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MGT 3100 Study Guide - Final Guide: International Accounting Standards Board, Tax Evasion, Cash Flow

Course Code
MGT 3100
John Blow
Study Guide

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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- PAEs – private enterprises
CPA Canada Handbook Part II ASPE
May be used by non- PAEs – 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
Issued by the International Accounting Standards Board (IASB)
IA“Bs ojetie is to hae all outies 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 soe aspets of speifi 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
Piate etepises o PAEs – 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;
Wats to e opaale ith puli opaies epots pepaed ude IF‘“
since competing for capital (domestically and globally);
Is a subsidiary and Parent reports under IFRS
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Copas otollig shaeholde is sellig shaes ad ats to ehae
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 ue ost used fo the opas
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
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
Ipat o pofit shaig ouses, opas ioe ta liailit, ipat on
financing available due to covenants, permitted returns in regulated industries,
pates etus
Financial statements impact perceptions and evaluative decisions by
o Lenders decide on loan advances;
o Income tax authorities check consistency of reporting by enterprise and
o Employees evaluate ability of company to pay higher compensation
o Shareholders assess aageet’s ability
o Security analysts make buy or sell recommendations
o Regulators evaluate reasonability of rate-regulated enterprises
To goups of uses
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
stateets ee though agaist aageets istutios
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Eteal Uses ojeties of fiaial epotig
Assessing & Predicting Cash Flows
Income Tax Deferral/Minimization
Contract Compliance
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.
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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