prepared by: gabriela h. schneider, cma; grant macewan college intermediate accounting intermediate...
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Prepared by:Gabriela H. Schneider, CMA; Grant MacEwan College
INTERMEDIATEINTERMEDIATEACCOUNTINGACCOUNTING
Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
C H A P T E R
11
The Canadian Financial
Reporting Environment
Learning Objectives
1. Describe the essential characteristics of accounting.
2. Identify the major financial statements and other means of financial reporting.
3. Explain how accounting assists in the efficient use of scarce resources.
4. Explain the meaning of stakeholders and identify the key stakeholders in financial reporting.
5. Identify the objective of financial reporting.
6. Explain the notion of management bias with respect to financial reporting.
7. Understand the importance of user needs in the financial reporting process.
Learning Objectives
8. Explain the need for accounting standards.
9. Identify the major entities that influence the standard-setting process and explain how they influence financial reporting.
10. Explain the meaning of GAAP.
11. Explain the significance of professional judgement in applying GAAP.
Learning Objectives
12. Understand issues related to ethics and financial accounting.
13. Identify some of the challenges facing accounting.
Learning Objectives
Financial Accounting and Accounting Standards
Role of Financial Reporting
Objectives of Financial Reporting
Standard Setting
GAAP Challenges Facing
Financial ReportingFinancial
statements and financial reporting
Management bias
Need to develop standards
GAAP Hierarchy
Accounting and capital allocation
Users needs Parties involved in standard setting
Professional judgement
Stakeholders
Standard setting in a political environment
Role of Ethics
Characteristics of Financial Accounting
• Accounting identifies, measures and communicates financial information
• This information is about economic entities
• Information is communicated to interested parties such as investors, creditors, unions and governmental agencies
Financial Reporting
• Preparation of financial reports are used by internal and external parties
• Contrasted with managerial accounting, it uses financial information used by management (internal users only)
• Financial reporting provides historical information
Financial Reporting
• Major financial statements include:– the balance sheet– the income statement– the statement of cash flows– the statement of owners’ (or shareholders’) equity
• Other forms of financial reporting include:– annual report– prospectuses– government reporting– news releases– management forecasts
Flow of Information through the Financial Statements
Income Statement
Statement of Equity
Balance Sheet
Statement of Cash Flows
Reports Net Income
Ending balance reported
Change in cash as reported displays the change in cash position
Accounting and the EfficientUse of Scarce Resources
Financial Reporting aids users in the allocation of scarce resources.
Accounting and the EfficientUse of Scarce Resources
FinancialReporting
aids
FinancialReporting
aids
Users(present andpotential) in
Users(present andpotential) in
CapitalAllocationdecisions
CapitalAllocationdecisions
FinancialStatements andother forms of
financialreporting
Users include:investors,creditors,
unions andgovt. agencies
Involvesdetermining
how funds areallocated among
competinginterests
Stakeholders in Financial Reporting
• Stakeholder: someone who prepares, relies on, reviews, audits or monitors financial information
• Includes both internal and external parties
• Key stakeholders include:– users of the financial information– both internal and external parties
Objectives of Financial Reporting
• The CICA Handbook, Section 1000, par. 15 outlines the overall objective as:
The objective … is to communicate information that is useful to … and other users in making their resource allocation decisions and/or assessing management stewardship. … financial statements provide information about:
1. an entity’s economic resources, obligations and equity/net assets;
2. changes in an entity’s economic resources, obligations and equity/net assets; and
3. the economic performance of the entity
Objectives of Financial Reporting
Was income earned to generate future cash?
YesAble to meet obligations and pay a return on investment
Did mgmt. decisions on resource acquisition and allocation increase shareholder wealth?
Yes Investor &
Creditor confidence continues
Resource Allocation Decisions
Assess Management Stewardship
Capital continues to be available
Management Bias
• Preparation of the financial statements are the responsibility of internal management
• May lead to preparing statements that report the enterprise in its best light– This is the underlying principle of management bias
• Motives include:– to reflect positive management stewardship– meet financial analysts’ expectations, resulting in a
positive reaction in the capital markets
• What safeguards are in place to protect financial users from management bias?
Understanding User Needs in the Financial Reporting
ProcessManagement
Users
Financial Statements
Prepare the reports
Use the reports for investment/lending decisions
Use the reports to acquire capital
Aggressive Financial Reporting has a direct impact on the users decision-making
process
The Need for Accounting Standards
• Standards are set to aid preparers and users of financial statements
• They allow the preparers of the financial statements to present fairly the enterprise operations
• Presented to the users a single set of financial statements to meet a majority of the user needs
• Standards are not rules, regulations, or laws• They are intended to be generally accepted
and universally practiced
The Standard Setting Process:
Parties Involved•Accounting Standards Board (AcSB) of the CICA
–Primary responsibility for setting GAAP
•Ensure that companies listed on the exchange prepare their statements in accordance with GAAP•U.S. standard setting body; SEC ensures compliance by listed companies
•Work toward eliminating international reporting standards
•Canadian Institute of Chartered Accountants (CICA)
•Provincial Securities Commission
•Financial Accounting Standards Board (FASB) and the Securities Exchange Commission•International Accounting Standards Committee (IASC)
International Accounting Standards
• The International Accounting Standards Committee (IASC) was formed in 1973
• The objective was to narrow divergence in international financial reporting
• There are many similarities between U.S. and International accounting standards
• The concern is that international standards may not be as rigorous as U.S. standards
Generally Accepted Accounting Principles
(GAAP)• The profession has developed GAAP, which
present fairly, clearly and completely the financial operations of the enterprise
• GAAP consist of authoritative pronouncements issued by certain accounting bodies
• CICA Handbook is the foremost source for GAAP
GAAP and Other Authoritative
Pronouncements• GAAP consist of FASB Standards and
Interpretations, APB Opinions and AICPA Accounting Research Bulletins
• However, there are other documents that are considered to provide authoritative support
• See next slide for a hierarchy of these pronouncements
The GAAP Hierarchy
Primary SourcePrimary SourceAccounting recommendations covered in the CICA Handbook
Secondary SourceSecondary SourcePrinciples generally accepted by a significant number of entities in CanadaPrinciples consistent with the CICA Handbook and are developed through professional judgement
Challenges Facing Accounting
•Globalization
•Technology
•New economy
•Accountability
A move to global markets and global investors
Ability to produce, and access, timely information
A move from the traditional ‘resource’ based to a ‘knowledge based’ economyDriven by more sophisticated and varied investors
The Impact of these Challenges
• Globalization– Global market place requires information to be
‘globally’ comparative– Global capital allocation: move from Canadian
stakeholders to global stakeholders
• Technology– As the ability to produce information increases, the
need/demand for readily accessible information increases
– Possible scenarios: Online real-time informationContinuous reporting
– Will annual financial statements fill the information need?
• New Economy– Measuring and reporting ‘value
creating assets’ not currently being reported
– The challenge is to find an objective value, and measure their impact on future earnings
The Impact of these Challenges
The Impact of these Challenges
• Accountability– An ‘expectations gap’ exists between the
• public’s perception of the profession’s accountability
• profession’s perception of its accountability to the public
– Shift from traditional financial reporting to business reporting• e.g. internal financial controls; regulatory
compliance– Balanced Scorecard model current move in this
direction
COPYRIGHT
Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / 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.
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