1. Chapter 1 The Canadian Financial Reporting Environment
Prepared by:
Patricia Zima, CA Mohawk College of Applied Arts and Technology

2. 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
Challenges Facing Financial Reporting
Globalization of companies and capital markets
Impact of technology
Changing nature of the economy
Increased requirement for accountability
GAAP
GAAP hierarchy
Professional judgement
Role of ethics

3. Characteristics of Accounting
Accounting identifies, measures, analyses, and communicates financial information to various users (decision makers)
Accounting has two broad classifications:
Financial accounting
Managerial accounting
Accounting theory and practice have evolved and will continue to evolve to meet changing demands and influences

4. Characteristics of Accounting
Identification, measurement, and communication of financial information about;
2. Economic entities to;
3. Interested persons.

5. Financial Reporting
Financial accounting provides historical information
Financial reporting is used by both internal and external users
External users include such decision makers as investors, creditors, unions, and government agencies
Managerial accounting provides both historical and forecast information
Managerial reporting information is used by management (internal users only)

6. Financial Statements and Other Means of Financial Reporting
Major financial statements include:
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Shareholders’ (Owners’) Equity
+ Note Disclosures

7. Financial Reporting Other forms of financial reporting include:
President’s letter
Prospectuses
Government reporting
News releases
Management forecasts

8. Flow of Information through the Financial Statements
Income Statement
Balance Sheet
Change in cash as reported displays the change in cash position
Reports Net Income
Ending balance reported
Statement of Equity
Statement of Cash Flows

9. Accounting and Capital Allocation
Financial reporting aids users in the allocation of scarce resources (capital)

10. Accounting and Capital Allocation
The accounting profession has the responsibility of measuring a company’s performance accurately, fairly, and on a timely basis
These measurements enable investors and creditors to compare the income and assets employed by companies
Investors can then assess the relative risks and returns associated with companies

11. Capital Allocation Process

12. Accounting and Capital Allocation
Financial
Reporting
aids
Users
(present and
potential)
Capital
Allocation
decisions
Financial
statements and
other forms of
financial
reporting
Users include:
investors,
creditors,
unions,
government
agencies, and
other
Involves
determining
how funds are
allocated among
competing
interests

13. Accounting and Capital Allocation
In Canada, the primary exchange mechanisms for allocating resources are:
Debt and equity markets (e.g. TSX)
Financial institutions (e.g. banks)

14. Sources of Capital

15. Accounting and Capital Allocation
An effective process of capital allocation is critical to a healthy economy
Unreliable information leads to poor capital allocation
Credit rating agencies use accounting to rate companies’ financial stability
This gives investors and creditors additional independent information

16. Stakeholders in Financial Reporting
Stakeholders: parties who have something at stake in the financial reporting environment
Key stakeholders include traditional users of financial information

17. Stakeholders in Financial Reporting
Broader definition of users is: anyone 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

18. Stakeholders in Financial Accounting
Investors and creditors rely on the financial statements to make decisions
Standard setters set Generally Accepted Accounting Principles (GAAP) for direction on accounting
GAAP is used to help reduce management bias and to ensure the information is useful to users

19. What is at Stake for Each Stakeholder
Investors & creditors
Management
Securities commissions and stock exchanges
What is at Stake?
Investment / loan
Job, bonus, reputation, salary increase, access to capital markets by company
Reputation, effective and efficient capital marketplace

20. What is at Stake for Each Stakeholder
Analysts & credit rating agencies
Auditors
Standard setters
What is at Stake?
Reputation and profits
Reputation and profits (companies are their clients)
Reputation

21. 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:
an entity’s economic resources, obligations and equity/net assets;
changes in an entity’s economic resources, obligations and equity/net assets; and
the economic performance of the entity.”

22. Objectives of Financial Reporting
Resource Allocation Decisions
Was income earned to generate future cash?
Yes
Able to meet obligations and pay a return on investment
Capital continues to be available
Assess Management Stewardship
Did management’s decisions on resource acquisition and allocation increase shareholder wealth?
Yes
Investor and creditor confidence continues

23. 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?

24. Understanding User Needs in the Financial Reporting Process
Management
Users
Use the reports to acquire capital
Use the reports for investment/lending decisions
Prepare the reports
Financial Statements
Aggressive financial reporting has a direct impact on the user’s decision-making process

25. 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 operations of the company
A single set of financial statements is prepared to meet the majority of the users’ needs
Standards are not rules, regulations, or laws
Standards are intended to be generally accepted and universally practised

26. The Standard Setting Process in Canada – Parties Involved
Canadian Institute of Chartered Accountants (CICA)
Accounting Standards Board (AcSB) of the CICA
Primarily responsible for setting GAAP in Canada
Two underlying premises for development of standards
Be responsive to the needs and viewpoints of the entire economic community
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

27. The Standard Setting Process in Canada — Parties Involved
Provincial Securities Commission (e.g. Ontario –
To oversee and monitor capital marketplace
Ensure strict adherence to securities law/legislation
Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission
Major standard setting body in the U.S.
International Accounting Standards Board (IASB)
Major international standard setting body

28. Generally Accepted Accounting Principles (GAAP)
The profession has developed GAAP, which aids in presenting fairly, clearly, and completely the financial operations of the enterprise
GAAP consists of authoritative pronouncements issued by certain accounting bodies
The CICA Handbook is the foremost source for GAAP

29. The GAAP Hierarchy Primary sources Other sources
Considered only after primary sources have been researched

30. GAAP Hierarchy–Primary Sources
Section 1100 of the Handbook (in order of authority)
Handbook Sections ( )
Accounting Guidelines
Background Information and Basis for Conclusions
EIC Abstracts
Illustrative Examples (of the above)
Implementation Guides

31. GAAP Hierarchy–Other Sources
Other sources include:
Pronouncements in other jurisdictions
Research studies
Accounting textbooks, journals, studies, and articles
Other
Must be consistent with primary sources and conceptual framework

32. Professional Judgement
There cannot be a rule for every situation
Rules vs. principles
Standards in Canada are based primarily on principles rather than specific rules
Therefore, must use professional judgement
The United States uses a rules-based approach

33. Sarbanes-Oxley Act (SOX)
The Sarbanes-Oxley Act (SOX) was enacted in 2002
Some of the legislation’s key provisions:
Public Company Accounting Oversight Board (PCAOB)
Independence rules
Bonus/profit forfeiture
CEO/CFO certification
Independent audit committees
Codes of ethics

34. Challenges Facing Accounting
Need for international harmonization of standards
Globalization
Technology
New economy
Accountability
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

35. COPYRIGHT
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