Acct 1250 C2 Mon F23
Acct 1250 C2 Mon F23
Acct 1250 C2 Mon F23
Interrelated
objectives and
fundamentals
Enhancescomparability of financial
statements of different companies
3
Conceptual Framework
4
Objective of Financial
Reporting
Provide information that is:
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. Understandability
• Allows reasonably informed users to see the significance of the
information
• Provides “enough” information so that it is clear
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. Representational faithfulness –
o Assets
o Liabilities
o Equity
o Revenues/Income
o Expenses
o Gains/Losses
22
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
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)
• 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.
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)
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
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
3
2
Foundational Principles
Recognition/ Presentation/
Derecognition Measurement Disclosure
1. Economic entity 5. Periodicity 10. Full disclosure
assumption assumption principle
33
Recognition
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.
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)
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
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
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
3. Revenue should be recognized on a per game basis over the season from
April to October.
EXERCISE 2.17 - SOLUTION
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.
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
4
9
Measurement
Monetary Unit Assumption
Money is the common unit of measure of
economic transactions
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
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
5
5
Presentation and Disclosure
Management’s explanation of the financial information
and its significance
6 disclosure principles:
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:
77
Expanded Conceptual
Framework
7
8
Financial Reporting Issues
1. Principles-Based Approach
80
Financial Reporting Issues
3. Fraudulent Financial Reporting
81