BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
CHAPTER 1 OUTLINE
A. Financial statements and financial reporting
1) Essential characteristics of accounting/ financial reporting/
elements of high quality accounting standards
2) Accounting and capital allocation – process and sources of capital
3) Public companies under IFRS (“PubCos”)
4) Canadian private companies under ASPE (“PrivCos”)
5) Stakeholders in financial reporting
6) Objective of financial reporting
7) Information symmetry and asymmetry
B. Standard setting
1) Need for common set of accounting standards and procedures
2) Four main parties involved in standard setting in Canada
3) Standard setting process under IFRS
4) User groups influential in setting accounting standards
5) How are standards enforced?
C. Generally accepted accounting principles (“GAAP”)
1) GAAP hierarchy – ASPE vs IFRS
2) Both hierarchies are similar
D. Challenges and opportunities for the accounting principles
1) Oversight in the Capital Marketplace
2) Centrality of Ethics
3) Other challenges and opportunities
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A. FINANCIAL STATEMENTS AND FINANCIAL REPORTING
A1) Essential Characteristics of Accounting, Financial Reporting and Elements Needed to Achieve Single Set of
High Quality Accounting Standards
Four Economic Entities:
Accounting
Financial Reporting
Recognizes,
Measures
and
Discloses
(communicates)
Financial Statements
financial information
about
economic
entities to interested
parties
Statement of:
 Financial Position (“SFP”)
 Comprehensive Income (“SCI”)
 Cash Flows (“SCF”)
 Changes in Equity (“SCE”)
Note disclosures
Prepared in accordance
with IFRS / ASPE
Additional Information
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Annual reports
President’s letter and MD&A
Reports to Securities
Commissions and Government
Prospectuses
News releases
Forward looking info. (forecasts)
Background on company/mgmt
, etc.
Not
necessarily covered
by IFRS / ASPE
Elements of High-Quality Accounting Standards
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Single set of high-quality accounting standards established by a single standard setting body
Consistency in application and interpretation
Common high-quality auditing standards and practices
Common approach to regulatory review and enforcement
Education and training of market participants
Common delivery systems
Common approach to corporate governance and legal frameworks around the western world
Interested Parties/
Stakeholders
3 Internal
5 External
BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A2)
Accounting and Capital Allocation – Process
 Pubic companies
o Securities (debt or equity or both) traded on public sto
exchange
o Must comply with securities commissions regulations
where stock traded
 Critical process for healthy economy
 Unreliable and irrelevant financial info leads to poor capital allocation
 Financial Analysts and Credit Rating Agencies use financial reports to compare Income
and Assets Employed by different companies to enable investors/ creditors to assess
relative risks and returns for proper decision-making.
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A2 Cont’d)
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Accounting and Capital Allocation – Sources of Capital
BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A3)
Public Companies Under IFRS (“PubCos”)
 Debt and equity securities traded on stock exchanges
 Must comply with strict reporting and filing requirements of
securities commissions’ regulators where stock traded
 Must be audited and follow IFRS
 Canadian company trading directly on US stock exchanges
and Canadian subsidiary of US parent must report in US$
o must reconcile to US GAAP in the notes until IFRS
adopted in US
o Either widely held or ‘control block’
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A4)
Canadian Private Companies Under ASPE (“PrivCos”)
 All shares owned privately and not subject to strict reporting and filing
requirements of PAEs
o New trend ‘To Go Private’ due to heavy burden of continuous
disclosure requirements for PubCos.
 Can raise debt or equity thru’ private placements with insiders (family &
friends) or sophisticated investors (Angels, Venture Capitalists) but can’t
re-sell to public
 Not registered with any securities commission so investors not protected by
full public disclosure
 Audit recommended for bankers and if ‘going-public’ is part of future plan
 Subject to limited number of ‘simplified’ accounting standards not available
to public companies
o Big vs Small GAAP = IFRS vs ASPE
o 2 HBs now since Jan 1, 2011.
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A5)

Stakeholders in Financial Reporting
Wide variety of stakeholders rely on general purpose financial statements for
decision-making
Stakeholders (Internal and External)
What’s at Stake?
