1. Prepared by: Gabriela H. Schneider, CMA Northern Alberta Institute of Technology INTERMEDIATE ACCOUNTING Seventh Canadian Edition KIESO, WEYGANDT, WARFIELD, YOUNG, WIECEK

2. C H A P T E R 1 The Canadian Financial Reporting Environment Reporting Environment The Canadian Financial Reporting Environment Reporting Environment

3. 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

4. 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

5. 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. Learning Objectives

6. 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

7. Accounting identifies, measures, analyses, and communicates financial information for various users (decision makers)Accounting identifies, measures, analyses, and communicates financial information for various users (decision makers) Accounting has two broad classificationsAccounting has two broad classifications –Financial accounting –Managerial accounting Characteristics of Accounting

8. Financial Reporting Financial accounting reporting provides historical informationFinancial accounting reporting provides historical information Financial reporting is used by both internal and external usersFinancial reporting is used by both internal and external users External users would include such decision makers as investors, creditors, unions and governmental agenciesExternal users would include such decision makers as investors, creditors, unions and governmental agencies Managerial accounting provides both historical and forecast informationManagerial accounting provides both historical and forecast information Managerial reporting information is used by management (internal users only)Managerial reporting information is used by management (internal users only)

9. Financial Reporting Major financial statements include:Major financial statements include: –Balance Sheet –Income Statement –Statement of Cash Flows –Statement of Owners’ (or shareholders’) Equity –Note disclosures Other forms of financial reporting include:Other forms of financial reporting include: –President’s letter –Prospectuses –Government reporting –News releases –Management forecasts

10. 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

11. Financial Reporting aids users in the allocation of scarce resources. Accounting and the Efficient Use of Scarce Resources

12. FinancialReportingaidsUsers (present and potential) in CapitalAllocationdecisions Financial statements and other forms of financialreporting Users include: investors,creditors, Unions, and governmentagencies Involvesdetermining how funds are allocated among competinginterests Accounting and the Efficient Use of Scarce Resources

13. Stakeholders in Financial Reporting Stakeholder: someone who prepares, relies on, reviews, audits or monitors financial informationStakeholder: someone who prepares, relies on, reviews, audits or monitors financial information Includes both internal and external partiesIncludes both internal and external parties Key stakeholders include:Key stakeholders include: –investors, creditors, auditors, regulators, analysts, management, standard setters, and others

14. The CICA Handbook, Section 1000, par. 15 outlines the overall objective as: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 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

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

16. Management Bias Preparation of the financial statements are the responsibility of internal managementPreparation of the financial statements are the responsibility of internal management May lead to preparing statements that report the enterprise in its best lightMay lead to preparing statements that report the enterprise in its best light Motives include: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?What safeguards are in place to protect financial users from management bias?

17. Understanding User Needs in the Financial Reporting Process ManagementUsers 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 user’s decision-making process

18. The Need to Develop Standards Standards are set to aid preparers and users of financial statementsStandards are set to aid preparers and users of financial statements They allow the preparers of the financial statements to present fairly the enterprise operationsThey 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 needsPresented to the users in a single set of financial statements to meet the majority of the user needs Standards are not rules, regulations, or lawsStandards are not rules, regulations, or laws They are intended to be generally accepted and universally practicedThey are intended to be generally accepted and universally practiced

19. The Standard Setting Process in Canada — Parties Involved Canadian Institute of Chartered Accountants (CICA) www.cica.ca www.cica.ca www.cica.ca –Accounting Standards Board (AcSB) of the CICA Primarily responsible for setting GAAPPrimarily responsible for setting GAAP Two underlying premises for development of standardsTwo 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

20. The Standard Setting Process in Canada — Parties Involved Provincial Securities Commission (e.g. Ontario – www.osc.gov.on.ca)Provincial Securities Commission (e.g. Ontario – www.osc.gov.on.ca)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.govFinancial Accounting Standards Board (FASB) www.fasb.org and the U.S. Securities and Exchange Commission www.sec.gov www.fasb.orgwww.sec.gov www.fasb.orgwww.sec.gov –Major standard setting body International Accounting Standards Board (IASB) www.iasb.org.ukInternational Accounting Standards Board (IASB) www.iasb.org.uk www.iasb.org.uk

21. International Accounting Standards The International Accounting Standards Board (IASB) was formed in 2001The International Accounting Standards Board (IASB) was formed in 2001 The objective was to narrow divergence in international financial reportingThe objective was to narrow divergence in international financial reporting Difficult task due to differing objectives, institutional structures, and national tendencies in various countriesDifficult task due to differing objectives, institutional structures, and national tendencies in various countries Strives towards a single, global method of accountingStrives towards a single, global method of accounting

22. Generally Accepted Accounting Principles (GAAP) The profession has developed GAAP, which present fairly, clearly, and completely the financial operations of the enterpriseThe 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 bodiesGAAP consist of authoritative pronouncements issued by certain accounting bodies CICA Handbook is the foremost source for GAAPCICA Handbook is the foremost source for GAAP

23. The GAAP Hierarchy Primary Sources Primary Sources O ther Sources O ther Sources Considered only after primary sources have been researched

24. GAAP Hierarchy–Primary Sources Section 1100 of the Handbook (in order of authority)Section 1100 of the Handbook (in order of authority) 1.Handbook Sections (1300-4460) 2.Accounting Guidelines 3.Background Information and Basis for Conclusion 4.EIC Abstracts 5.Illustrative Examples (of the above) 6.Implementation Guides

25. GAAP Hierarchy–Other Sources Other Sources include:Other Sources include: 1.Pronouncements in other jurisdictions 2.Research Studies 3.Accounting textbooks, journals, studies, and articles 4.Other Must be consistent with primary sources and conceptual framework

26. Professional Judgement There cannot be a rule for every situationThere cannot be a rule for every situation Rules vs. principlesRules vs. principles

27. Ethics Reporting biasReporting bias Ethical sensitivityEthical sensitivity Doing the right thingDoing the right thing

28. Sarbanes-Oxley Act (SOX) Public Company Accounting Oversight Board (PCAOB)Public Company Accounting Oversight Board (PCAOB) Independence rulesIndependence rules Bonus/profit forfeitureBonus/profit forfeiture CEO/CFO certificationCEO/CFO certification Independent audit committeesIndependent audit committees Codes of ethicsCodes of ethics

29. Canadian Response to SOX Canadian Public Accounting Board (CPAB)Canadian Public Accounting Board (CPAB) Ontario Securities Commission rulesOntario Securities Commission rules CSA harmonized rulesCSA harmonized rules Amendments to Securities ActAmendments to Securities Act OtherOther

30. Challenges Facing Accounting GlobalizationGlobalization TechnologyTechnology New economyNew economy AccountabilityAccountability 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

31. The Impact of these Challenges GlobalizationGlobalization –Global marketplace requires information to be ‘globally’ comparative –Global capital allocation: move from Canadian stakeholders to global stakeholders TechnologyTechnology –As the ability to produce information increases, the need or demand for readily accessible information increases –Possible scenarios: Online real-time informationOnline real-time information Continuous reportingContinuous reporting –Will annual financial statements fill the information need?

32. New EconomyNew 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

33. AccountabilityAccountability –An ‘expectations gap’ exists between the public’s perception of the profession’s accountabilitypublic’s perception of the profession’s accountability profession’s perception of its accountability to the publicprofession’s perception of its accountability to the public –Shift from traditional financial reporting to business reporting e.g. internal financial controls; regulatory compliancee.g. internal financial controls; regulatory compliance –Balanced Scorecard model current move in this direction

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