Chapter 1

The Canadian Financial Reporting Environment

Chapter Overview

  • Importance of Capital: Capital is essential for business operations, from small businesses to large corporations.

    • Different methods to raise capital, such as borrowing or issuing shares.

    • Smaller companies face challenges like high costs and regulations from major exchanges.

Alternative Capital Markets

  • Canadian Securities Exchange (CSE): Established in 2004 to provide a streamlined process for smaller companies to access public capital.

    • Key Features:

      • Fixed fees for companies.

      • Requirements that are less stringent compared to larger exchanges.

    • Recent Trends:

      • In 2017, shares traded valued at $7.8 billion with significant contributions from the cannabis and financial technology sectors.

Emerging Markets and Case Study

  • Global UAV Technologies: Example of a company leveraging new technology in aerial surveying.

    • Originally a mining company, transformed into UAV technology provider with significant earnings in 2017.

Purpose of Financial Reporting

  • Financial reporting must comply with standards for clarity and consistency, aimed at investors and stakeholders.

  • Accurate financial information aids in informed decision-making.

Learning Objectives

  1. Understand the financial reporting environment and stakeholders.

  2. Recognize the need for accounting standards and discuss entities involved in their development.

  3. Explain GAAP significance and the role of professional judgment in its application.

  4. Discuss the challenges and opportunities faced by the accounting profession.

Financial Reporting Environment

Key Characteristics of Accounting

  • Accounting Definition: Process involving identification, measurement, and communication of financial information about economic entities.

    • Types of accounting:

      1. Financial Accounting: Reports financial activities to external users.

      2. Managerial Accounting: Provides information for internal decision-making.

Essential Financial Statements

  • Principal means of communication:

    • Statement of Financial Position (Balance Sheet)

    • Statement of Income/Comprehensive Income (Income Statement)

    • Statement of Cash Flows

    • Statement of Changes in Equity

  • Additional disclosures enhance understanding beyond statistics.

Accounting Challenges

  • Factors affecting the landscape include:

    • Business failures (e.g., Enron, WorldCom).

    • Financial crises (e.g., subprime lending) leading to greater scrutiny and regulation.

Stakeholders in Financial Reporting

Key Stakeholders

  • Include investors, creditors, financial analysts, auditors, regulators.

  • Each has specific interests and information needs regarding a company’s financial health and performance.

Financial Reporting Systems and Oversight

  • Complying with securities regulations is crucial for public companies.

  • Auditing serves as a check on management to ensure accurate reporting.

Standard Setting

Need for Standards

  • Unified GAAP is essential to reduce confusion and provide comparability.

  • Helps address information asymmetry in capital markets.

Significant Entities in Canada

  • Canadian Accounting Standards Board (AcSB) guides standards for private entities, pension plans, and non-profits.

  • International Accounting Standards Board (IASB) and U.S. Financial Accounting Standards Board (FASB) influence global standards.

    • GAAP Development: Involves the AcSB for ASPE (accounting standard for private enterprises) and IFRS for public companies.

GAAP and Professional Judgment

GAAP Overview

  • GAAP consists of authoritative standards and practices mandatory for financial reporting.

Role of Professional Judgment

  • Accountants apply judgment in ambiguous situations, ensuring compliance with presence and relevance of standards.

Challenges and Opportunities

Current Challenges

  • Issues include increasing regulation, ethical dilemmas, and maintaining integrity in financial reporting.

Opportunities for Growth

  • Advancements in technology offer pathways for innovation in reporting and analysis, allowing for better data handling.

Conclusion

  • The accounting profession must adapt to changing environments and strive to maintain high standards for financial reporting to ensure market efficiency and trust.