CHAPTER 1:

Conceptual and
Case Analysis
Frameworks for
Financial
Reporting

Prepared by
Shannon Butler, CPA, CA
© 2022 McGraw Hill Limited Carleton University
 Learning Objectives

LO1 Describe and apply the conceptual framework for

financial reporting.
LO2 Describe how accounting standards in Canada are
tailored to different types of organizations.
LO3 Identify some of the differences between
IFRS and ASPE.
LO4 Analyze and interpret financial statements to
assess the impact of different accounting
methods on key financial statement ratios.
LO5 (Appendix 1A) Apply the case analysis framework to
solve accounting and reporting issues.
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 The Conceptual Framework
for Financial Reporting, Part 1
 Financial statements should cater to the needs of the users.
 The CPA Canada Handbook (Handbook):
 is an authoritative document in Canada because many legal statutes
require its use.
 provides the accounting and reporting requirements as well as
explanations and guidance for most transactions and events
encountered by an entity.
 When a transaction or event is not explicitly addressed by the
standards, an entity can look to “The Conceptual Framework for
Financial Reporting”. This document is in the first section of the
Handbook.

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 The Conceptual Framework
for Financial Reporting, Part 2
 The purpose of the Conceptual Framework (SP1.1) is to:

a) assist the International Accounting Standards Board to develop

IFRS® Standards that are based on consistent concepts;
b) Assist preparers to develop consistent accounting policies when
no Standard applies to a particular transaction or other event, or
when a Standard allows a choice of accounting policy; and
c) assist all parties to understand and interpret the Standards.

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 The Conceptual Framework
for Financial Reporting, Part 3
 The Conceptual Framework is not a Standard in and of itself.
Nothing in the Conceptual Framework overrides any Standard or
any requirement in a Standard.

 The Conceptual Framework has a primary emphasis on properly

recognizing assets and liabilities, which will then determine the
income, expenses and equity.

 All accounting practices should be traceable to and supported by

the conceptual framework.

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 The Conceptual Framework
for Financial Reporting, Part 4
 The Conceptual Framework went through a major review
and was revised in 2018. It now contains eight chapters:
Chapter 1:The objective of general purpose financial reporting
Chapter 2:Qualitative characteristics of useful financial
information
Chapter 3:Financial statements and the reporting entity
Chapter 4:The elements of financial statements
Chapter 5:Recognition and derecognition
Chapter 6:Measurement
Chapter 7:Presentation and disclosure
Chapter
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Hill Limited 6
 The Conceptual Framework
for Financial Reporting, Part 5
 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.

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 Accounting Standards in Canada
 The CPA Canada Handbook contains five parts as follows:

Name for
Part # Applicable To:
Standards
I Publicly accountable entities IFRS
II Private enterprises ASPE
III Not-for-profit organizations
IV Pension plans

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 GAAP for Publicly Accountable
Enterprises

 At one time, Canada intended to harmonize its standards with

those of the United States.
 Most Canadian publicly accountable enterprises have to report
under IFRS.
 Part I of the CPA Canada Handbook now contains standards
that are the same as IFRS.
 Rather then always referring to Part I of the Handbook, we now
refer to it as IFRS.

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GAAP for Private Enterprises, Part 1
 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.

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GAAP for Private Enterprises, Part 2

 In 2009, it was decided that private companies would have a

separate part of the CPA Canada Handbook dedicated solely
for them.
 These standards are included in Part II of the Handbook and
are referred to as Accounting Standards for Private Enterprises
(ASPE).
 Private enterprises can adopt either IFRS (Part I) or ASPE
(Part II).

