FA4 Class notes
Barbara Wyntjes, B.Sc., CGA
Module 1: Canadian and International Accounting Environments
Part 1: General Introduction - no notes
Part 2:
Users objectives of financial reporting:
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Section 1000 identifies the primary users of financial statements: investors and
creditors of profit-oriented businesses and members, contributors and creditors of
non-profit oriented businesses
Users typically use financial statements to:
: Make decisions for resource allocation – need to predict the entity’s ability
to earn income, generate a return on investment and generate cash flows to
meet future obligations
: Assess management’s stewardship of assets (how has management cared for
and maintained the assets) and evaluate management performance (has
management met the investors’ objectives).
: Assess compliance with legal and other business contracts (ex: debt
covenants)
Financial statements are the primary source of information to the users and thus
they should be prepared to satisfy these users’ needs.
Preparers objectives of financial reporting:
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Preparer objectives may include choosing accounting policies to:
: Optimize income - present the amount of income desired by users by
smoothing (reliable and stable income), minimizing (rate-regulated
companies), or maximizing reported income (motivated by user’s objectives
of stewardship & performance evaluations)
: Income tax planning: Legitimately defer the payment of income tax as long
as possible
: Comply with contracts and disclosure requirements
Ranking of objectives differ (private vs. public firms)
When determining which accounting policies to use for financial statement
presentation, preparers must consider the objectives of the users in addition to
their own objectives.
Often users and preparers have conflicting objectives and motivations, which may
result in preparers inappropriately bias the financial statements to conform to
what the users want to see rather than representing what has actually happened.
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FA4 Class notes
Barbara Wyntjes, B.Sc., CGA
Part 3:
What constitutes GAAP in Canada?
• GAAP consists of the basic accounting concepts, specific rules (not strict rules),
and broad principles and conventions that are generally accepted and practised,
when applicable, by most preparers of financial statements.
• Section 1000 CICA Handbook contains the objectives of financial reporting and
the financial statement concepts
• The CICA Handbook is the primary source of GAAP. It is a collection of
recommendations issued by AcSB, focuses on professional judgment to determine
the most reasonable or fair presentation and is authoritative since various legal
statutes recognize it.
When compliance with GAAP is required?
• Compliance with GAAP is required for an unqualified audit opinion.
• Financial statements are meant to satisfy the needs of external users, thus the
users’ needs determine when GAAP should be followed and which choice is
made among alternatives within GAAP.
• GAAP is usually followed for general purpose statements because GAAP is
usually expected and desired by users.
• The majority of corporations are required by the Canada Business Corporations
Act and most provincial corporation acts to submit to the government annual
financial statements that comply with GAAP (the CICA Handbook). Also, the
corporation acts require companies to annually submit audited financial
statements to their shareholders. Companies will want an unqualified opinion.
• Publicly traded companies are required to submit financial statements that comply
with GAAP to the securities commission.
Sources of GAAP:
• To ensure GAAP is applied correctly, the Board has established a two-level
structure of sources of GAAP with the ‘primary sources’ being the most important
and is hierarchical. Whereas the ‘other sources’ have less authority and is not
hierarchical.
• Primary sources of GAAP include CICA Handbook, which is the most important
source of GAAP, accounting guidelines, and the EIC abstracts, etc (Review
Exhibit 1.3-1 in module notes).
• This hierarchy will aid professionals in identifying and applying the most relevant
GAAP to each situation.
• ‘Other sources’ of GAAP include standards published by U.S. FASB and
International Accounting Standards Board, approved drafts of primary sources of
GAAP, research studies, etc.
• Industry association guidelines are not considered GAAP and thus do not have
AcSB authorization.
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FA4 Class notes
Barbara Wyntjes, B.Sc., CGA
Differential Reporting:
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Effective for fiscal years beginning on or after January 1, 2002, the Board
approved section 1300, which allows “qualifying enterprises” to report using the
alternative disclosure provisions of specified CICA Handbook sections.
Since these alternatives are specified in CICA Handbook, Differential reporting is
GAAP.
A “qualified enterprise” is defined as a non-publicly accountable enterprise whose
owners unanimously give their consent to apply an approved alternative
disclosure option (Section 1300).
Differential reporting allows “qualified” entities to report specified topics
differently from the “normal” GAAP on the basis of a cost/benefit analysis. Note
there are only a few CICA Handbook sections that permit differential reporting
treatment of which many relates to this course (Sections 3465, 3860, 1590, 3050,
3055, 3062 and 3240).
