MGT 3100 Study Guide - Final Guide: International Accounting Standards Board, Tax Evasion, Cash Flow
Accounting Chapter 1: The framework for financial reporting
2 sets of financial reporting standards: IFRS and ASPE
CPA Canada Handbook – Part I - IFRS
• Must be used by publicly accountable enterprises (PAE)
• May be used by non- PAEs – private enterprises
CPA Canada Handbook – Part II – ASPE
• May be used by non- PAEs – private enterprises
Canadian Publicly Accountable Enterprises
PAE’s include:
• Publicly traded entities
• Fiduciary enterprises – act in a trustee capacity for general public –
• Examples: Investment fund, mutual fund, credit union, saving institutions
• Government business enterprises
• Examples: Canada Post, VIA Rail
IFRS
Issued by the International Accounting Standards Board (IASB)
IA“Bs ojetie is to hae all outies adopt IFRS as their reporting standard
Three approaches have been taken by countries:
• Adopt - Fully adopt IFRS, which replaces pre-existing GAAP (ex. Canada)
• Adapt – Country may modify soe aspets of speifi IF‘“s to ette eet the
needs of that national environment (ex. European Union)
• Converge – National standard setter revises their own standards to reduce
differences with IFRS (ex. USA)
Canadian Private Accountable Enterprises
Piate etepises o PAEs – that do not issue debt or shares to the public and do
not hold assets in a fiduciary capacity
Three choices of standards to adopt:
• IFRS; or
• Canadian accounting standards for private enterprises (ASPE); or
• Disclosed basis of accounting
Standards for private entities
Why would a private enterprise choose IFRS?
• Is considering going public in the near future;
• Wants to raise capital through private placements and private capital providers
require IFRS statements;
• Wats to e opaale ith puli opaies epots pepaed ude IF‘“
since competing for capital (domestically and globally);
• Is a subsidiary and Parent reports under IFRS
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• Copas otollig shaeholde is sellig shaes ad ats to ehae
credibility of statement to potential acquirer
Reporting Currency
• Canadian companies do not always prepare their financial statements in
Canadian dollars. Under IFRS, a company should report in its functional currency
• Functional currency – is the ue ost used fo the opas
transactions
• Presentation currency – the currency in which the financial statements
are presented
• May be different in rare cases
(Note: ASPE does not specify a presentation currency or discuss functional currency –
but entity likely reports in Canadian currency)
Objectives of financial reporting
• Provide financial information that is useful into the users in making economic
decisions
o The most fundamental criteria for deciding on policies, estimates, and
disclosures are the objectives of financial reporting for the specific
reporting enterprise or organization
o the financial statements must convey information that is useful for their
decision purposes.
• Financial statements have direct economic impact on enterprise and its
stakeholders:
• Ipat o pofit shaig ouses, opas ioe ta liailit, ipat on
financing available due to covenants, permitted returns in regulated industries,
pates etus
• Financial statements impact perceptions and evaluative decisions by
stakeholders:
o Lenders decide on loan advances;
o Income tax authorities check consistency of reporting by enterprise and
owners
o Employees evaluate ability of company to pay higher compensation
o Shareholders assess aageet’s ability
o Security analysts make buy or sell recommendations
o Regulators evaluate reasonability of rate-regulated enterprises
• To goups of uses
o External users – all non-management users
▪ Example: lenders, investors, employees
o Preparers – managers who determine policies, estimates and disclosures,
and accountants
▪ Preparers may also be users
o Ethical issue for accountants – must still insist on fair presentation of
stateets ee though agaist aageets istutios
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Eteal Uses ojeties of fiaial epotig
• Assessing & Predicting Cash Flows
• Income Tax Deferral/Minimization
• Contract Compliance
• Stewardship
• Performance evaluation
Assessing and predicting cash flows
• Assessment of current cash flows – Users need to understand
• cash inflows and outflows with emphasis on cash flow from operating activities
• availability of sources of financing
• Prediction of future cash flows – users need to understand:
• Future commitments of cash flows are disclosed
Income tax deferral/minimization
• Income Tax Deferral: Why pay taxes this year if they can be delayed until next year?
• Tax-book conformity – corporation adopts same practices for financial and tax reporting
• Tax deferral is using legitimate options for reducing current taxable income
• Tax evasion is fraud - deliberate misstatement
Contract Compliance
• External users often use financial statements as the basis for assessing whether an
enterprise has complied with contract provisions.
• The most common type of financial statement contracting is for debt.
• Debt contracts or agreements usually have provisions that require companies to
maintain a certain level of performance.
Stewardship
A steward : a person who is responsible for managing an enterprise on behalf of someone else
Stewardship reporting – how resources have been managed
• Transparent and few large allocations that could obscure results
Choose accounting policies that:
• Minimize interperiod allocations; and
• Provide full disclosure (more than minimum)
Performance evaluation
Managers use financial statements to:
• evaluate their own performance
• evaluate the performance of managers of subsidiaries and other related
companies in a corporate family of companies
Managers motivated to select policies to enhance their performance evaluation
• Capitalize rather than expense
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Document Summary
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