Intermediate Accounting Volume 1, Sixth Canadian Edition Lecture Notes

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Copyright 2014 McGraw-Hill Ryerson Ltd. All rights reserved
Instructor’s Manual to accompany Intermediate Accounting, 6th edition 1
CHAPTER 1
THE FRAMEWORK FOR FINANCIAL REPORTING
Learning Objectives
After you have studied this chapter, you should:
LO-1 Understand the various accounting standards used by Canadian entities.
LO-2 Understand the objectives of financial reporting.
LO-3 Understand the financial reporting needs of external users of financial
information.
LO-4 Understand the motivations of preparers of financial information.
Lecture Notes
1. ACCOUNTING STANDARDS IN CANADA
Authoritative Source of Canadian Standards
The accounting standard-setting body in Canada is the Accounting Standards Board
(AcSB). The AcSB is part of the Canadian Institute of Chartered Accountants
(CICA). The authority of the CICA comes from the corporations acts of the
federal and provincial governments. The GAAP requirement for public companies
is enforceable by the provincial securities commissions. The commissions are
responsible for enforcing the reporting standards for companies that are traded in
their province.
AcSB had for many decades maintained standards by regular revisions and
additions to the CICA Handbook. Currently they have a two-pronged approach for
Canadian enterprises:
For public companies or publicly accountable enterprises, IFRS is required for
financial reporting for all reporting periods beginning on or after January 1, 2011.
All the IFRS standards are included in the CICA Handbook as Part 1.
Private nonpublicly accountable enterprises have a choice between using full IFRS
or Canadian accounting standards for private companies (ASPE) as prescribed in
the CICA Handbook, Part II. ASPE is somewhat less complex and is based more
on historical-cost accounting, and has far fewer disclosure requirements.
IFRS Overview
Motivation for Change
The rapid development of international financial markets in the 1990s stimulated
interest in developing a worldwide set of accounting standards.

Copyright 2014 McGraw-Hill Ryerson Ltd. All rights reserved
Instructor’s Manual to accompany Intermediate Accounting, 6th edition 2
One by one, major countries decided to adopt or harmonize with international
GAAP. Canada adopted IFRS on January 1, 2011 for financial reporting for public
companies.
International standards are developed and issued by the International Accounting
Standards Boarch (IASB)
Accounting Standards for Canadian Publicly-Accountable Enterprises
Publicly accountable enterprise (PAE) – any company that has securities (debt or
equity or both) issued to the public or that is in the process of issuing debt or equity
to the public or a for-profit private enterprise that holds assets in a fiduciary
capacity for a broad group of outsiders as one of its primary businesses.
A fiduciary enterprise is any organization that acts in a trusteeship capacity for
members of the general public. (e.g. a mutual fund, a privately owned bank,
pension funds, credit unions).
Also government business enterprises must disclose their financial performance
and thus are PAEs.
Reporting in U.S. GAAP
In order to enhance the acceptability of its shares in the U.S. financial markets, a
Canadian company may choose to follow U.S. GAAP, but it is rare for a Canadian
company to do so.
Legal and Regulatory Requirements
In some special industries such as banks, the normal provisions of IFRSs may be
supplemented by legal requirements such as requirements from Canada’s Bank Act.
Reporting Currency
Canadian companies do not always prepare their financial statements in Canadian
dollars. In general, IFRS requires a company to use another presentation currency
when its financial environment is other than the currency of its home country. The
company should report in its functional currency which is the currency in which
most of a company’s transactions are conducted.

Copyright 2014 McGraw-Hill Ryerson Ltd. All rights reserved
Instructor’s Manual to accompany Intermediate Accounting, 6th edition 3
Accounting Standards for Canadian Private Enterprises
A private enterprise is one that done not issue debt or equity securities to the
public nor is in the process of doing so and also does not hold assets in a fiduciary
capacity. All shares are held privately and not offered for sale on the open market.
Users are limited and generally have access to the information they need, either as
owners and /or managers or as bankers/creditors.
Private companies can use IFRS, ASPE or tailored accounting policies known as a
disclosed basis of accounting.
A private company is often referred to as an SME, which is a small to medium
sized enterprise. The choice between following IFRS versus Canadian ASPE is
unaffected by a Canadian private corporation’s size.
Using IFRS
A private company may use IFRS instead of ASPE because it is in completion with
public companies for capital, and wants to be comparable. Despite the inability to
sell shares to the public, private corporations can obtain substantial capital through
private placements. A private placement is arranged by direct negotiation between
the company seeking capital and one or more suppliers of capital.
Other reasons for private companies to use IFRS:
1. The company is a subsidiary of a parent that reports on the basis of IFRS.
2. The company may issue shares to the public in the future and wants to establish
a pattern of IFRS compliance.
3. The company’s controlling shareholders may intend to sell the company in the
near future. IFRS may enhance credibility.
Using ASPE
The ACSB simplified the pre-existing standards in the CICA Handbook, by
stripping out requirements that are less appropriate for private companies. ASPE is
based more on historical cost and less on fair values, and the disclosure
requirements are less onerous. As a result of continuing use of the CICA
Handbook instead of IFRS-SME, many private companies found little change in
their reports.
Using a Disclosed Basis of Accounting
In practice, private enterprises are not bound by GAAP unless an external user
(such as a major lender) required the company to use GAAP. When non-GAAP
accounting policies are used, the company is said to be reporting on a disclosed
basis of accounting (DBA).
A company cannot toss out all of GAAP. Deviations from GAAP usually
are limited to just certain policies (e.g. using tax based CCA instead of
accounting depreciation.
WATCH!

Copyright 2014 McGraw-Hill Ryerson Ltd. All rights reserved
Instructor’s Manual to accompany Intermediate Accounting, 6th edition 4
Private Company Standards Internationally
IFRS for SMEs (Small and Medium-Sized Enterprises)
Private companies in the rest of the world can use a simplified version of IFRS,
IFRS-SME. Canada opted to develop their own private entity GAAP, rather than
use IFRS-SME.
Learning Multiple Sets of Standards
Canada is using different accounting standards for public and private enterprises..
Although these are two different sets of GAAP, they are very similar and use the
same general principles and practices. Thus, Canadian private company GAAP can
be regarded mainly as simplifying exceptions to IFRS rather than as a substantially
different body of standards.
The Issue of Comparability
The point of establishing IFRS is not only to promote multiple exchange listings,
but also to greatly improve comparability between companies based in different
countries. However, international comparisons of financial statements are fraught
with hazard because of differences between legal requirements, ways of doing
business, political environment, etc.
2. OBJECTIVES FOR FINANCIAL REPORTING
Management’s choice of accounting policy and disclosure are constrained by the
requirements of IFRS and Canadian ASPE.
To exercise judgement, the accountant must have criteria against which to measure
the suitability of alternatives. The most fundamental criteria for deciding on
policies, estimates, and disclosures are the objectives of financial reporting for the
organization.
To establish each enterprise’s financial objectives management must consider
many aspects of the company and the users of its financial statements.
See Exhibit 1-2 in the text which show the forces that shape a company’s financial
reporting objectives (facts, constraints, prepare motivations, user needs and user
power).

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