Chapter 2

Transparency

Represents economic reality

Completeness

Inclide all information needed to portray underlying events and transactions

Neutrality

Information foes not favour one set of interested parties over another. Supported by the concept os conservatism/prudence

Freedom from error

Reliability; arises from good information systems and strong internal controls

Comparability

Information is measures and reported in a similar way, company to compay and year to year

Verifiability

Knowledgable, independent users achieve similar results

Timeliness

Information is available in sufficient time to influence decisions

Understandability

Information must be of sufficient quality and clarity so reasonably informed users can see its significance

Foundational principle: Economic entity Assumption

Economic activity can be identified with a particular unit of accountability

an economic entity is not always a legal entity. The company, a division, or person can be differentiated

Foundational principle: control

ASPE: control is the continuing power to determine strategic decions without the co-operation of others

IFRS: investor has control over an investee when it has

• power over the investee

• rights to variable returns from its involvement with the investor

  • Ability to affect the amount of the investors return

Foundational principle: revenue frcognitions (ASPE)

ASPE: income statement approach - focuses more on the earnings process. revenue is recognized when

• risks and rewards have passes and or the earnings process is substancially complete - significant actis have been performed and there is no continuing involvement

• revenue is measurable

  • revenue is collectable (realized or realizable)

Foundational principle: revenue recognition (IFRS)

IFRS: balance sheet approach - transaction occurs when entity enters the contract. 5 step approach

1. identify the contract with the customer

2. identify the performace obligations

3. determine the transaction price

4. allocate the price to each performace obligation

   1. recognize revenue when each performance obligations is satisfied

Foundational principle: Matching principle

cause and effect relationship between money spent to earn revenues and the revenues themselves

the effort is matched with the accomplishments

Foundational principle: Periodically assumptions

Economic activity of an entity can be divided into artificial time periods for reporting purposes

Foundational principle: monetary unit assumption

Money is in the same unit of measure. All in CAD or USD, not multiple types of currency

At the time of reporting, make sure that they are all in the same currency

Reports should be consistent and comparable to others

Foundational principle: Going concern

The assumption is that the business will continue to operate in the foreseeable future

Foundational principle: Historical cost

Transactions are measured at the amount of cash or cash equivalents paid or recieves, or the fair value of the initial transaction

3 underlying assumptions of historical cost

1. Represents a value at a point in time

2. results from a reciprocal exchange (2 way exchange)

3. exchange includes an outside arm’s-length party

Foundational principle: Fair value principle

IFRS: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

ASPE: amount of consideration that would be agreed upon in an arm’s-length transaction between knowledgeable, willing parties who are under no compulsion to act

Foundational principle: Full disclosure principle

General practice of providing information that is important enough to influence an informed users judgement and decesions.

avoid information overload

What are the 2 key qualitative characteristics of accounting information. AND what do they mean

Relevance: information should be able to make a difference in someone’s decision.

Representational faithfulness: transparency, completeness, neutrality, and free from error

Foundational Principle: Revenue recognition (in general, what is this)

• revenues are realized when products, merch, or other assets are exchanged for cash

• Revenue is realizable if the asses received or held can be readily converted into cash or claims to cash

• Assets are readily convertible if they can be sold or interchanged in an active market

  • at a price that is readily determinable

  • AND there is no significant additional cost

What are the elements of the financial statements (6)

1. Assets

2. Liabilities

3. Equity

4. Revenue

5. Expenses

6. Gains/Losses

What are the 3 essential characteristics of assets

1. they represent a present economic resource

2. the entity has control over that resource (through legal ownership or a contractual or other right)

3. resource results from a past transaction or event

3 essential characteristics of liabilities

1. they represent a present duty or responsibility and there is no practical ability to avoid it

2. The entity is obligated to transfer an economic resource

3. Obligation results from a past transaction or event

3 Types of liability obligations

1. Contractual obligations or statutory requirements

2. Constructive obligations - acknowledging a potential economic burden. “we’ve done it in the past so our customers or stakeholders expect us to do it” (cutting down trees and replanting)

3. Equitable obligations - from moral or ethical considerations. (spilling oil in the ocean → you have to clean it up)

What is equity. What does it include?

Essentially Net Worth of a business.

includes: Common and preferred shares, retained earnings, Accumulated other comprehensive income/loss (IFRS)

What are revenues (ASPE and IFRS)

ASPE: revenues are increases in economic resources which result from ordinary operations

IFRS: Income is increases in assets or decreases in liabilities that result in increases to equity, other than those related to contributions from shareholders

What are expenses (ASPE and IFRS)

ASPE: Decreases in economic resources that result from ordinary revenue-generating activities

IFRS: no distinction between ordinary revenue-generating activities and losses. Focuses on decreases in assets or increases in liabilities that result in decreases on equity

What are gains/Losses (ASPE and IFRS)

ASPE:

IFRS:

What are the 4 financial statements

1. Statement of financial performance (IFRS) OR income statement (ASPE)

2. Statement of financial position (IFRS) OR Balance sheet (ASPE)

3. STatement of changes in shareholders equity (IFRS) OR statement of retained earnings (ASPE

4. Statement of cahs flows (IFRS) OR cash flow statement (ASPE)

6 discloser principles for the MD&A (and what does that stand for

MD&A

1. provide a view through managements eye

2. supplement and compliment information in the financial statements

3. Provide fair, complete and balances information that is material to decision makers

4. outline key trends, risks, and uncertainties that may affect the company in the future

5. explain managements plan for long and short term goals

6. be understandable, relevant, comparable, verifiable, and timely

5 key elements included in the MD&A

1. core business

2. objectives and strategies

3. capabilities to deliver results

4. results and outlook

5. Key performance measures or indicators

WHat is financial engineering and is it legal?

it is creating legal arrangements and financial instruments so the resulting accounting meets the desires objective within GAAP

Creating instruments so the financial reporting objectives are within GAAP

Its is not legal