Acct 1250 C2 Mon F23

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CHAPTER 2

CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL REPORTING


What is the Conceptual Framework?

 Foundation for developing standards


and rules
 Increases
understanding of and
confidence in financial reporting

 Interrelated
objectives and
fundamentals
 Enhancescomparability of financial
statements of different companies

3
Conceptual Framework

First level: the building blocks,


identifies goals and purposes

Second level: characteristics that


make accounting information useful

Third level: principles used in


establishing and applying accounting
standards

4
Objective of Financial
Reporting
Provide information that is:

1. USEFUL to users (e.g. investors,


creditors, etc.), and

2. Decision RELEVANT (resource


allocation)

5
Fundamental Qualitative
Characteristics

The 2 Rs:
The Fundamental Qualitative Characteristics

1. Relevance

2. Representational Faithfulness

6
Fundamental Qualitative
Characteristics
1. Relevance – makes a difference in a decision
PFM:
• Has predictive value about future income
• Has feedback value confirming or
correcting previous expectations
• Materiality – how important a piece of info
is including qualitative.

7
Fundamental Qualitative
Characteristics

2. Representational Faithfulness: - reflect


economic reality, transparency.
CNF:
• Complete – statements should include all
info necessary

• Neutral –Factual, truthful, unbiased. Info


cannot be selected to favour one set of
interested parties over another.

• Free from material error – Reliable,


systems and internal controls can minimize
errors.
8
Enhancing Qualitative
Characteristics
Enhancing Qualitative Characteristics are:
CUTV:
1. Comparability
• Information measured and reported in a similar way (company
to company, and year to year)
• Allows users to identify real economic similarities and
differences

2. Understandability
• Allows reasonably informed users to see the significance of the
information
• Provides “enough” information so that it is clear

3. Timeliness – information is available to decision-makers before


it loses its ability to influence their decisions

4. Verifiability
• Similar results achieved if same methods are used 9
nt 1: a-g are one of the 2 fundamental qualitative characteristics: Relevance or Representational faithfulness

nt 2: h-k are one of the enhancing qualitative characteristics: Comparability, Understandability, Timeliness and Verifiability
SOLUTION
Representational faithfulness (RF)- completeness
Relevance
RF - Neutrality
RF
Relevance – predictive value
RF – Freedom from material error
Relevance – feedback value
Comparability
Understandability
Timeliness
Verifiability
BE2.17 For each of the situations discussed below, explain
the qualitative characteristics of financial information that
help provide decision-useful information to users.

Hint: Start with a fundamental qualitative characteristic and add an enhancing qualitative
characteristic if it applies.

a. Marcus Corp. has a management bonus plan based on


net income. Marcus records revenue only after the risks
and rewards of ownership of the goods it sells have
passed to the customer.
BRIEF EXERCISE 2.17 - SOLUTION
Marcus Corp. has a management bonus plan based on net
income. Marcus records revenue only after the risks and rewards
of ownership of the goods it sells have passed to the customer.

a. Representational faithfulness –

• Neutrality – Financial information should not favour one user or


stakeholder over another.

• Verifiability is also a reasonable choice.


BE2.17 What is the objective of financial reporting? For
each of the situations discussed below, explain the
qualitative characteristics of financial information that help
provide decision-useful information to users.
Hint: A fundamental qualitative characteristic.

b. Beliveau Ltd. is a real estate company that holds land


for eventual sale to developers. Beliveau provides fair
value information on its property holdings to its users.
BE2.17 – SOLUTION

b. Beliveau Ltd. is a real estate company that holds land


for eventual sale to developers. Beliveau provides fair
value information on its property holdings to its users.

Relevance – Financial information that makes a difference


in the decision making of a user is being provided.
BE2.17 What is the objective of financial reporting? For
each of the situations discussed below, explain the
qualitative characteristics of financial information that help
provide decision-useful information to users.

