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Prepared by:

Gabriela H. Schneider, CMA


Northern Alberta Institute of Technology
INTERMEDIATE
ACCOUNTING

Seventh Canadian Edition

KIESO, WEYGANDT, WARFIELD, YOUNG, WIECEK

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

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
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
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
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
Accounting identifies, measures, analyses,
and communicates financial information for
various users (decision makers)
Accounting has two broad classifications
Financial accounting
Managerial accounting
Characteristics of Accounting
Financial Reporting
Financial accounting reporting provides historical
information
Financial reporting is used by both internal and
external users
External users would include such decision
makers as investors, creditors, unions and
governmental agencies
Managerial accounting provides both historical
and forecast information
Managerial reporting information is used by
management (internal users only)
Financial Reporting
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:
Presidents letter
Prospectuses
Government reporting
News releases
Management forecasts
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
Financial Reporting aids users in the
allocation of scarce resources.
Accounting and the Efficient
Use of Scarce Resources
Financial
Reporting
aids
Users
(present and
potential) in
Capital
Allocation
decisions
Financial
statements and
other forms of
financial
reporting
Users include:
investors,
creditors,
Unions, and
government
agencies
Involves
determining
how funds are
allocated among
competing
interests
Accounting and the Efficient
Use of Scarce Resources
Stakeholders in Financial
Reporting
Stakeholder: someone who prepares, relies
on, reviews, audits or monitors financial
information
Includes both internal and external parties
Key stakeholders include:
investors, creditors, auditors, regulators,
analysts, management, standard setters, and
others
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 entitys economic resources, obligations and
equity/net assets;
2. changes in an entitys economic resources,
obligations and equity/net assets; and
3. the economic performance of the entity
Objectives of Financial
Reporting
Objectives of Financial
Reporting
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 managements decisions
on resource acquisition and
allocation increase
shareholder wealth?
Yes
Investor and Creditor
confidence continues
Capital
continues to
be available
Management Bias
Preparation of the financial statements are the
responsibility of internal management
May lead to preparing statements that report the
enterprise in its best light
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?
Understanding User Needs in the
Financial Reporting Process
Management Users
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
users decision-making process
The Need to Develop Standards
Standards are set to aid preparers and users of
financial statements
They 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 needs
Standards are not rules, regulations, or laws
They are intended to be generally accepted and
universally practiced
The Standard Setting Process in
Canada Parties Involved
Canadian Institute of Chartered Accountants (CICA)
www.cica.ca
Accounting Standards Board (AcSB) of the CICA
Primarily responsible for setting GAAP
Two 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
The Standard Setting Process in
Canada Parties Involved
Provincial Securities Commission
(e.g. Ontario 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.gov
Major standard setting body

International Accounting Standards Board (IASB)
www.iasb.org.uk
International Accounting
Standards
The International Accounting Standards Board
(IASB) was formed in 2001
The objective was to narrow divergence in
international financial reporting
Difficult task due to differing objectives,
institutional structures, and national tendencies
in various countries
Strives towards a single, global method of
accounting
Generally Accepted Accounting
Principles (GAAP)
The 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 bodies
CICA Handbook is the foremost source for
GAAP
The GAAP Hierarchy
Primary Sources
Other Sources
Considered only after primary sources have been
researched
GAAP HierarchyPrimary Sources
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
GAAP HierarchyOther Sources
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
Professional Judgement
There cannot be a rule for every situation
Rules vs. principles
Ethics
Reporting bias
Ethical sensitivity
Doing the right thing
Sarbanes-Oxley Act (SOX)
Public Company Accounting Oversight Board
(PCAOB)
Independence rules
Bonus/profit forfeiture
CEO/CFO certification
Independent audit committees
Codes of ethics
Canadian Response to SOX
Canadian Public Accounting Board (CPAB)
Ontario Securities Commission rules
CSA harmonized rules
Amendments to Securities Act
Other
Challenges Facing Accounting
Globalization
Technology
New economy
Accountability


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
The Impact of these Challenges
Globalization
Global marketplace requires information to be globally
comparative
Global capital allocation: move from Canadian
stakeholders to global stakeholders
Technology
As the ability to produce information increases, the
need or demand for readily accessible information
increases
Possible scenarios:
Online real-time information
Continuous reporting
Will annual financial statements fill the information
need?
New 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
The Impact of these Challenges
Accountability
An expectations gap exists between the
publics perception of the professions accountability
professions perception of its accountability to the
public
Shift from traditional financial reporting to business
reporting
e.g. internal financial controls; regulatory
compliance
Balanced Scorecard model current move in this
direction
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