical dilemmas are common in accounting and other areas of businessIt is not always easy to do the right thing or make the right decision Ethical decisions often go beyond applying GAAP or rules of the profession


Challenges and Opportunities for the Accounting ProfessionStandard setting in a political environmentPolitical action can have a significant impact on accounting standardsPrinciples versus rulesPrinciple-based standards (like ASPE and IFRS) are more dependent on professional judgment


Challenges and Opportunities for the Accounting ProfessionImpact of technologyIncreased ability to produce and access timely informationNew ways of communicating financial information (e.g. XBRL)Integrated reportingReporting to extend beyond financial information and include broader business reporting (e.g. governance and compensation, as well as sustainability reporting)


COPYRIGHTCopyright 2013 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.

#Copyright John Wiley & Sons Canada, Ltd.

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