Chapter 1

Conceptual and Case Analysis

Frameworks for Financial
Reporting
 The Conceptual Framework
for Financial Reporting
 The Conceptual Framework for Financial reporting is a document
found just prior to IFRS in Part 1 of the CPA Canada Handbook.

 Main items include:

• The objective of general-purpose financial reporting
• Qualitative characteristics of useful financial information
• Underlying assumptions
• Definition, recognition, and measurement of the
elements of financial statements

 All accounting practices should be traceable back to and supported

by the conceptual framework.
 The Conceptual Framework
for Financial Reporting
 Professional judgement is the ability to make a decision in situations
in which the answer is not clear-cut.

 Lots of judgement is involved when preparing financial statements.

 Judgment is involved when adopting accounting policies, making

estimates, and writing the notes to the financial statements.

 Financial statements should present what really happened during

the period: that is, they should tell it how it is.
 Accounting Standards in Canada
 The CPA Canada Handbook contains five parts as follows:

Part # Applicable To: Name for Standards

I Pubicly accountable entities IFRS
II Private enterprises ASPE
III Not-for-profit organizations  
IV Pension plans  
V All entities not yet using other parts Pre-changeover GAAP
 GAAP for Publicly
Accountable Enterprises
 At one time, Canada intended to harmonize its standards with those
of the United States.

 Canadian publicly accountable enterprises had to report under IFRS

starting in 2011.

 Part I of the CPA Canada Handbook contains IFRS.

 IFRS allows the use of fair values and optional treatments to a

greater degree than pre-changeover Canadian GAAP (Part V of the
CPA Canada Handbook).
 GAAP for Private Enterprises
 In the 1970s there was a lot of discussion in Canada about Big
GAAP versus Little GAAP, wondering if there should be different
standards for big companies and little companies.

 Eventually the concept of Big GAAP/Little GAAP was abandoned.

 There were a few other approaches over time but in 2006 when the
decision was made to adopt IFRS there was a task force in place to
determine what private companies should do.
GAAP for Private Enterprises
 In 2009, it was decided that private companies would have a
separate part of the CPA Canada Handbook dedicated solely for
them.

 Part II of the CPA Canada Handbook contains GAAP for private

enterprises.

 Private enterprises can report under either IFRS or ASPE.

 IFRS versus ASPE
 ASPE sometimes allows a choice between different
reporting methods.

 Key differences between IFRSs and ASPE include:

• disclosure requirements
• impaired loans
• revaluation and depreciation of components of
property, plant and equipment
• impairment losses and subsequent reversal of loss
• development costs
• post-employment benefits
• interest capitalization
• Compound financial instrument
• Preferred shares in tax planning arrangement
• Value of conversion option for convertible bonds
 Analysis and Interpretation of
Financial Statements
 Different accounting methods have different
impacts on key financial statement ratios.
 We will focus on the following key ratios:
Ratio Formula What Is Measured
Current ratio Current Assets ÷ Current Liabilities Liquidity
Debt-to-equity ratio Total debt ÷ Shareholders' equity Solvency
Return on assets Income before interest & taxes ÷ Total assets Profitability of assets
Return on equity Net Income ÷ Shareholders' equity Profitability of owners' investment

 When determining the impact on ratios of changes in

reporting methods, we must consider the impact on
both the numerator and the denominator.