Hint: A fundamental qualitative characteristic.

c. Mohawk Inc. has entered into a rental agreement that


will eventually transfer ownership of the manufacturing
equipment to Mohawk at the end of three years.
Irrespective of the legal documentation, Mohawk will
account for this transaction based on its economic
impact to the company.
BE2.17 – SOLUTION

c. Mohawk Inc. has entered into a rental agreement that


will eventually transfer ownership of the manufacturing
equipment to Mohawk at the end of three years.
Irrespective of the legal documentation, Mohawk will
account for this transaction based on its economic
impact to the company.
c. Representational faithfulness –
• Accounting information should reflect economic substance
of business events or transactions over its legal form.
• The lease represents a financing arrangement through
which Mohawk is purchasing asset
BE2.17 What is the objective of financial reporting? For
each of the situations discussed below, explain the
qualitative characteristics of financial information that help
provide decision-useful information to users.

Hint: A fundamental qualitative characteristic

d. Standard setters must ensure that accounting


standards do not favour one set of users over
another or one industry over another.
BE2.17 – SOLUTION

d. Standard setters must ensure that accounting


standards do not favour one set of users over
another or one industry over another.

Representational faithfulness - neutrality – Standards


too must remain neutral and free from bias, regardless
of the economic consequences.
Elements of Financial Statements
• Basic elements of financial statements include the
following:

o Assets
o Liabilities

o Equity
o Revenues/Income
o Expenses
o Gains/Losses

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Elements of Financial Statements:
Assets
Assets:
• Involve some economic benefit to entity
• Entity has control over that benefit
• Benefit results from past transaction or
event

2
3
Elements of Financial Statements:
Liabilities
 Liabilities:
• Represent a present obligation
or responsibility
• Entity is obligated to transfer
an economic resource
• Obligation results from a past
transaction or event

2
4
Elements of Financial Statements:
Equity
Equity (net assets) represents residual
interest in assets, after all liabilities are
deducted. Also known as “net worth”

LIABILITIE
ASSETS EQUITY
S

What a What a Owner


business owns business portion of
owes assets

Equity consists of shares, retained


earnings, and under IFRS, accumulated
other comprehensive income (AOCI).
Elements of Financial
Statements
 Revenues
• Increases in economic resources, resulting from ordinary
activities

 Expenses
• Decreases in economic resources, resulting from
ordinary revenue-generating activities

 Gains
• Increases in equity (net assets), resulting from
incidental transactions

 Losses
• Decreases in equity (net assets), resulting from
incidental transactions

2
6
Elements of Financial
Statements
Comprehensive Income = Net Income + Other Comprehensive
Income
(OCI)

Other Comprehensive income (OCI) – IFRS only


• Revenues, expenses, gains, and losses recognized in comprehensive
income but NOT included in net income
• Examples:
• Unrealized holding gains and losses on certain securities,
• Gains/losses related to translation of foreign operations and cash flow
hedges (eg. Futures contract to mitigate risk of price increase on a
direct material ).

• OCI does NOT exist under ASPE – items would be booked through net
income or straight to shareholder’s equity.
Items Included in Financial Statements:

IFR S ASPE
Statement of financial performance Income statement
Or
Statement of profit and loss and
Statement of other comprehensive OCI does not exist
income*
Statement of financial position Balance sheet
Statement of changes in Statement of retained
shareholders’ equity earnings
Statement of cash flows Cash flow statement

*
Other comprehensive income (OCI) includes all changes in equity except for net
income and owner’s investments and distributions.
Comprehensive income includes net income and other comprehensive income.

28
BE2.13 Explain how you would decide whether to record each
of the following expenditures as an asset or an expense.
Assume all items are material.

a. Legal fees paid in connection with the purchase of land are


$1,500.

b. Eduardo Inc. paves the driveway leading to the office building at


a cost of $21,000.

c. A meat market purchases a meat-grinding machine at a cost of


$3,500.

d. On June 30, the partnership Monroe and Moore, medical doctors,


pays six months' office rent to cover the month of July and the next
five months.

e. Smith's Hardware Ltd., a public company, pays $9,000 in wages


to labourers for construction on a building to be used in the
business.

f. Alvarez's Florists Ltd. pays wages of $2,100 for the month to an


employee who serves as driver of their delivery truck.

