Textbook Notes (368,150)
Canada (161,680)
York University (12,802)
ADMS 3585 (22)
Ping Peng (3)
Chapter 1

Chapter 1 financial reporting environment.docx

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Administrative Studies
ADMS 3585
Ping Peng

Chapter 1: The Canadian Financial Reporting Environment  Financial reporting 1. identifies, measures, and communicates financial information about 2. economic entities to 3. interested persons (decision makers) Identify - Whether to record Measure - What amount to record Communicate - How to report Financial Reporting • Financial accounting provides historical information • Financial reporting is used by both internal and external users • External users include such decision makers as investors, creditors, unions, and government agencies • Managerial accounting provides both historical and forecast information • Managerial reporting information is used by management (internal users only) • Major financial statements include: o Balance Sheet o Income Statement o Statement of Cash Flows o Statement of Shareholders’ (Owners’) Equity o + Note Disclosures  Other forms of financial reporting include: o President’s letter o Prospectuses o Government reporting o News releases o Management forecasts  Why bother to report? o Benefits? o Costs?  Depends on the nature of reporting entity o Public firms o Private firms o Other (NPOs, pension funds) • Stakeholder: any parties that have a stake with a firm’s financial information. o Includes anyone who prepares, relies on, reviews, audits, or monitors financial information • Key stakeholders include o Internal: management, employees, etc. o External: investors, creditors, external auditors, regulators, analysts, standard setters, etc. o What is at stake? Why Financial Reporting? Financial reporting aids users in the allocation of scarce resources (capital) Accounting and Capital Allocation • The accounting profession has the responsibility of measuring a company’s performance accurately, fairly, and on a timely basis • These measurements enable investors and creditors to compare the income and assets employed by companies • Investors can then assess the relative risks and returns associated with companies o In Canada, the primary exchange mechanisms for allocating resources are:  Debt and equity markets (e.g. TSX)  Financial institutions (e.g. banks Objective of Financial Reporting • The overall objective of financial reporting is to provide information that is: o useful to users, and o decision relevant • Financial statements should provide information about: o the entity’s economic resources and claims to those resources, and o changes in those resources and claims • Resource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value) 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: o to reflect positive management stewardship (job, compensation) o 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?  Principles: GAAP • Watchdogs  Auditors  Whether the firm follows GAAP  Market regulators (US: SEC; Canada: provincial securities commission): o Whether market players comply with securities law The Standard Setting Process in Canada – Parties Involved • Canadian Accounting Standards Board (AcSB) o Primarily responsible for setting GAAP in Canada  From 2011, this will be limited to standards for private enterprises, not-for- profit entities, and pension plans only (standards for publicly accountable entities will be set by the International Accounting Standards Board) • Two underlying premises for development of standards  Be responsive to the needs and viewpoints of the entire economic community  Operate in full public view through due process  International Accounting Standards Board (IASB) • Major international standard setting body • Mission “to develop, in the public interest, a single set of high quality, understandable and international reporting standards (IFRSs) for general purpose financial statements” • Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC)  FASB is the major standard setting body in the U.S.  SEC has the final authority over accounting standards in the U.S • Provincial Securities Commission (e.g. Ontario Securities Commission)  To oversee and monitor capital marketplace  Ensure strict adherence to securities law/legislation 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 • GAAP varies by country and region • US GAAP, Cananian GAAP, IFRS, etc. • Standards are not rules, regulations, or laws • Standards are intended to be generally accepted and universally practised Scope of GAAP CICA HANDBOOK (CICAHB) • Part I: IFRS • Part II: Private Entity GAAP • Part III: Accounting for NPO’s • Part IV: Accounting for Pensions • Part V: Existing GAAP Scope of GAAP? • Broad scope o Part I through Part IV • Narrow scope  Part II only (PE GAAP)  Part II through Part IV (Non-public Entity GAAP) o Text comparison is between IFRS and PE GAAP Why GAAP? • Standards are set to aid preparers and users of financial statements • They allow the preparers of the financial statements to present fairly the operations of the company • A single set of financial statements is prepared to meet the majority of
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