What are the 5 parts to the CPA Canada Handbook?
- Part I - International Financial Reporting Standards (IFRS)
- Part II - Accounting Standards for Private Enterprises (ASPE)
- Part III - Accounting Standards for Not-for-Profit Organizations
- Part IV - Accounting Standards for Pension Plans
- Part V - Pre-changeover Accounting Standards
What is the name of the accounting body that sets accounting standards in Canada?
Accounting Standards Board (AcSB)
Which accountings standards are federal, provincial, territorial, and local governments governed by?
CPA Canada Public Sector Accounting Handbook
What are private enterprises governed by?
- IFRS
- ASPE; or
- Disclosed basis of accounting (DBA)
What are not-for-profit organizations (NFPOs) governed by?
- IFRS; or
- ASPE and accounting standards for NFPOs
What is the IFRS conceptual framework and what does it address?
It is a preface to the IFRS describing abstract concepts, however nothing in it overrides the IFRS
It addresses:
- users of financial reporting
- objectives of financial reporting
- qualitative characteristics of financial statements
- going concern
- capital maintenance
- elements of financial statements
- measurement of elements
Who are the main users of financial statements?
Investors and creditors (present and future)
Users can be internal or external.
Who are external and internal users of financial statements?
External Users:
- Investors
- Creditors
- Regulatory Bodies
- Taxing Authorities
- Non-managment employees
Internal Users:
- Managers of the organization
The objective of financial reporting is to provide useful information on….?
- Future cash flows
- Economic resources controlled by entity
- Entity’s performance
- Changes in financial position
- Entity’s financial structure, liquidity and solvency
- Management stewardship
Financial statements are prepared on an accrual or cash basis?
Accrual
What are fundamental qualitative characteristics of information?
- Relevance: makes a difference in a decision. It is tempered by materiality which is an entity-specific aspect of relevance. E.g., $20k is material to company that makes $50k but not one that makes billions.
- Faithful Representation: Accounting information should represent what it says. FR has 3 attributes: completeness, neutrality, and freedom from error.
What are the enhancing qualitative characteristics?
- Comparability: ability to compare one set of financial statement with another.
- Verifiability: different knowledgeable and independent observers measure a transaction and obtain consensus that the reported result is representationally faithful.
- Timeliness
- Understandability: information is useful to users only if they can understand it
- Considers cost versus benefit (?)
What is going concern?
Financial statements are normally prepared with the underlying assumption that the business will continue in operation for the foreseeable future.
What is capital?
Owners’ interest in the business.
What are the 2 main concepts of capital as identified in the conceptual framework?
- Financial concept
- Physical concept
Financial concept takes 2 forms: nominal dollar (based on historical cost) and purchasing power (takes into account inflation).
Physical concept takes into account specific changes in the productive capacity of assets by measuring capital as the change in units of output per day (as an example).
Which concept of capital do most Canadian businesses use?
Nominal dollar financial concept
This is when prices are relatively stable.
What are the elements of financial statements?
- Assets
- Liabilities
- Equity
- Revenues
- Expenses
- Gains or losses
1-3 measure financial position of the entity
4-6 measure financial performance
What are the 4 principal measurement bases identified in the conceptual framework?
- Historical cost: amount paid or fair value
- Current cost: if same or equivalent asset was acquired currently.
- Realizable value: amount that could be obtained by selling the asset.
- Present value: assets are carried at the present discounted value of the future net cash inflows.
Historical cost is the most widely used. However financial statements often use a mix e.g., inventory at the lower of cost and net realizable value. p.15
How is ASPE different from IFRS (framework wise)?
- User group limited
- Qualitative characteristics are understandability, relevence, reliability, and comparability
- Discusses trade off relevance versus reliability - not in IFRS
- Added conservatism (as sub-characteristic of reliabilty)
- Must use nominal captial maintenance only - IFRS gives choice
What are the steps in the accounting cycle?
- Identifying and measuring transactions and other economic events (e.g., sale of merchandise)
- Journalizing the transactions
- Posting the transactions to the general ledger (G/L)
- Preparing a trial balance that summarizes all of the account balances in the G/L
- Preparing adjusting journal entries for accruals and adjustments in order to ensure that all balances reflect the economic events that transpired during the operating period
- Preparing an adjusted trial balance that summarizes the updated account balances in the G/L
- Preparing a set of financial statements for the reporting period
- Closing the (temporary) revenue and expense accounts out to retained earnings
- Preparing a post-closing trial balance
- Journalizing reversing entries
What are reversing journal entries for?
To reverse certain journal entries that have been made in the previous accounting period.
E.g., if you made an accrual during the previous accounting period, the company woudl set up a reversing journal entry in the current period.
What is the governing standard that stipulates the requirements with respect to the preparation of financial statements?
IAS 1 Preparation of Financial Statements
What are the required financial statements under IFRS?
- Statement of financial position (balance sheet)
- Statement of profit or loss (income statement) and other comprehensive income.
- Statement of changes in equity
- Statement of cash flow
- Notes to financial statements
Alternative titles may be used.
Note: statement of profit or loss and other comprehensive income is also known as just statement of comprehensive income. It may be one statement or two.
What are the required financial statements under ASPE?
- Balance sheet
- Income statement
- Statement of changes in retained earnings
- Cash flow statement
- Notes to financial statements
