Kế toán, kiểm toán - Chapter 1: The canadian financial reporting environment

CHAPTER 1:ThE CANADIAN FINANCIAL REPORTING ENVIRONMENT2After studying this chapter, you should be able to:Explain how accounting makes it possible to use scarce resources more efficiently.Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.Identify the objective of financial reporting.Explain how information asymmetry and bias interfere with the objective of financial reporting.Explain the need for accounting standards and identify the major entities that influence the standard setting and financial reporting. Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.Discuss some of the challenges and opportunities for accounting.3The Canadian Financial Reporting EnvironmentThe Canadian Financial Reporting Environment4Characteristics of AccountingAccounting identifies, measures, and communicates financial information to various users (decision makers)Accounting has two broad classifications:Financial accountingManagerial accountingAccounting theory and practice have evolved and will continue to evolve to meet changing demands and influences5 Characteristics of AccountingIdentification, measurement, and communication of financial information about;Economic entities to;Interested persons.6Financial ReportingFinancial accounting results in preparation of financial reports about business activitiesFinancial reporting is used by both internal and external usersExternal users include such decision makers as investors, creditors, unions, and government agenciesManagerial accounting is used by management (internal users only)7Financial Statements and Other Means of Financial ReportingMajor financial statements include:Statement of Financial PositionIncome StatementCash Flow StatementStatement of Changes in Equity+ Note Disclosures8Financial ReportingOther forms of financial reporting include:President’s letterProspectusesGovernment reportingNews releasesManagement forecasts9Accounting and Capital AllocationFinancial reporting aids users in the allocation of scarce resources (capital)10Accounting and Capital AllocationThe accounting profession has the responsibility of measuring a company’s performance accurately, fairly, and on a timely basisThese measurements enable investors and creditors to compare the income and assets employed by companiesInvestors can then assess the relative risks and returns associated with companies11Capital Allocation Process12Accounting and Capital AllocationIn Canada, the primary exchange mechanisms for allocating resources are:Debt and equity markets (e.g. TSX)Financial institutions (e.g. banks)13Sources of Capital14Accounting and Capital AllocationAn effective process of capital allocation is critical to a healthy economyUnreliable and irrelevant information leads to poor capital allocationCredit rating agencies use accounting to rate companies’ financial stabilityThis gives investors and creditors additional independent information15Stakeholders in Financial ReportingStakeholders: parties who have something at risk (stake) in the financial reporting environmentKey stakeholders include traditional users of financial information16Stakeholders in Financial ReportingBroader definition of users is: anyone who prepares, relies on, reviews, audits, or monitors financial informationIncludes both internal and external partiesKey stakeholders include:investors, creditors, auditors, employees, regulators, analysts, management, standard setters, and others17Stakeholders in Financial AccountingInvestors and creditors rely on the financial statements to make decisionsStandard setters set Generally Accepted Accounting Principles (GAAP) to provide direction for accounting18What is at Stake for Each Stakeholder19Objective of Financial ReportingThe overall objective of financial reporting is to provide information that is decision-useful.Financial statements should provide information about:the entity’s economic resources and claims to those resources, and 2. changes in those resources and claimsResource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value)General-purpose financial statements are prepared for a wide variety of stakeholders20Information AsymmetryIdeally, all stakeholders should have equal access to all relevant information (i.e. symmetry of access to information) Managers have access to more information than other stakeholders (i.e. information asymmetry)Some reasons for information asymmetryCapital markets are not fully efficientHuman behaviour sometimes motivated by maximizing self-interest at the cost of others 21Information Asymmetry ProblemsTwo types of information asymmetry problems: Adverse selection: knowing that there is an information asymmetry, capital markets may attract wrong kinds of companies Moral Hazard: knowing that there is information asymmetry, individuals may act in their own best interest at the expense of others (e.g. management bias)Some of the possible motivations for management bias include the following: Evaluation of management performanceCompensation structuresAccess to capital markets and meeting analyst expectationsMeeting contractual obligations22The Need to Develop StandardsAccounting standards help reduce information asymmetry problems in financial reportingStandards are not rules, regulations, or laws they are recommendationsStandards are intended to be generally accepted and universally practised23The Standard Setting Process in Canada – Parties InvolvedCanadian Accounting Standards Board (AcSB)Primarily responsible for setting GAAP for Canadian private enterprises (ASPE), not-for-profit entities, and pension plansTwo underlying premises for development of standardsBe responsive to the needs and viewpoints of the entire economic communityOperate in full public view through due process24The Standard Setting Process in Canada – Parties InvolvedInternational Accounting Standards Board (IASB)Major international standard setting bodyMission “to develop, in the public interest, a single set of high quality, understandable and international reporting standards (IFRSs) for general purpose financial statements”IFRS must be used by public companies in CanadaPrivate enterprises have an option of using IFRS25The Standard Setting Process in Canada — Parties InvolvedFinancial 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.SProvincial Securities Commission(e.g. Ontario Securities Commission)To oversee and monitor capital marketplaceEnsure strict adherence to securities law/legislation26Generally Accepted Accounting Principles (GAAP)Under ASPE, GAAP consists of :Primary sourcesCPA Canada Handbook Sections 1400 to 3870Accounting guidelinesOther sourcesBackground documents and implementation guidance issued by AcSB Pronouncements in other jurisdictionsResearch studies, accounting textbooks, journals, etc. Must be consistent with primary sources and in accordance with the conceptual framework (i.e. CPA Canada Handbook Section 1000)27Generally Accepted Accounting Principles (GAAP)Under IFRS, GAAP includes:IFRSInternational Accounting Standards (IAS)Interpretations (IFRIC or SIC)If above sources do not specifically apply, other sources may be considered:Pronouncements of other standard-setting bodiesOther accounting literatureAccepted industry practices28Professional JudgementThere cannot be a rule for every situationStandards in Canada are based primarily on principles rather than specific rulesTherefore, must use professional judgement The United States currently uses a rules-based approach29Sarbanes-Oxley Act (SOX)The Sarbanes-Oxley Act (SOX) was enacted in 2002 (in the United States)Some of the legislation’s key provisions:Public Company Accounting Oversight Board (PCAOB)Independence rulesBonus/profit forfeitureCEO/CFO certificationManagement report on effectiveness of internal controls over financial reportingIndependent audit committeesCodes of ethics30Canadian ResponseThe Canadian Public Accountability Board (CPAB)Additional rules issued by Canadian Securities Administrators (CSA) including:Management responsibility for appropriateness and fairness of financial statementsIndependent audit committeesIncreased disclosures31Centrality of EthicsEthical dilemmas are common in accounting and other areas of businessIt is not always easy to do the right thing or make the right decision Ethical decisions often go beyond applying GAAP or rules of the profession 32Challenges and Opportunities for the Accounting ProfessionStandard setting in a political environmentPolitical action can have a significant impact on accounting standardsPrinciples versus rulesPrinciple-based standards (like ASPE and IFRS) are more dependent on professional judgment33Challenges and Opportunities for the Accounting ProfessionImpact of technologyIncreased ability to produce and access timely informationNew ways of communicating financial information (e.g. XBRL)Integrated reportingReporting to extend beyond financial information and include broader business reporting (e.g. governance and compensation, as well as sustainability reporting)34