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

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