2016 McGraw-Hill Education

CHAPTER
1:
Conceptual
and Case
Analysis
Frameworks
for Financial
Reporting

Prepared by
Shannon Butler, CPA,
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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for Financial Reporting

LO1

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.
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for Financial Reporting

LO1

Professional judgement is the ability to make a

decision in situations in which the answer is not clearcut.

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.
4

Accounting Standards in
Canada

LO2

The CPA Canada Handbook contains five parts as

follows:
Part
#
I
II
III
IV
V

Name for
Applicable To:
Standards
Pubicly accountable entities IFRS
Private enterprises
ASPE
Not-for-profit organizations

Pension plans

All entities not yet using other Pre-changeover

parts
GAAP
5

GAAP for Publicly

Accountable Enterprises

LO2

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).
6

GAAP for Private

Enterprises

LO2

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

LO2

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

LO3

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
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Analysis and
Interpretation of
Financial Statements

LO4

Different accounting methods have different

impacts on key financial statement ratios.

We will focus on the following key ratios:

Ratio
Current ratio
Debt-to-equity
ratio

Formula
Current Assets Current Liabilities

Total debt Shareholders' equity

Income before interest & taxes
Return on assets Total assets

What Is Measured
Liquidity
Solvency
Profitability of assets
Profitability of owners'
investment

Return
on equity
Net Income Shareholders'
equityon ratios of changes
When
determining
the impact
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

LO5

Generic Framework for Case Analysis:

I
II
III
IV
V

Determine Your Role and Requirements

Identify Users and Their Needs
Identify and Rank Issues
Identify Viable Alternatives for Each Major Issue
Analyze Alternatives Using Criteria for Resolving
Communicate Practical
VI Recommendations/Conclusions

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I: Determine Your Role

& Requirements

LO5

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

LO5

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 users needs,

always consider the environment in which you
both operate.
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III: Identify and Rank

Issues

LO5

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

LO5

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 clients unique situation.

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V: Analyze Alternatives
Using Criteria for
Resolving

LO5

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
LO5
Practical
Recommendations/Concl
usions 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 users needs.

Your solution should demonstrate the organizational

skills required of a professional person.
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