CHAPTER
1:
Conceptual
and Case
Analysis
Frameworks
for Financial
Reporting
© 2022 McGraw Hill Limited
Prepared by
Shannon Butler, CPA, C
Carleton University
Learning Objectives
LO1 Describe and apply the conceptual framework
for
financial reporting.
LO2 Describe how accounting standards in Canada
are tailored to different types of organizations.
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
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for Financial Reporting,
Part 1
 Financial statements should cater to the needs of
the users.
 The CPA Canada Handbook (Handbook):
 is an authoritative document in Canada because many
legal statutes require its use.
 provides the accounting and reporting requirements as
well as explanations and guidance for most
transactions and events encountered by an entity.
 When a transaction or event is not explicitly
addressed by the standards, an entity can look to
“The Conceptual Framework for Financial Reporting”.
This document is in the first section of the
Handbook.
3
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for Financial Reporting,
Part 2
 The purpose of the Conceptual Framework (SP1.1) is
to:
a) assist the International Accounting Standards Board
to develop IFRS® Standards that are based on
consistent concepts;
b) Assist preparers to develop consistent accounting
policies when no Standard applies to a particular
transaction or other event, or when a Standard
allows a choice of accounting policy; and
c) assist all parties to understand and interpret the
Standards.
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for Financial Reporting,
Part 3
 The Conceptual Framework is not a Standard in and
of itself. Nothing in the Conceptual Framework
overrides any Standard or any requirement in a
Standard.
 The Conceptual Framework has a primary emphasis
on properly recognizing assets and liabilities, which
will then determine the income, expenses and
equity.
 All accounting practices should be traceable to and
supported by the conceptual framework.
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for Financial Reporting,
Part 4
 The Conceptual Framework went through a major
review and was revised in 2018. It now contains eight
chapters:
Chapter 1:The objective of general purpose financial reporting
Chapter 2:Qualitative characteristics of useful financial
information
Chapter 3:Financial statements and the reporting entity
Chapter 4:The elements of financial statements
Chapter 5:Recognition and derecognition
Chapter 6:Measurement
Chapter 7:Presentation and disclosure
Chapter 8:Concepts of capital and capital maintenance
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for Financial Reporting,
Part 5
 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.
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Accounting Standards in
Canada
 The CPA Canada Handbook contains four parts as
follows:
Part
#
I
II
III
IV
Applicable To:
Publicly accountable entities
Private enterprises
Not-for-profit organizations
Pension plans
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Name for
Standards
IFRS
ASPE
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GAAP for Publicly
Accountable Enterprises
 At one time, Canada intended to harmonize its
standards with those of the United States.
 Most Canadian publicly accountable enterprises
have to report under IFRS.
 Part I of the CPA Canada Handbook now contains
standards that are the same as IFRS.
 Rather then always referring to Part I of the
Handbook, we now refer to it as IFRS.
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GAAP for Private
Enterprises, Part 1
 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.
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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.
 These standards are included in Part II of the
Handbook and are referred to as Accounting
Standards for Private Enterprises (ASPE).
 Private enterprises can adopt either IFRS (Part I)
or ASPE (Part II).
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IFRS versus ASPE, Part 1
 ASPE sometimes allows a choice between different
reporting methods.
 Key differences between IFRSs and ASPE include:
• disclosure requirements
• impaired loans receivable
• Qualitative characteristics
• revaluation and depreciation of components of
property, plant and equipment
• impairment losses and subsequent reversal of
loss
• development costs
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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
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GAAP for Not-for-Profit
Organizations
 The not-for-profit (NFP) sector was divided in two:
the government NFP sector and the
nongovernment NFP sector.
 The nongovernment NFPOs can report under
either IFRS or Part III of the CPA Canada
Handbook, combined with relevant sections from
Part II of the Handbook.
 Part III carries forward the 4400 series of sections
from the prechangeover Handbook, largely
without change.
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Organizations, Part 1
 All levels of government should follow the PSA
Handbook.
 Government business enterprises are expected to
follow IFRS.
 Other government organizations can follow either
IFRS or the PSA Handbook.
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Organizations, Part 2
Type of Organization
Standards Required or Allowed
Publicly accountable
organizations
IFRS (Part I)
Private enterprise
IFRS (Part I) or ASPE (Part II)
Nongovernmental NFPO
IFRS (Part I) or Standards for NFPOs
(Part III)
Governmental NFPO
PSA Handbook with or without 4200
series
Government business enterprise
IFRS (Part I)
Other government organization
IFRS (Part I) or PSA Handbook
Pension plan
Standards for Pension Plans (Part IV)
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of Financial Statements,
Part 1
 The main objective of financial reporting is to
provide information useful to the external users of
the financial statements.
 The quality of financial reporting is based on how
accurately the financial statements present the
actual situation of the reporting entity.
 When the quality of financial reporting is low, the
users of the financial statements are not being
told the truth about the entity’s financial situation.
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of Financial Statements,
Part 2
 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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of Financial Statements,
Part 3
 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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Case 1-3
 Follow Appendix 1A to analyze the case
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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
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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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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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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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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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