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 IFRS versus ASPE, Part 1

 ASPE sometimes allows a choice between different

reporting methods.
 Key differences between IFRSs and ASPE include:
• disclosure requirements
• impaired loans receivable
• Qualitative characteristics
• revaluation and depreciation of components of
property, plant and equipment
• impairment losses and subsequent reversal of loss
• development costs
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 IFRS versus ASPE, Part 2

 Key differences between IFRSs and ASPE include, continued:

• post-employment benefits
• Actuarial gains/losses
• Income taxes
• interest capitalization
• Compound financial instrument
• Preferred shares in tax planning arrangement
• Value of conversion option for convertible bonds
• Lease accounting by lessee

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 GAAP for Not-for-Profit
Organizations

 The not-for-profit (NFP) sector was divided in two: the

government NFP sector and the nongovernment NFP sector.
 The nongovernment NFPOs can report under either IFRS or
Part III of the CPA Canada Handbook, combined with relevant
sections from Part II of the Handbook.
 Part III carries forward the 4400 series of sections from the
prechangeover Handbook, largely without change.

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Government Organizations, Part 1

 All levels of government should follow the PSA Handbook.

 Government business enterprises are expected to follow IFRS.

 Other government organizations can follow either IFRS or the

PSA Handbook.

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Government Organizations, Part 2
Type of Organization
Publicly accountable organizations
Private enterprise
Nongovernmental NFPO
Governmental NFPO
Government business enterprise
Other government organization
Pension plan
© 2022 McGraw Hill Limited
Standards Required or Allowed
IFRS (Part I)
IFRS (Part I) or ASPE (Part II)
IFRS (Part I) or Standards for NFPOs (Part
III)
PSA Handbook with or without 4200 series
IFRS (Part I)
IFRS (Part I) or PSA Handbook
Standards for Pension Plans (Part IV)
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 Analysis and Interpretation of
Financial Statements, Part 1
 The main objective of financial reporting is to provide
information useful to the external users of the financial
statements.

 The quality of financial reporting is based on how accurately

the financial statements present the actual situation of the
reporting entity.

 When the quality of financial reporting is low, the users of the

financial statements are not being told the truth about the
entity’s financial situation.

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 Analysis and Interpretation of
Financial Statements, Part 2
 Financial statement analysis involves reviewing, evaluating,
and interpreting the company’s financial statements.
 Common-sized financial statements make it easier to see the
relationship between financial statement items in terms of
percentages.
 When companies in the same industry use different accounting
policies, it may be necessary to adjust the financial statements
of one of the companies to make the statements more
comparable.

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 Analysis and Interpretation of
Financial Statements, Part 3
 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.

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 Appendix 1A: A Generic
Approach to Case Analysis

 Generic Framework for Case Analysis:

I Determine Your Role and Requirements

II Identify Users and Their Needs Given the Case Environment
III Identify and Rank Issues
IV Identify Viable Alternatives for Each Major Issue
V Analyze Alternatives Using Criteria for Resolving
VI Communicate Practical Recommendations/Conclusions

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 I: Determine Your Role &
Requirements

 The first step is to determine who you are in the context of

the case.

 The key requirements are often found in the last two

paragraphs of the main body of the case.

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 II: Identify Users and Their Needs
Given the Case Environment

 Define all the other characters in the case.

 The other characters will be seeking your expertise in
financial matters, consider their needs.

 When focusing your task on the user’s needs, always

consider the environment in which you both operate.

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 III: Identify and Rank Issues

 Issues are usually ranked based on controversy, errors, and

complexity.

 Do not rank an issue as important only because you know a

lot about the subject.

 Rank items solely on their importance to the other characters

in the case.

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IV: Identify Viable Alternatives for
Each Major Issue

 Very few case issues will have one correct answer.

 You will need to create various possible solutions to each
case issue.

 The alternatives should be relevant and viable for the client’s

unique situation.

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 V: Analyze Alternatives Using
Criteria for Resolving

 For each issue listed on your case plan, an analysis of the

previously identified alternative should be performed.

 This may include quantitative and or qualitative forms of

analysis.

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 VI: Communicate Practical
Recommendations to Users

 Your answer to the case should be in the form required by the

question.

 It should provide clear, practical recommendations based on our

analysis and should directly address the identified user’s needs.

 Your solution should demonstrate the organizational skills

required of a professional person.

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