Remember:
1. Expense is a decrease in an asset through ordinary revenue-
generating activities of company
2. Asset represents a present economic resource, the entity has control
over that resource and the resource results from a past transaction or
BE2.13 SOLUTION
Explain how you would decide whether to record each of the following
expenditures as an asset or an expense. Assume all items are material.

a. Legal fees paid in connection with the purchase of land are $1,500.
ASSET. Debit to Land – necessary cost incurred to acquire land
(historical cost principle)

b. Eduardo Inc. paves the driveway leading to the office building at a


cost of $21,000. ASSET. Recorded to Land Improvements account – will
last many years so should be capitalized and depreciated which would
not be the case if debited to the Land account.

c. A meat market purchases a meat-grinding machine at a cost of


$3,500.
ASSET. Equipment – will last many years and contribute to operations
over that time.

Remember:
1. Expense is a decrease in an asset through ordinary revenue-generating activities of
company
2. Asset represents a present economic resource, the entity has control over that
resource and the resource results from a past transaction or event.
BE2.13 SOLUTION continued
Explain how you would decide whether to record each of the following
expenditures as an asset or an expense. Assume all items are material.

d. On June 30, the partnership Monroe and Moore, medical doctors, pays
six months' office rent to cover the month of July and the next five
months.
1. Prepaid asset on June 30 and Expense each month after – if
financial statements are prepared on some date before December 31.
2. Expense. If fiscal year end is December 31. OR

e. Smith's Hardware Ltd., a public company, pays $9,000 in wages to


labourers for construction on a building to be used in the business.
ASSET. Building is a present economic resource being constructed. Wages
paid should be debited to the Buildings account during its construction,
as they are part of the cost of that asset (getting it ready for its intended
use) which will contribute to operations for many years (historical cost
principle).

f. Alvarez's Florists Ltd. pays wages of $2,100 for the month to an


employee who serves as driver of their delivery truck.
EXPENSE. The delivery driver’s wages do not represent a present
economic resource; they represent an operating expense, as the benefits
are used up as the service is provided. There are no future economic
benefits.

Remember:
1. Expense is a decrease in an asset through ordinary revenue-generating activities of
company
2. Asset represents a present economic resource, the entity has control over that
Foundational Principles

 Explain which, when, and how financial


elements and events should be
recognized/derecognized, measured, and
presented/disclosed

 Guidelines for developing rational responses


to controversial financial reporting issues

3
2
Foundational Principles
Recognition/ Presentation/
Derecognition Measurement Disclosure
1. Economic entity 5. Periodicity 10. Full disclosure
assumption assumption principle

2. Control 6. Monetary unit


assumption
3. Revenue 7. Going concern
recognition and assumption
realization principles

4. Matching principle 8. Historical cost


principle

9. Fair value principle


and value in use

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Recognition

• Including an item on entity’s balance sheet


or income statement.

• Eg. Should a purchase order be recognized? NO


because the seller has not shipped the goods and the
purchaser has not paid for them. Neither party has
performed.

The principle is to recognize an element in the financial


statements if the information is useful

3
4
Recognition
When are elements of financial statements
recognized?
• For ASPE and historically:
1. Meet the definition of an element (e.g. asset)
2. Are probable, and
3. Are reliably measurable
• Under new IFRS Conceptual Framework:
1. Meet the definition of an element (e.g. asset)
2. Provide users with relevant information that
faithfully represents the underlying transaction or
event.
3. No probability or measurement criteria
o If there is significant uncertainty as to existence or
measurement, or low probability of occurrence, information
may not be useful anyway
3
5
Derecognition
• Process of ‘removing’ something from the
balance sheet or income statement.

• For assets, when control is given up.

• For liabilities, when obligation is


extinguished.

