Business Administration 4407Q/R/S/T Chapter Notes - Chapter 4: Financial Statement, The Seller, Disclose

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IFRS and ASPE Qualitative Characteristics
4 attributes financial information should have if it’s to be useful to
1. Understandability information is provided for moderately skilled
audience (ie. People with a reasonable understanding of business and
accounting and a willingness to study the information)
2. Comparability important for stakeholders to compare the financial
statements of the company over time and with those of other entities.
To help achieve this IFRS requires entities to:
o Disclose their accounting policies
o Disclose any changes to their accounting policies (but no need
to disclose changes in estimates)
o Provide information about previous periods in their financial
3. Relevance information is relevant if it influences stakeholder
decisions and helps in making predications
o However, financial statements are backwards looking and
difficult to make predictions unless stable and established
4. Reliability representative of the entity’s underlying economic
activity and free of bias and material error.
o However, we have seen that much bias creeps into accounting
decisions and policies
Unfortunately, there are conflicts amongst the characteristics. Generally
reliability wins out over relevance (ie. Historic Cost principle when purchase
assets). Under IFRS, trying to address this conflict by allowing writing up
of assets to market values.
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Revenue Recognition
Revenue Recognition
An economic gain earned by an entity from providing goods and
services to customers
The issue is when does this economic gain actually “happen” or get
“recognized” in the financial statements. This decision impacts the
amounts reported in the financial statements, financial ratios and
possibly people’s perceptions of how the entity is performing.
2 different approaches to recognizing revenue
1. Critical-Event Approach
2. Gradual Approach
The Critical Event Approach
Identifies a particular point in the earnings process as the appropriate
time to recognize revenues. This point is called the critical event
(completion of production, delivery, after delivery if there are
warranty, returns or collection issues and reasonable estimate can’t be
At the critical event, 100% of the revenue is recognized
Guidelines for Revenue Recognition under IFRS and ASPE
5 criteria that should be met under ASPE and IFRS to recognize
1. Performance has occurred and the significant rights and risks of
ownership have been transferred to the buyer
2. The seller has no involvement or control over the goods sold
3. Collection of payment can be reasonably assured
4. The amount of revenue can be reasonably measured
4. Costs of earning the revenues can be reasonably measured
NOTE: As we will see, many times these are not hard and fast rules and
judgment and estimates are involved in deciding answers to above as terms
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are not clearly defined and this makes revenue recognition policies
susceptible to bias. (ie. What is significant, what is reasonable?)
First 2 criteria are performance criteria usually met once customer
purchases goods and takes delivery unless
o Buyer has to resell the merchandise before the seller gets paid
(ie. Consignment goods)
o The seller has to install the goods and the installation is a
significant part of the purchase
Third criteria is collectability must have a reasonable expectation of
getting paid or a reasonable estimate of how much can be collected
must be able to be made
Criteria 4 and 5 deal with measurability the entity must be able to
estimate the amount it has earned and the costs incurred to earn it
(matching critiera).
-example warranty costs if can’t properly estimate can’t
recognize the revenues
-other example is returns
Also, remember at the end of the day, the critical even should provide a
reasonable and fair representation of the entity’s activities (but once again
how do we interpret “reasonable” and “fair”.
Overall, there is a general bias to be more conservative and delay
recognition of revenues under IFRS to reduce uncertainty and make the f/s
more “reliable”, however also not practical to wait until all uncertainty is
resolved. Choices need to be made.
Review question for consideration pg.173
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