1. Management and B of D
1. Job, salary increase, bonus, reputation,
capital market access for expansion
2. Employees/ Union
2. Job security, salary & wages, profit
sharing
3. Financial Analysts
4. Investors
3. & 4. Risk/reward decisions re. share
price and dividends
5. Securities Commissions and Stock
Exchanges (Regulatory Agencies)
5. Full and plain disclosure to maintain
efficient and effective capital mktplace
6. Creditors (bankers and suppliers) and
Credit Rating Agencies
6. Trends or significant changes as
background for Loans/AP
7. Auditors
7. Shareholder reporting to keep
management accountable
8. Standard setters
8. Effectiveness of new pronouncements
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A6)
Objective of Financial Reporting
 Overall objective is to provide decision-useful information:
investors, creditors and other users in making resource
allocation decisions
 Generally, while recognizing different needs and levels of knowledge,
FS provide information about:
(i) Entity’s economic resources and claims to those resources
(SFP)
(ii) Changes in those resources and claims (SCF and SCE)
(iii) Entity’s economic performance (SCI)
 Specifically, FS allow investors to assess:
o Companies ability to generate net cash flows
o Management’s ability to protect and enhance capital investments
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
A7)
Information Symmetry vs Asymmetry
 Information symmetry: ideally, all stakeholders have equal access to all
relevant information
 Information asymmetry (lack of equal access to info) : reality is management
has access to more information than all other stakeholders!
o So share prices don’t always reflect most current information about the
company
 Knowing that information asymmetry exists creates two potential problems:
i)
Capital markets may attract the wrong kinds of companies
(called _________________________)
ii)
Management may act in their own self-interest at the expense of
others in preparation of company’s FS
(called ________________________)
o Evaluation of own performance by overstating income/assets and
understating expenses/liabilities
o Compensation structures
o Access to capital markets and meeting analyst expectations
o Meeting contractual obligations
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
B. STANDARD SETTING
B1)
Need for Common Set of Accounting Standards and
Procedures
 Helps reduce
reporting
information
asymmetry
problems
in
financial
 Transactions and events recognized, measured and disclosed in a
specific way
 Recommendations are Principles-Based….not rules, regulations or
laws, like US GAAP at present
 Intended to be generally accepted and universally practiced over
time………“Generally Accepted Accounting Principles”
 Have legal status
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
B2) Four Main Parties Involved in Standard Setting in Canada
i)
_________________________________________________
 Primarily responsible for setting GAAP standards for Private Companies (ASPE),
NFPs and pension plan
 Two underlying premises for development of standards
o Be responsive to needs and viewpoints of entire economic community
o Operate in full public view thru’ due process
 The CBCA leaves development of standards with the accounting profession
ii)
________________________________________________
 Major international standard setting body responsible for IFRS
 Mission “to bring transparency, accountability and efficiency to financial markets
around the world by developing IFRS standards. Our work serves the public
interest by fostering trust growth and long term financial stability in the global
economy”
 All public companies in Canada must use IFRS and Private companies have the
option
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
iii) Financial Accounting Standards Board (“FASB”) and the Securities
and Exchange Commission (“SEC”) in the US
 FASB is the major standard setting body for US GAAP but SEC has
final authority..….more specific guidelines, rules-based.
 FASB and IASB committed to converging US and International
Standards
iv) Provincial Securities Commissions in Canada, eg. BCSC, ASC, OSC
 Oversee and monitor capital market places in their respective
provinces to ensure fair presentation of companies financial
position, eg. TSX-V
 Ensure strict adherence to securities law and legislation
 OSC is home to TSX where most large companies are registered in
Canada
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
B3)
Standard Setting Process Under IFRS
 Evolution of a new
Reporting Standard’
i)
or
revised
‘International
Financial
Agenda consultation with public during 3 – 5 year plan
ii) Research programme including discussion papers, public
comments and agenda proposals
iii) Standards development including exposure draft and public
comments leading to final IFRS standard
iv) Implementation including narrow-scope amendments during
public comment process and post-implementation review
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
B4)
USER GROUPS INFLUENTIAL IN SETTING ACCOUNTING STANDARDS
Business
entities
(management)
Public accounting firms
Financial community
(analysts, bankers, etc.)
Professional organizations
(AcSB of CPA Canada)
Academics (CAAA)
Government
Canada Customs and Revenue
Securities commissions
Non-Canadian
standard setters
(IASB, FASB)
Stock exchanges
Investing public
Industry associations
AcSB
CPA Canada Handbook
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
B5) How Are Standards Enforced
1. CPA Canada HB has legal status, outside the Gov’t, with violations
subject to court proceedings.