3
6
Recognition/Derecognition
Economic Entity Assumption (also called Entity
Concept)
 Business activity is separate and distinct from
its owners (and any other business unit)
 Individual, departments or divisions of an
entity, or an entire industry may be considered
separate entities
 A parent & subsidiary may be separate legal
entities (for tax and legal purposes), but
merge activities for accounting &
reporting to give more meaningful information
– consolidated financial statements.
3
7
Recognition/Derecognition
Control – defines entities that should be
consolidated (related to Economic Entity Principle)
- Historically control existed where entity held >50% of
voting common shares of other entity (similar to ASPE)

IFRS 10 - principles based, broadens concept noting


investor has control over investee when it has the
following:
1. Power over the investee – can direct the other entity’s
activities & strategic decisions without cooperation
(some exceptions)
2. Ability to use its power over the investee to affect the
amount of investors’ returns
3. Rights to variable returns from its involvement with the
investee
Recognition/Derecognition
Revenue Recognition Principle (ASPE)
• Revenue is recognized when:
o Risks and rewards have passed or the earnings process is
substantially complete
o Revenue is measurable and
o Revenue is collectible (realized or realizable)
 Revenues are realized when products (goods or services),
merchandise, or assets are exchanged for cash (or claims to cash)

39
Recognition/Derecognition
Revenue Recognition Principle (IFRS)
 Follows a 5-step approach (covered fully in Chapter 6):
1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the price to each performance obligation
5. Recognize revenue when each performance obligation is satisfied

 Collectible revenues are recognized when control over goods and


services passes to the customer

40
E2.17 (Revenue Recognition Principle) The following
independent situations require professional judgement for
determining when to recognize revenue from the
transactions.
1. Air Yukon sells you an advance purchase airline ticket in
September for your flight home at Christmas.
2. Better Buy Ltd. sells you a home theatre on a “no money
down, no interest, and no payments for one year” promotional
deal.
3. The Centurions baseball team sells season tickets to games
online. Fans can purchase the tickets at any time, although the
season doesn't officially begin until April. It runs from April
through October.
4. River's End Ltd. sells you a sweater. In August, you placed the
order using River's End's online catalogue. The sweater arrives
in September and you charge it to your River's End credit card.
You receive and pay the credit card bill in October.
Required:
a. Explain when revenue is recognized in each of these situations
under ASPE.
b. Identify when revenue should be recognized in each of the
situations under the IFRS 15 model.
EXERCISE 2.17 - SOLUTION

a. Under ASPE, revenue is recorded when:


 Risks and rewards have passed
 Revenue is measurable; and,
 Collectability is reasonably assured

1. Revenue should not be recognized until December. Since the sales effort (i.e. passing
of risks and rewards) is not complete until the flight actually occurs,
EXERCISE 2.17 - SOLUTION

2. Recognize revenue at point of sale IF collection can be reasonably


assured and an estimate of uncollectible amounts can be made

Record sale when payment is received IF an estimate for uncollectible


amounts cannot be made, accounting reverts to a cash basis (further
discussed in chapter 6).
EXERCISE 2.17 - SOLUTION

3. Revenue should be recognized on a per game basis over the season from
April to October.
EXERCISE 2.17 - SOLUTION

4. Revenue should be recorded at the time the sweater is shipped to the


customer and charged to her credit card.

The usual treatment is to recognize revenue when the goods are shipped,
and to estimate any future charges that may arise in connection with that
revenue.
• estimate a returns allowance, a contra account to sales revenue for
expected returns, all based on prior experience or industry norms.

• Estimate a bad debt expense and an allowance for doubtful accounts.


EXERCISE 2.17 (SOLUTION CONTINUED)

Using the new IFRS 15 model, a 5-step approach would be


used in determining when revenue is recognized:

1. Identify the contract with the customer,


2. Identify the performance obligations in the contract
(promises to transfer goods and/or services that are
distinct),
3. Determine the transaction price,
4. Allocate the transaction price to each performance
obligation, and
5. Recognize revenue as each performance obligation is
satisfied.

