1. Prepared by: Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

2. C H A P T E R 1 The Canadian Financial Reporting Environment

3. Learning Objectives 1. Describe the essential characteristics of accounting. 2. Identify the major financial statements and other means of financial reporting. 3. Explain how accounting assists in the efficient use of scarce resources.

4. 4. Explain the meaning of stakeholders and identify the key stakeholders in financial reporting. 5. Identify the objective of financial reporting. 6. Explain the notion of management bias with respect to financial reporting. 7. Understand the importance of user needs in the financial reporting process. Learning Objectives

5. 8. Explain the need for accounting standards. 9. Identify the major entities that influence the standard-setting process and explain how they influence financial reporting. 10. Explain the meaning of GAAP. 11. Explain the significance of professional judgement in applying GAAP. Learning Objectives

6. 12. Understand issues related to ethics and financial accounting. 13. Identify some of the challenges facing accounting. Learning Objectives

7. Financial Accounting and Accounting Standards Role of Financial Reporting Objectives of Financial Reporting Standard Setting GAAPChallenges Facing Financial Reporting Financial statements and financial reporting Management bias Need to develop standards GAAP Hierarchy Accounting and capital allocation Users needsParties involved in standard setting Professional judgement StakeholdersStandard setting in a political environment Role of Ethics

8. Characteristics of Financial Accounting Accounting identifies, measures and communicates financial information This information is about economic entities Information is communicated to interested parties such as investors, creditors, unions and governmental agencies

9. Financial Reporting Preparation of financial reports are used by internal and external parties Contrasted with managerial accounting, it uses financial information used by management (internal users only) Financial reporting provides historical information

10. Financial Reporting Major financial statements include: –the balance sheet –the income statement –the statement of cash flows –the statement of owners’ (or shareholders’) equity Other forms of financial reporting include: –annual report –prospectuses –government reporting –news releases –management forecasts

11. Flow of Information through the Financial Statements Income Statement Statement of Equity Balance Sheet Statement of Cash Flows Reports Net Income Ending balance reported Change in cash as reported displays the change in cash position

12. Accounting and the Efficient Use of Scarce Resources Financial Reporting aids users in the allocation of scarce resources.

13. Accounting and the Efficient Use of Scarce Resources Financial Reporting aids Financial Reporting aids Users (present and potential) in Users (present and potential) in Capital Allocation decisions Capital Allocation decisions Financial Statements and other forms of financial reporting Users include: investors, creditors, unions and govt. agencies Involves determining how funds are allocated among competing interests

14. Stakeholders in Financial Reporting Stakeholder: someone who prepares, relies on, reviews, audits or monitors financial information Includes both internal and external parties Key stakeholders include: –users of the financial information –both internal and external parties

15. Objectives of Financial Reporting The CICA Handbook, Section 1000, par. 15 outlines the overall objective as: The objective … is to communicate information that is useful to … and other users in making their resource allocation decisions and/or assessing management stewardship. … financial statements provide information about: 1.an entity’s economic resources, obligations and equity/net assets; 2.changes in an entity’s economic resources, obligations and equity/net assets; and 3.the economic performance of the entity

16. Objectives of Financial Reporting Was income earned to generate future cash? Yes Able to meet obligations and pay a return on investment Did mgmt. decisions on resource acquisition and allocation increase shareholder wealth? Yes Investor & Creditor confidence continues Resource Allocation Decisions Assess Management Stewardship Capital continues to be available

17. 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 –This is the underlying principle of management bias Motives include: –to reflect positive management stewardship –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?

18. Understanding User Needs in the Financial Reporting Process ManagementUsers Financial Statements Prepare the reports Use the reports for investment/lending decisions Use the reports to acquire capital Aggressive Financial Reporting has a direct impact on the users decision-making process

19. The Need for Accounting Standards Standards are set to aid preparers and users of financial statements They allow the preparers of the financial statements to present fairly the enterprise operations Presented to the users a single set of financial statements to meet a majority of the user needs Standards are not rules, regulations, or laws They are intended to be generally accepted and universally practiced

20. The Standard Setting Process: Parties Involved Accounting Standards Board (AcSB) of the CICA –Primary responsibility for setting GAAP Ensure that companies listed on the exchange prepare their statements in accordance with GAAP U.S. standard setting body; SEC ensures compliance by listed companies Work toward eliminating international reporting standards Canadian Institute of Chartered Accountants (CICA) Provincial Securities Commission Financial Accounting Standards Board (FASB) and the Securities Exchange Commission International Accounting Standards Committee (IASC)

21. International Accounting Standards The International Accounting Standards Committee (IASC) was formed in 1973 The objective was to narrow divergence in international financial reporting There are many similarities between U.S. and International accounting standards The concern is that international standards may not be as rigorous as U.S. standards

22. 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 CICA Handbook is the foremost source for GAAP

23. GAAP and Other Authoritative Pronouncements GAAP consist of FASB Standards and Interpretations, APB Opinions and AICPA Accounting Research Bulletins However, there are other documents that are considered to provide authoritative support See next slide for a hierarchy of these pronouncements

24. The GAAP Hierarchy Primary Source Accounting recommendations covered in the CICA Handbook Secondary Source Principles generally accepted by a significant number of entities in Canada Principles consistent with the CICA Handbook and are developed through professional judgement

25. Challenges Facing Accounting Globalization Technology New economy Accountability A move to global markets and global investors Ability to produce, and access, timely information A move from the traditional ‘resource’ based to a ‘knowledge based’ economy Driven by more sophisticated and varied investors

26. The Impact of these Challenges Globalization –Global market place requires information to be ‘globally’ comparative –Global capital allocation: move from Canadian stakeholders to global stakeholders Technology –As the ability to produce information increases, the need/demand for readily accessible information increases –Possible scenarios: Online real-time information Continuous reporting –Will annual financial statements fill the information need?

27. New Economy –Measuring and reporting ‘value creating assets’ not currently being reported –The challenge is to find an objective value, and measure their impact on future earnings The Impact of these Challenges

28. Accountability –An ‘expectations gap’ exists between the public’s perception of the profession’s accountability profession’s perception of its accountability to the public –Shift from traditional financial reporting to business reporting e.g. internal financial controls; regulatory compliance –Balanced Scorecard model current move in this direction

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