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Chapter 1-12

BU387 Chapter Notes - Chapter 1-12: Comprehensive Income, Current Asset, Measurement Uncertainty

by

Department
Business
Course Code
BU387
Professor
Keith Whelan
Chapter
1-12

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Chapter One: The Canadian Financial Reporting Environment
Accounting is the identification, measurement, and communication of financial
information about economic entities to interested persons.
Stakeholder What is at stake?
Investors/creditors Investment/loan
Management Job, bonus, reputation, salary increase,
access to capital markets by company
Securities commissions and stock
exchanges
Reputation, effective and efficient capital
marketplace
Analysts and credit rating agencies Reputation, profits
Auditors Reputation, profits (companies are their
clients)
Standard Setters Reputation
Various -
The overall objective of financial reporting is to provide financial information that is
useful to users and that is decision relevant. The statements should
communicate information about:
1. The entity’s economic resources and claims to those resources
2. Changes in those resources and claims
Sometimes financial statements are prepared with biased information to depict the
company in its best light through aggressive financial reporting (opposite to
conservative financial reporting). This process may involve overstating assets or
net income, understating liabilities/expenses or carefully selecting note disclosures
that emphasize positive events.
Meeting financial analysts’ expectations and the fact that managers are often
compensated based on the company’s net income are several reasons why bias in
the financial statements may arise. Additionally, certain benchmarks may need to
be met to comply with contracts that the company has (financial stability or liquidity
ratios).
A single set of general-purpose financial statements are prepared with the
expectation that the majority of the stakeholder needs will be met. These
statements are also expected to present the enterprise’s financial operations fairly.
Accounting professions in various countries have tried to develop a set of standards
that are generally accepted and universally practised. The common set of
standards and procedures is called generally accepted accounting principles
(GAAP). International GAAP is often referred to as International Financial Reporting
Standards (IFRS).
To be listed on a U.S. exchange, companies must follow U.S. GAAP or IFRS.

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Professional judgement plays an especially important role in private entity GAAP
and IFRS. There cannot be a rule for every situation and therefore private entity
GAAP and IFRS are based primarily on general principles rather than specific rules.
The basic premise of this is that accountants with significant experience will be able
to apply these principles appropriately to any situation. In a principles-based
standard-setting system, the conceptual framework underlies the standards.
Accountants either apply specific standards that are based on the conceptual
framework, or it no specific standard exists, the accountant uses the conceptual
framework and professional judgement to reason through to an answer.
Ethical dilemmas are common in accounting. Management biases – either internally
promoted (to maximize bonuses) or externally promoted (to meet analysts’ earning
expectations) – are the starting point typically. These typically lead to an emphasis
on the short term or long term results and place accountants in an environment of
pressure.
Some of the challenges facing accounting are globalization which leads to a
requirement for international harmonization of standards, increased technology
which results in the need for more timely information, and the move to a new
economy resulting in a focus on measuring and reporting non-traditional assets that
create value. An increased requirement for accountability is also a challenge which
results in the creation of new measurement and reporting models that look at
business reporting as a whole.

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Chapter Two: Conceptual Framework Underlying Financial Reporting
Why is a conceptual framework necessary?
1. To by useful, standard setting should build on an established body of concepts
and objectives. Useful and consistent standards can be additionally added over
time. The result is a coherent set of standards and rules, as they have all been built
upon the same foundation.
2. By referring to an existing framework, it should be possible to solve new and
emerging practical problems more quickly.
The following diagram shows an overview of a conceptual framework. At the first
level, the objectives identify accounting’s goals and purposes: these are the
conceptual framework’s building blocks. At the second level are the qualitative
characteristics that make accounting information useful and the elements of
financial statement (assets, liabilities, equity, revenues, expenses, gains and
losses). At the third and final level are the foundational principles used in
establishing and applying accounting standards.
First Level: The “why” –
goals and purposes of
accounting
Second Level:
Bridge between
Third Level: The
“how” -
implementation
OBJECTIVE
S of
financial
reporting
Qualitative
Characteristi
cs of
accounting
information
Elements
of financial
statements
Foundational
Principles
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