SAME AS ASPE. For all 4 transactions given in the


exercise, the timing of the revenue recognition will be the
same as was given for ASPE as the critical event used to
trigger revenue corresponds to the timing for satisfaction
of the performance obligation.
Recognition/Derecognition
Matching Principle
 Expenses are matched with revenues that
they produce - “cause and effect
relationship” between money spent to
earn revenues
 Eg. Long-lived assets cost allocated over
periods during which asset is used because
contributes to revenue generation throughout
its life

 If the expense benefits the future periods


and meets the definition of asset, it is
recorded as an asset

4
7
Measurement
 All elements must be measurable to be
recognized
 Accrual accounting requires many
elements of financial statements to be
estimated (uncertainty)
 New IFRS Conceptual Framework specifies
historical costs or current values (fair
value, value in use, current cost)

4
8
Measurement
Periodicity Assumption
 Economic activity of an entity can
be divided into artificial time
periods for reporting purposes

 Most common: one month, one


quarter, and one year

 With technology, investors want


more on-line, real-time financial
information to ensure relevant
information

4
9
Measurement
Monetary Unit Assumption
 Money is the common unit of measure of
economic transactions

 Use of a monetary unit is relevant, simple


and understandable, universally available,
and useful

 In Canada and the United States, the


dollar is assumed to remain relatively
stable in value (effects of
inflation/deflation are ignored i.e.
price-level change is ignored)

5
0
Measurement
Going Concern Assumption
 Assumption that a business enterprise
will continue to operate in the
foreseeable future
 Management must look out at least 12
months from balance sheet date
 Full disclosure is required of any
material uncertainties of continuing as
a going concern
 The historical cost principle would have limited
usefulness if liquidation were assumed likely
whereby asset values are better stated at net
realizable value (sales price – costs of disposal)
than at acquisition cost. 5
1
Measurement
Historical Cost Principle
• 3 basic assumptions:
 Represents a value at a point in time
 Results from a reciprocal exchange

(i.e. a two-way exchange)


 Exchange includes an outside arm’s-
length party

• Initial recognition: for non-financial


assets, record all costs incurred to
get the asset “ready” for sale or for
use (e.g. includes transportation and
installation costs) 5
2
Measurement
Historical Cost Principle (continued)
Measurement challenging for :
1. Non-monetary or barter transactions (as
no cash/monetary consideration exchanged)
2. Non-monetary, non-reciprocal
transactions - ie. no exchange (e.g.
donations)
3. Related party transactions – not acting at
“arm’s length” (use exchange value or cost)

oAn attempt may be made to estimate the fair


value
o Applies also to short-term financial
instruments (eg. Bonds, A/P, and receivables.
5
3
Measurement
Fair Value Principle: emerging principle IFRS 13
 At initial acquisition, historical cost = fair value, but subsequently they
often differ

 FV often more relevant about expected cash flows related to the asset
or liability.
 Under IFRS,
 Fair Value (FV) = exit price= selling price at measurement date =
market value.
 Allows > use of FVs in financial statements than ASPE
 Standards allow use of FV on PP&E and investment properties

 Under ASPE,
 “The amount of consideration that would be agreed upon in an
arm’s length transaction…”
 Acknowledges it might be used in certain industries including
agriculture & mining

 FV option available for most financial instruments because it reflects


current cash equivalent value. Gains/losses booked to income (ASPE &
IFRS) 5
4
Presentation and Disclosure
Full Disclosure Principle
 Practice of providing information
important enough to influence an
informed user’s judgement and
decisions (trade-off: Is it detailed
enough? Is it condensed enough?)

 Disclosure may be made:


 Within main body of financial statements
 As notes to financial statements
 As supplementary information, including
Management Discussion and Analysis
(MD&A)

5
5
Presentation and Disclosure
 Management’s explanation of the financial information
and its significance

 6 disclosure principles:

1. Provide a view through management’s eyes


2. Supplement and complement information in F/S
3. Provide fair, complete, balanced information that is material
4. Outline key trends, risks, uncertainties that may affect
company in future and provide information on quality of
earnings and cashflow
5. Explain management’s plan for long- and short-term goals
6. Be understandable, relevant, comparable, verifiable, timely
56
BE2.10 What principle(s) from the conceptual framework does Henday Limited use
in each of the following situations?