2. External Audit Report
3. Professional Code of Ethics
4. Securities Exchange Commissions
5. Banks’ reporting requirements to maintain credit limits
6. General acceptance
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
C) GENERALLY ACCEPTED ACOUNTING PRINCIPLES (“GAAP”)
C1)
GAAP Hierarchy – ASPE vs IFRS
 Under ASPE, GAAP includes:
o Primary sources
 CPA Canada HB Sections 1400 to 3870 since Jan 1, 2011
 Accounting guidelines
o Other sources in descending order of importance
 Background documents and implementation guidance issued
by AcSB
 Pronouncements in other jurisdictions
 Research studies, accounting textbooks, journals, etc.
 Must be consistent with primary sources and in accordance
with the conceptual framework
ie. CPA Canada HB Section 1000
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
 Under IFRS, GAAP consists of:
o Primary sources
 IFRS – Principles-based
 International Accounting Standards (“IAS”)
 Interpretations
by
International
Financial
Reporting
Interpretations Committee (“IFRIC”) and Standard Industrial
Classifications (“SIC”)
o Other sources
 Pronouncements of other standard-setting bodies (FASB, SEC)
 Other accounting literature, eg. accounting textbooks
 Accepted industry practices
C2 – Both Hierarchies are Similar
o Grounded in ‘Conceptual Framework’ (Ch 2)
o Provide guidance on “What’s GAAP”; rank sources; establish value
o Canada is Principles-based using Professional Judgement; whereas
US is currently Rules-based…..can be problematic since not a rule
for every situation!
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
D. CHALLENGES AND OPPORTUNITIES FOR THE ACCOUNTING
PRINCIPLES
D1)
Oversight in the Capital Marketplace
 Following the Enron scandal in 2002, US Congress enacted the
Sarbanes-Oxley Act (“SOX”) to include the following:
o Public Company Accounting Oversight Board (”PCAOB”)
o CEO/CFO certification…..quarterly
o Annual management report on effectiveness of internal controls
over financial reporting
o Independent and expert audit committees
o Audit independence rules and materiality guidelines for financial
reporting
o Forfeiture of CEO/CFO bonus/profit if accounting restatements
arise due to material non-compliance
o Codes of ethics
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
D1)
Oversight in the Capital Marketplace (cont’d)
 Canadian response to SOX includes:
o Canadian Public Accountability Board (“CPAB”)
o Additional rules issued by Canadian Securities Administrators
(“CSA”)
 Management responsibility for fairness of FS via CEO/CFO
Certificates
 Independent audit committees
 Increased disclosures, eg. rating agency ratings, payments
to stock promoters, previous involvement of Directors with
bankrupt companies, etc.
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
D2)
Centrality of Ethics
 Ethical dilemmas are common in accounting and other business
areas, eg. moral hazard (pg 9), Nortel, Enron, Sino Forest, SNC
Lavelin
 Management bias sometimes leads to emphasis on short-term
results putting Professional Accountants in a conflicted
environment
 Ethical sensitivities and alternative choices complicated due to
work pressures. Not always easy to do the right thing or make the
right decision
 Ethical decisions often go beyond GAAP or professional rules
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
D3) Other Challenges and Opportunities
i)
Standard setting in a political environment
o Political action by special interest groups can have a significant
impact…some for some against
ii) Principles vs Rules
o Principles-based standards more dependent on Professional
Judgement but must ensure:
 Cohesive set of principles and conceptual framework
 Flexibility for use in different business situations and
industries
 Detailed enough for good guidance without being unwieldy
o Rules-based Canadian Tax System usually interpreted literally
leading to ‘loop holes’
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BCIT - Intermediate Accounting (Kieso 12e) – THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
D3) Other Challenges and Opportunities (cont’d)
iii)
Impact of technology on traditional financial reporting
o Easy access to significant amount of timely company information:
 More detail disclosed; access to larger group of users; disclosure targeted to
specific users
o New ways of communicating financial information
 Extensive Business Reporting Language (“XBRL”) as global standard for
electronic reporting of business and financial information
 Allows tagging of FS items to determine specific GAAP item used making for
easier analysis by users
iv)
Integrated reporting under development
o Extend normal corporate reporting beyond just financial to include broader
business (ie. non-financial) information
o International Integrated Reporting Council (“IIRC”) established August 2010 to
determine what non-financial information should be reported periodically regarding
value creation over time and how best to do it. Reporting should include:
Strategic vision
Governance, performance and prospects
Environmental sustainability
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