Part 4:
Various Financial Statement Concepts:
• Section 1000 of the CICA Handbook contains the basic accounting concepts and
principles in which all accounting practices should be based on.
• Financial Statements provide readers with information about a firm’s economic
performance, resources, obligations and equity.
• The main concepts are: The elements of financial statements and the definitions of
assets, liabilities, equity, revenues and expenses, gains and
losses
: Financial statements are subject to the Constraints of cost
versus benefit and materiality
: Qualitative characteristics of financial statements make
information useful to users if it is understandable, relevant
(timely, predictive of future events and feedback on past
events), reliable, and comparable.
: Recognition criteria, the basis of measurement, and
disclosure principles
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FA4 Class notes
Barbara Wyntjes, B.Sc., CGA
Professional judgment and its application:
• Accountants use professional judgment to determine if the CICA Handbook is
applicable given the objectives of the users and preparers and industry practices.
If the Handbook is applicable, accountants must choose among the different
alternatives and interpret the wording of the Handbook (ex: significant, material).
• Ordinary judgment involves evaluations based on one’s perception, knowledge,
cultural training, socialization, and past experiences and thus is unique to each
person and varies over time.
• Professional judgment is derived from being exposed to common
training/knowledge, similar experiences and situational interpretations of one’s
profession. It does not vary as much between accountants as ordinary judgment
does between people. Involves complying with ethical principles of the
accounting profession.
• To exercise professional judgment, one must have the ability to understand the
consequences of those affected by one’s decisions.
Case Analysis:
• Case analysis will give you the opportunity to develop your professional
judgment.
• Approach to case analysis:
o Skim over the case to determine your role and what is required.
o Re-read the material and make notes on the side for quick reference.
o Follow the proper format as follows:
 Identify the problems and issues
 Analyze the environmental factors, organizational factors, financial
position and the financial statement users.
 Analysis: identify the alternatives and analyze each alternative
looking for the pros and cons of both qualitative and quantitative
factors.
 Recommendation: make recommendations that are consistent with
your analysis (ex: recommend one of your alternatives).
Part 5:
Factors that influence the development of accounting standards in different
countries and cultures:
• Accounting standards are or should be developed to satisfy the needs of users.
• The economic, political, and legal conditions in which a user lives or operates are
factors in determining the users’ needs.
• When the conditions are similar, it should be possible to harmonize accounting
standards for countries.
• If these conditions vary between countries, then the accounting standards will
likely vary from country to country.
• The specific factors that have been found to influence the development of a
country’s accounting and reporting practices are:
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FA4 Class notes
Barbara Wyntjes, B.Sc., CGA
- The country’s tax system – U.S. and Canada minimal effect vs. strongly
influence in Germany and Japan
- The government’s involvement in standard setting – strong in Germany,
France and Japan vs. U.S., Canada and G.B. private standard setting board
- The level of development of capital markets and the sophistication of
users and suppliers of capital and the types of financing
- Political and economic trading and investing relationships between
countries (ex: Canada and U.S.)
- General level of inflation in the country – historical cost method assumes
stable unit of measure thus does not reflect inflation. Can., U.S. and G.B.
use supplemental reporting
United States and Canadian’s GAAP are similar with a few main differences:
1. Canadians capitalize and amortize certain Development costs whereas U.S.
expenses them immediately (thus current year expenses higher but amortization
lower over the long run).
2. EPS calculations are different.
3. The United States’ pronouncements are more detailed than Canada’s.
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Differences will impact ratios and decrease compatibility between countries
Role of International Accounting Standards Board (IASB):
• Goal is to harmonize accounting throughout the world’s financial makes.
• Advantage of harmonization is it would reduce the cost of financial reporting
because multinational companies only need to provide one set of F/Ss.
• Obstacles: no effective enforcement agency to ensure compliance with IASB
standards, political pressures, different philosophies and tax-driven nature of
many countries.
• In 2006, over 100 countries are represented by the IASB
• Canadian strategy: In 2005, the AcSB determined it would be in Canada’s best
interest to pursue separate accounting strategies for the following entities.
o Public companies: AcSB has decided to converge Canadian GAAP with
IASB’s International Financial Reporting Standards (IFRS) by 2011.
o Private companies – GAAP apply if significant external users
o Not-for-profit organizations
THE END
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