Prepared by: Gabriela H. Schneider, CMA Northern Alberta Institute of Technology
C H A P T E R
1 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 stakeholder and identify key stakeholders in financial reporting.
Learning Objectives 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. 8. Explain the need for accounting standards.
Learning Objectives 9. Identify the major entities that influence the standard-setting process and explain how they influence financial reporting. 10. Explain the meaning of Generally Accepted Accounting Principles (GAAP). 11. Explain the significance of professional judgement in applying GAAP. 12. Understand issues related to ethics and financial accounting. 13. Identify some of the challenges facing accounting.
The Canadian Financial Reporting Environment
Role of Financial Reporting Financial statements and financial reporting Accounting and capital allocation Stakeholders Objective of Financial Reporting Management bias Users needs Standard Setting Need to develop standards Parties involved in standard setting Standard setting in a political environment GAAP GAAP hierarchy Professional judgement Role of ethics Challenges Facing Financial Reporting Globalization of companies and capital markets Impact of technology Changing nature of economy Increased requirement for accountability
Characteristics of Accounting Accounting identifies, measures, analyses, and communicates financial information for various users (decision makers) Accounting has two broad classifications Financial accounting Managerial accounting
Financial Reporting Financial accounting reporting provides historical information Financial reporting is used by both internal and external users External users would include such decision makers as investors, creditors, unions and governmental agencies Managerial accounting provides both historical and forecast information Managerial reporting information is used by management (internal users only)
Financial Reporting Major financial statements include: Balance Sheet Income Statement Statement of Cash Flows Statement of Owners (or shareholders) Equity Note disclosures Presidents letter Prospectuses Government reporting News releases Management forecasts
Other forms of financial reporting include:
Flow of Information through the Financial Statements
Income Statement Reports Net Income
Balance Sheet Ending balance reported Change in cash as reported displays the change in cash position
Statement of Equity
Statement of Cash Flows
Accounting and the Efficient Use of Scarce Resources
Financial Reporting aids users in the allocation of scarce resources.
Accounting and the Efficient Use of Scarce Resources
Financial Reporting aids Users (present and potential) in Users include: investors, creditors, Unions, and government agencies Capital Allocation decisions Involves determining how funds are allocated among competing interests
Financial statements and other forms of financial reporting
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: investors, creditors, auditors, regulators, analysts, management, standard setters, and others
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 users in making their resource allocation decisions and/or assessing management stewardship. financial statements provide information about: 1. an entitys economic resources, obligations and equity/net assets; 2. changes in an entitys economic resources, obligations and equity/net assets; and 3. the economic performance of the entity
Objectives of Financial Resource Allocation Decisions Was income earned to generate future cash?
Reporting
Yes
Able to meet obligations and pay a return on investment Capital continues to be available
Assess Management Stewardship
Did managements decisions on resource acquisition and allocation increase shareholder wealth?
Yes
Investor and Creditor confidence continues
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 Motives include: to reflect positive management stewardship (job, compensation) 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 Process
Management Prepare the reports Use the reports to acquire capital
Users Use the reports for investment/lending decisions
Financial Statements Aggressive financial reporting has a direct impact on the users decision-making process
The Need to Develop 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 in a single set of financial statements to meet the 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 in Canada Parties Involved
Canadian Institute of Chartered Accountants (CICA) www .cica.ca Accounting Standards Board (AcSB) of the CICA Primarily responsible for setting GAAP Two underlying premises for development of standards 1. Be responsive to the needs and viewpoints of the entire economic community 2. Operate in full public view through due process
Ensures that companies listed on the exchange prepare their statements in accordance with GAAP Key objective to ensure framework for measurement and reporting facilitates the global flow of capital and serves the public interest
The Standard Setting Process in Canada Parties Involved
Provincial Securities Commission (e.g. Ontario www.osc.gov.on.ca) To oversee and monitor capital marketplace Ensure strict adherence to securities law/legislation Financial Accounting Standards Board (FASB) www.fasb.org and the U.S. Securities and Exchange Commission www.sec.gov Major standard setting body International Accounting Standards Board (IASB) www.iasb.org.uk
International Accounting Standards
The International Accounting Standards Board (IASB) was formed in 2001 The objective was to narrow divergence in international financial reporting Difficult task due to differing objectives, institutional structures, and national tendencies in various countries Strives towards a single, global method of accounting
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
The GAAP Hierarchy
Primary Sources Other Sources
Considered only after primary sources have been researched
GAAP HierarchyPrimary Sources
Section 1100 of the Handbook (in order of authority) 1. 2. 3. 4. 5. 6. Handbook Sections (1300-4460) Accounting Guidelines Background Information and Basis for Conclusion EIC Abstracts Illustrative Examples (of the above) Implementation Guides
GAAP HierarchyOther Sources
Other Sources include: 1. 2. 3. Pronouncements in other jurisdictions Research Studies Accounting textbooks, journals, studies, and articles 4. Other
Must be consistent with primary sources and conceptual framework
Professional Judgement There cannot be a rule for every situation Rules vs. principles
Ethics Reporting bias Ethical sensitivity Doing the right thing
Sarbanes-Oxley Act (SOX)
Public Company Accounting Oversight Board (PCAOB) Independence rules Bonus/profit forfeiture CEO/CFO certification Independent audit committees Codes of ethics
Canadian Response to SOX
Canadian Public Accounting Board (CPAB) Ontario Securities Commission rules CSA harmonized rules Amendments to Securities Act Other
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 economy Driven by more sophisticated and varied investors
The Impact of these Challenges
Globalization Global marketplace 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 or demand for readily accessible information increases Possible scenarios: Online real-time information Continuous reporting
Will annual financial statements fill the information need?
The Impact of these Challenges
New Economy Measuring and reporting value creating assets not currently being reported The challenge is to find an objective value and measure impact on future earnings
The Impact of these Challenges
Accountability An expectations gap exists between the publics perception of the professions accountability professions 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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