a. Henday includes the activities of its subsidiaries in its financial statements.


b. Henday was involved in litigation with Kinshasa Ltd. over a product malfunction. This
litigation is disclosed in the financial statements.
c. Henday allocates the cost of its tangible assets over the period when it expects to receive
revenue from these assets.
d. Henday records the purchase of a new packaging machine at its cash equivalent price.
e. Henday prepares quarterly financial statements for its users.
f. In preparing its financial statements, Henday assesses its ability to continue to operate for
the foreseeable future.
g. Henday records revenue when risks and rewards (control) are passed to the purchaser.
BE2.10 What principle(s) from the conceptual framework does Henday Limited use in each of
the following situations? SOLUTION

a. Economic entity & control


Henday includes the activities of its subsidiaries in its financial statements.
b. Henday was involved in litigation with Kinshasa Ltd. over a product malfunction. This
litigation is disclosed in the financial
Fullstatements.
disclosure
c. Henday allocates the cost of its tangible assets over the period when it expects to receive
revenue from these Matching
assets.
d. Henday records the purchase of a new packaging machine at its cash equivalent Historical
price. cost
e. Henday prepares quarterly financial statements for itsPeriodicity
users. and timeliness
f. In preparing its financial statements, Henday assesses its ability to continue to operate for
the foreseeable future.
Going concern
g. Revenue recognition
Henday records revenue when risks and rewards (control) are passed to the purchaser.
E2.12 Examples of operational guidelines used by
accountants follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has
been violated.

1. The treasurer of Sweet Grapes Corp. would like to prepare


financial statements only during downturns in the company’s wine
production, which occur periodically when the grape crop fails. He
states that it is at such times that the statements could be most
easily prepared. The company would never allow more than 30
months to pass without statements being prepared.
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

1. The treasurer of Sweet Grapes Corp. would like to prepare


financial statements only during downturns in the company’s
wine production, which occur periodically when the grape crop
fails. He states that it is at such times that the statements
could be most
Foundational easily
principle prepared. The company would never allow
or characteristic
more than 30 months to pass without statements being
violated:
1.
prepared. Periodicity; relevance (predictive and feedback value);
timeliness
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

2. Tower Manufacturing Ltd. Decided to manufacture its own


widgets because it would be cheaper than buying them from an
outside supplier. In an attempt to make its statements comparable
with those of its competitors, Tower charged its inventory accounts
for what it felt the widgets would have cost if they had been
purchased from an outside supplier. (Do not use the revenue
recognition principle.)
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

2. Tower Manufacturing Ltd. Decided to manufacture its own


widgets because it would be cheaper than buying them from an
outside supplier. In an attempt to make its statements comparable
with those of its competitors, Tower charged its inventory accounts
for what it felt the widgets would have cost if they had been
purchased from an outside supplier. (Do not use the revenue
Foundational principle or characteristic
recognition
violated: principle.)
2. Historical cost; verifiability; relevance
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

3. Cargo Discount Centres buys its merchandise by the truckload


and train carload. Cargo does not include any transportation costs
in calculating the cost of its ending inventory. Such costs, although
they vary from period to period, are always material in amount.
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

3. Cargo Discount Centres buys its merchandise by the truckload


and train carload. Cargo does not include any transportation costs
in calculating the cost of its ending inventory. Such costs, although
they vary from
Foundational period
principle to period, are always material in amount.
or characteristic
violated:

3. Historical cost or matching; comparability;


representational faithfulness; relevance
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

4. Quick & Healthy, a fast-food company, sells franchises for


$100,000, accepting a $5,000 down payment and 25-year note for
the remainder. Quick & Healthy promises to assist in site selection,
building and management training for three years. Quick &
Healthy records the full $100,000 franchise fee as revenue when
the contract is signed.
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

4. Quick & Healthy, a fast-food company, sells franchises for


$100,000, accepting a $5,000 down payment and 25-year note for
the remainder. Quick & Healthy promises to assist in site selection,
building and management training for three years. Quick &
Foundational
Healthy principle
records the or full
characteristic
$100,000 franchise fee as revenue when
violated:
the contract is signed.
4. Revenue recognition and realization; representational
faithfulness
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

