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Accounting Theory by HC121104001557


Class Announcements
   Assignment #1 is due September 20th; available on-line
   See SCC for information on information sessions
   Women in Business Awards application deadline is 12 noon Monday
    September 24th.
     See

     Each award is worth $3,000 and there are two awards given annually.

     The awards will be presented at the Women in Business Speakers' Series
      which is scheduled for 2:15pm Thursday October 4th in SCHW110.
   Making the Career Connection Networking Dinner - Thursday, September
    27, 2012 MacKay Room, Workplace Insight Sessions, 5:00pm to 5:30pm
    Reception begins at 5:30pm | Dinner served at 6:00pm Tickets: $25 per student; SCHW 178
Class Objectives
1.   The Canadianization of the Conceptual Framework
2.   The Canadian Conceptual Framework CICA 1000
3.   The building blocks of a conceptual framework
     inherent in CICA 1000
Conceptual Framework
   “In my opinion, judgments based on an objective,
    internally consistent and generally accepted conceptual
    framework would provide more useful information to
    financial statement users than judgment based on
    subjective factors, which are more difficult to interpret
    and apply. Without some form of conceptual framework,
    professional accounting judgments are based on little
    more than personal experiences and biases.” (Amernic &
    Leon 1984)
Conceptual Framework: Canadian
   “A Canadian Conceptual Framework should reflect
    cultural, political and environment difference leading to
    different financial reporting standards”
       History differ – revolution vs. separation
       Approaches differ – adversarial vs. non adversarial
       Social policy differ – social justice and social welfare
       Spectrum of political opinion differ
       System of laws and taxation differ
       Political process and structure differ
                   (Amernic & Leon 1984)
Conceptual Framework: Development

   FASB developed a conceptual framework 1976 and
    likened a conceptual framework to a constitution
       “a constitution describing it as a coherent system of interrelated
        objectives and fundamentals that can lead to consistent
        standards and that prescribes the nature, function and limits of
        financial accounting and financial statements” FASB 1976
   CICA adopted a user oriented deductive approach
   CICA rejected US rule based approach running counter
    to concept of professionalism; adopted a principles
    based approach
Conceptual Framework: CICA 1000

   CICA Handbook Section 1000 “ Financial Statement
   Purpose: to describe concepts underlying the
    development and use of accounting principles in
    general purpose financial statements
Conceptual Framework: Building Blocks

   The building blocks of a conceptual framework are:
   1) Statement of objectives including presumption as
    to users and needs
   2) Business purpose and nature of the economics
   3) Qualitative characteristics and limitation of
    financial information
1. Objectives of Financial Reporting
    Every conceptual framework begins with a statement of
        Users - investors & creditors
            Consideration of various users’ objectives not just dominant group
            Objectives of different users – bias
            Ccompeting interests generate competing considerations of relevance
            A multiplicity of users and uses might suggest a general financial statement is
        User Decision-making
            Assess management stewardship
            Assess financial performance (past, present and future)
            Allocations of resources
2. Business Purpose and Nature
   Business Purposes:
     capital maintenance
     creation of wealth

     measurement of wealth (cash flow, net assets)

   Economic system:
     capitalist

     socialist

     Government/state   controlled
3. Qualitative Characteristics

   1) Understandability       4) Reliability
   2) Relevance                   Representational
                                 a)

     a) predictive & feedback faithfulness
      value                    b) Verifiability

     b) Timeliness            c) Neutrally

   3) Comparability           d) conservatism
Does CICA 1000 contain these
essential building blocks for a
conceptual framework?
CICA 1000: Business Purpose and Nature
   Business Purpose:
       Ownership segregated from management (.09)
       Describe economic events (.15)
       Describe changes in economic events (.15)
   Business Nature:
       Canadian Economic Environment (.07)
           Profit oriented (0.04)
           Nonprofit oriented (0.08)
       Debt and Equity markets and financial institution act a
        exchange mechanisms (0.07)
       Representations of the past rather than future (0.05)
       Limited to transaction and events (0.05)
       Prepared on an accrual basis (0.46) and capital maintenance
        basis (0.55) of accounting
CICA 1000: Statement of Objectives
   Purpose:
       need for external communication of economic information about the entity to
        investors (.09)
       general purpose financial statements (.01)
       meet common information needs of external users (0.01)
       Requires the use of professional judgment (0.02) and is part of financial reporting
        process (0.06)
   Users:
       Primary focus on creditors and investors (.11)
       Not practicable to expect financial statements to satisfy the many and varied
        information needs of all external uses of information about the entity (.11)
   User needs:
       Resource allocation (.12)
       Prediction of cash flow (.12)
       Stewardship (.14)
CICA 1000: Qualitative Characteristics and

   Qualitative Characteristics
       Understandability (.19)
       Relevance – predictive and feedback value; timeliness (.20)
       Comparability (.22)
       Reliability – representational faithfulness; verifiability; neutrality;
        conservatism (.21)
       Tradeoff between qualitative characteristics (.24)
   Limitations
       Scope limit to financial statements (.04)
       Based on representations of the past (0.04)
       Going concern (.58)
       Cost benefit tradeoff (.16)
       Materiality (.17)

   .33 Liabilities have three essential characteristics:
   (a) they embody a duty or responsibility to others that
    entails settlement by future transfer or use of assets,
    provision of services or other yielding of economic
    benefits, at a specified or determinable date, on
    occurrence of a specified event, or on demand;
   (b) the duty or responsibility obligates the entity
    leaving it little or no discretion to avoid it; and
   (c) the transaction or event obligating the entity has
    already occurred.
   .30     Assets have three essential characteristics:
   (a) they embody a future benefit that involves a capacity,
    singly or in combination with other assets, in the case of
    profit-oriented enterprises, to contribute directly or indirectly
    to future net cash flows, and, in the case of not-for-profit
    organizations, to provide services;
   (b) the entity can control access to the benefit; and
   (c) the transaction or event giving rise to the entity's right
    to, or control of, the benefit has already occurred.
   .44 The recognition criteria are as follows:
   (a) the item has an appropriate basis of measurement
    and a reasonable estimate can be made of the amount
    involved; and
   (b) for items involving obtaining or giving up future
    economic benefits, it is probable that such benefits will be
    obtained or given up.
    IFRS Conceptual Framework
   “The IFRS is committed to narrowing differences by seeking to harmonize
    regulations, accounting standards and procedures relating to the preparation
    and presentation of financial statements.”
   Purpose: Useful in making economic decisions (expanded list of decision
    examples provided)
   Scope:
       Objectives of financial reporting
       Qualitative characteristics
         Fundamental – relevance and faithful representation
         Enhancing – comparability, verifiability, timeliness, understandability

       Definition, recognition and measurement of the elements from this financial
        statements are constructed
       Concept of capital and capital maintenance - financial or physical
       Different measurement bases

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