CHAPTER 1:
Conceptual
and Case
Analysis
Frameworks
for Financial
Reporting
© 2019 McGraw-Hill Education
Prepared by
Shannon Butler, CPA, CA
Carleton University
Learning Objectives
LO1
Describe and apply the conceptual framework for
financial reporting.
Describe how accounting standards in Canada are
tailored to different types of organizations.
LO2
LO3
Identify some of the differences between
IFRS and ASPE.
LO4
Analyze and interpret financial statements to
assess the impact of different accounting
methods on key financial statement ratios.
LO5
(Appendix 1A) Apply the case analysis framework
to solve accounting and reporting issues.
2
The Conceptual Framework
for Financial Reporting
 The Conceptual Framework for Financial reporting is a
document found just prior to IFRS in Part 1 of the CPA
Canada Handbook.
 Main items include:
•
•
•
•
The objective of general-purpose financial reporting
Qualitative characteristics of useful financial information
Underlying assumptions
Definition, recognition, and measurement of the
elements of financial statements
 All accounting practices should be traceable back to and
supported by the conceptual framework.
3
The Conceptual Framework
for Financial Reporting Part 2
 Professional judgement is the ability to make a decision in
situations in which the answer is not clear-cut.
 Lots of judgement is involved when preparing financial
statements.
 Judgment is involved when adopting accounting policies,
making estimates, and writing the notes to the financial
statements.
 Financial statements should present what really happened
during the period: that is, they should tell it how it is.
4
Accounting Standards in
Canada
 The CPA Canada Handbook contains five parts as
follows:
Part # Applicable To:
I
II
III
IV
Publicly accountable entities
Private enterprises
Not-for-profit organizations
Pension plans
V
All entities not yet using other parts
Name for
Standards
IFRS
ASPE
Pre-changeover
GAAP
5
GAAP for Publicly Accountable
Enterprises
 At one time, Canada intended to harmonize its standards
with those of the United States.
 Canadian publicly accountable enterprises have to report
under IFRS.
 Part I of the CPA Canada Handbook contains IFRS.
 IFRS allows the use of fair values and optional treatments
to a greater degree than pre-changeover Canadian GAAP
(Part V of the CPA Canada Handbook).
6
GAAP for Private Enterprises
 In the 1970s there was a lot of discussion in Canada
about Big GAAP versus Little GAAP, wondering if there
should be different standards for big companies and little
companies.
 Eventually the concept of Big GAAP/Little GAAP was
abandoned.
 There were a few other approaches over time but in 2006
when the decision was made to adopt IFRS there was a
task force in place to determine what private companies
should do.
7
GAAP for Private Enterprises
Part 2
 In 2009, it was decided that private companies would
have a separate part of the CPA Canada Handbook
dedicated solely for them.
 Part II of the CPA Canada Handbook contains GAAP for
private enterprises.
 Private enterprises can report under either IFRS or
ASPE.
8
IFRS versus ASPE
 ASPE sometimes allows a choice between different
reporting methods.
 Key differences between IFRSs and ASPE include:
• disclosure requirements
• impaired loans
• revaluation and depreciation of components of
property, plant and equipment
• impairment losses and subsequent reversal of loss
• development costs
9
IFRS versus ASPE Part 2
 Key differences between IFRSs and ASPE include,
continued:
• post-employment benefits
• Actuarial gains/losses
• Income taxes
• interest capitalization
• Compound financial instrument
• Preferred shares in tax planning arrangement
• Value of conversion option for convertible bonds
• Lease accounting by lessee
10
Analysis and Interpretation of
Financial Statements
 Financial statement analysis involves reviewing,
evaluating, and interpreting the company’s financial
statements.
 Common-sized financial statements make it easier to see
the relationship between financial statement items in
terms of percentages.
 When companies in the same industry use different
accounting policies, it may be necessary to adjust the
financial statements of one of the companies to make the
statements more comparable.
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Analysis and Interpretation of
Financial Statements Part 2
 Different accounting methods have different impacts on key
financial statement ratios.
 We will focus on the following key ratios:
Ratio
Current ratio
Debt-to-equity ratio
Return on assets
Return on equity
Formula
Current Assets ÷ Current Liabilities
Total debt ÷ Shareholders' equity
Income before interest & taxes ÷ Total assets
Net Income ÷ Shareholders' equity
What Is Measured
Liquidity
Solvency
Profitability of assets
Profitability of owners' investment
 When determining the impact on ratios of changes in
reporting methods, we must consider the impact on both
the numerator and the denominator.
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Appendix 1A: A Generic
Approach to Case Analysis
 Generic Framework for Case Analysis:
I
II
III
IV
V
VI
Determine Your Role and Requirements
Identify Users and Their Needs Given the Case
Environment
Identify and Rank Issues
Identify Viable Alternatives for Each Major Issue
Analyze Alternatives Using Criteria for Resolving
Communicate Practical Recommendations/Conclusions
13
I: Determine Your Role &
Requirements
 The first step is to determine who you are in the context
of the case.
 The key requirements are often found in the last two
paragraphs of the main body of the case.
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II: Identify Users and Their Needs
Given the Case Environment
 Define all the other characters in the case.
 The other characters will be seeking your expertise in
financial matters, consider their needs.
 When focusing your task on the user’s needs, always
consider the environment in which you both operate.
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III: Identify and Rank Issues
 Issues are usually ranked based on controversy, errors,
and complexity.
 Do not rank an issue as important only because you
know a lot about the subject.
 Rank items solely on their importance to the other
characters in the case.
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IV: Identify Viable Alternatives
for Each Major Issue
 Very few case issues will have one correct answer.
 You will need to create various possible solutions to
each case issue.
 The alternatives should be relevant and viable for the
client’s unique situation.
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V: Analyze Alternatives Using
Criteria for Resolving
 For each issue listed on your case plan, an analysis of
the previously identified alternative should be
performed.
 This may include quantitative and or qualitative forms
of analysis.
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VI: Communicate Practical
Recommendations to Users
 Your answer to the case should be in the form required by
the question.
 It should provide clear, practical recommendations based
on our analysis and should directly address the identified
user’s needs.
 Your solution should demonstrate the organizational skills
required of a professional person.
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A Framework for Solving an Accounting
and Financial Reporting Case
I: Determine Your Role and Requirements
II: Identify Users and Their Needs Given the Case
Environment
III: Identify and Rank Issues
IV: Identify Alternatives for Each Given Issue
V: Analyze Alternatives Using Criteria for Resolving
VI: Communicate Practical Recommendations/
Conclusions to Information Users
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