5. Kalil Corp. faces a possible government expropriation (that is,


takeover) of its foreign facilities and possible losses on amounts
that are owed by various customers who are almost bankrupt. The
company president has decided that these possibilities should not
be noted on the financial statements because Kalil still hopes that
these events will not take place.
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

5. Kalil Corp. faces a possible government expropriation (that is,


takeover) of its foreign facilities and possible losses on amounts
that are owed by various customers who are almost bankrupt. The
company president has decided that these possibilities should not
be noted on the financial statements because Kalil still hopes that
Foundational principle or characteristic
these events will not take place.
violated:

5. Full disclosure; representational faithfulness;


relevance
E2.12 Examples of operational guidelines used by
accountants follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has
been violated.

6. Maurice Norris, owner of Rare Bookstore Inc., bought a


computer for his own use. He paid for the computer by
writing a cheque on the bookstore chequing account and
charged the Office Equipment account.
E2.12 Examples of operational guidelines used by
accountants follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has
been violated.

6. Maurice Norris, owner of Rare Bookstore Inc., bought a


computer for his own use. He paid for the computer by
writing a cheque on the bookstore chequing account and
charged the Office Equipment account.

Foundational principle or characteristic


violated:

6. Economic entity; free from material error, representational


faithfulness
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

7. Brock Inc. decides that it will be selling its subsidiary, Breck Inc.,
in a few years. Brock has excluded Breck’s activities from its
consolidated financial results.
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

7. Brock Inc. decides that it will be selling its subsidiary, Breck Inc.,
in a few years. Brock has excluded Breck’s activities from its
consolidated financial
Foundational principle results.
or characteristic
violated:

7. Control; comparability; representational


faithfulness
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

8. Wilhem Corporation expensed the purchase of new


manufacturing equipment.
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

8. Wilhem Corporation expensed the purchase of new


manufacturing equipment.
Foundational principle or characteristic
violated:

8. Matching; free from error; relevance


E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

9. A large lawsuit has been filed against Mahoney Corp. Mahoney


has recorded a loss and related estimated liability that is equal to
the maximum possible amount that it feels it might lose. Mahoney
is confident, however, that either it will win the suit or it will owe a
much smaller amount.
E2.12 Examples of operational guidelines used by accountants
follow.
List the fundamental qualitative characteristic (2Rs) and
foundational principle of financial information that has been
violated.

9. A large lawsuit has been filed against Mahoney Corp. Mahoney


has recorded a loss and related estimated liability that is equal to
the maximum possible amount that it feels it might lose. Mahoney
is confident, however, that either it will win the suit or it will owe a
much smaller
Foundational amount.
principle or characteristic
violated:

9. Full disclosure and representational faithfulness


(neutrality)
Management Discussion and Analysis

• Five key elements:


1. Core business
2. Objectives and strategy
3. Capability to deliver results
4. Results and outlook
5. Key performance measures and indicators

Under IFRS general trend towards increased disclosure to


achieve greater transparency

77
Expanded Conceptual
Framework

7
8
Financial Reporting Issues
1. Principles-Based Approach

• IFRS and ASPE are principles-based; grounded in the


conceptual framework
• Benefits > Consistency and flexibility

• Some think too flexible


• In absence of specific GAAP guidance, policies should be
developed using professional judgement and applying the
conceptual framework
79
Financial Reporting Issues
2. Financial Engineering – moved from accepted
practice to potentially fraudulent
• Legally structuring a business arrangement so it meets
company’s financial reporting objectives - such as
maximizing earnings.
• Structured financing—creating instruments so the financial
reporting objectives are within GAAP
• Could result in biased information

80
Financial Reporting Issues
3. Fraudulent Financial Reporting

• Changes in economic or business environment could


trigger manipulation of financial information

• Negative influence of budgets may lead to inappropriate


decisions

• Weak internal controls and governance

81

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