User Orientation Needs

Objectives
Provide information that is:
1. Useful in investment and credit decisions
2. Useful in making resource allocation decisions and assesing management stewardship
Qualitative Characteristics Elements of Financial Statements
A. Fundamental 1. Assets
1. Relevance * Involve some economic benefit to the entity
Make a difference in decision * Entity has control over that benefit
Predictive and feedback value * Benefit results from a past transaction or event
Includes all material information (materiality is based on size of company) 2. Liabilities
2. Representational Faithfulness * Represent a duty or responsibility
Complet * Entity is obligated and has little or no discretion to avoid the duty or
e responsibility
Free from bias
Neutral * Obligation results from a past transaction or event
3. Equity
B. Enhancing Qualitative Characteristics * Represents residual interest in assets after all liabilities are deducted
1. Comparability: info measured and reported in a similar way, allows users to 4. Revenues
identify real economic similarities/differences …..* Increases in economic resources resulting from ordinary activities
2. Verifiability: Similar results when same methods are used 5. Expenses
3. Timeliness * Decreases in econmoic resources resulting from ordinary revenue
4. Understandability: allows reasonably informed users to see the significances in generating activities 6.
the info, provides enough info so things are clear Gains
* Increases in equity (net assets) resulting from incidental transactions
*Trade-offs happen when one characteristic is sacrificed for another 7. Losses
* Decreases in equity (net assests) resulting from incidental transactions
* Other comprehensive income (IFRS only)
Foundational Principles
Help explain which, when, and how financial elements should be recognized/derecognized, measured and presented/disclosed. They act as guidlines for developing rational
responses to controversial financial reporting issues.
Recognition/Derecognition Measurement Presentation and Disclosure
All elements must be measurable to be recognized. 10. Full Discolure Principle
Recognition: Process of including an item on entity's Because of accural accounting, many elements require * Anything that is relevant to users' decisions should
balance sheet or income statement. Elements of financial use of estimates, therefore we must: be included in the financial statements
statements have hostorically been recognized when: 1. Determine level of uncertainty * Disclosure may be made:
1. They meet the definition of an element 2. Use appropriate meaurement tools
2. They are probable 3. Disclose sufficient information to indicate 1. Within the main body of the financial statements
3. They are reliably measurable uncertainty 2. As notes to the financial statements
Derecognition: Process of removing something from the 3. As supplementary information, including
balance sheet or income statement 5. Periodicity Assumption Management Discussion & Analysis (MD&A)
* Economic activity can be divided into artificial time * Disclosed information should:
1. Economic Entity Assumption periods for reporting periods 1. Provide sufficient detail of the occurrence
* The economic activity can be identified with a * Most common: month, quarter, year 2. Be sufficiently condensed to remain
particlar unit of accountability 6. Monetary Unit Assumption understandable and appropriate in terms of cost of
* The business activity is separate and distinct from its * Money is common unit of measure of economic preparing/using it
owners (& other business unit) transactions * Full disclosure is not a substitute for proper
* Its use is relevant, simple, understandable, accounting practice
* An individual, departments or divisions of an entity or universally available and useful * Notes to the financial statements are essential to
entire industry may be considered separate entities * Is relevant as long as it is assumed that quantitative understanding the enterprise's performance and
* Does not necessarily refer to legal entity data are useful in communicating econmic information position
* Legal entity is used for tax/legal puposes 7. Going Concern Assumption MD&A
2. Control * Assumption that business will continue to operate in 5 key elements should be included:
* Important factor in determining entities to be the forseeable future 1. Company's vision, core business, and strategy
consolidated and included in the economic entity * Expectation of conitnuing long enough to meet thier 2. Key performance drivers
Under IFRS: objectives and commitments 3. Captial and other resources
1. Having power over investee * Full disclosure is required of any material 4. Historical and prospective results
2. Exposure or rights to variable returns from uncertainties of continuing as a going concern 5. Risks
involvement with investee 8. Historical Cost Principle
3. Ability to use power over investee to affect amount Three basic assumptions:
of investor's returns 1. Represents a value at a point in time
Under ASPE: 2. Results from a reciprocal exchange
1. Continuing power to determine strategic decisions 3. Exchange includes an outside arm's-length party
without the cooperation of others
3. Revenue Recognition Principle Initial recognition: for non-financial assets, record all
* Revenue is recognized when: costs incurred to get the asset ready for sale or for use
1. Risks and rewards have passed * Measurement is especially challenging for:
2. Revenue is measurable 1. Non-monetary transactions
3. Revenue is collectible 2. Non-monetary, non-reciprocal transactions
* Revenues are realized when products, merchandise, 3. Related party transactions
or assets are exchanged for cash 9. Fair Value Principle
4. Matching Principle
* Expenses are matched with revenues "The price that would be received to sell an asset o paid
* If the expense benefits the future periods and meets to transfer a liability in an orderly transaction between
the definition pf an asset, it is recorded as an asset. It is market participants at the measurment date"
then systematically and rationally matched to future * Subsequent to initial recognition, historical cost and
revenues fair value often differ
* Fair value is often considered more relevant for
certain assets/liabilities