Advanced Financial - Chapters) Copyright © 2014 Pearson Canada Inc. 1

Advanced Financial Accounting, 7e Thomas Beechy Umashanker Trivedi Kenneth MacAulay (Solutions Manual All Chapters) 1 / 4

Copyright © 2014 Pearson Canada Inc. 1

CHAPTER 1

Setting the Stage

Chapter 1 is intended to set the stage for the application of accounting standards in differing contexts and the exercise of professional judgement. Throughout this text, the need for professional accountants to apply professional judgement in most areas of financial reporting is emphasized, especially in the crucial area of estimates. The choice of accounting policies is highly constrained in most of the subject areas of Advanced Financial Accounting, but applying the mandated accounting policies still leaves a lot of room for estimates, such as assigning fair values to assets acquired in a business combination. The allocation of the purchase price can have a substantial impact on the reported consolidated financial results.

There are three major topics covered in this chapter: (1) the general approach in Canada to accounting standards for the four different types of economic entities; (2) the comparability of financial statements when prepared in different countries; and (3) accounting standards for private enterprise. The use of a disclosed basis of accounting (DBA) as an alternative to GAAP-based presentation is also presented.

Two additional topics that appeared in the sixth edition of Advanced Financial Accounting have been moved to the Instructor Resource Manual, in case instructors wish to use this material as background material for their own teaching or for providing to the

students:

• A more detailed explanation of financial reporting objectives, in case students have not already become fully acquainted with using the different (and usually conflicting) users and preparer reporting objectives in approaching accounting judgements.• A description of the background of the IASB and development of international standards, including the formal structure of the IASB and its different bodies.

Students will obtain practice in exercising their professional judgement through case analysis. There are several cases at the end of each chapter. These cases highlight the existence of alternative accounting policies and raise the question as to what criteria should be used to make a choice. Students need to consider the importance of financial reporting objectives in arriving at decisions, as well as the specific facts and constraints presented in the case situation.

The extent of will vary from university to university and program to program. For students who lack familiarity with situation-specific objectives, this chapter will contain new material and may require substantial study. For these students, a thorough coverage of the cases at the end of this chapter is strongly recommended. The Chapter 1 cases should not be assigned all at once, but they probably should all be covered over the 2 / 4

Chapter 1 – Setting the Stage

Copyright © 2014 Pearson Canada Inc.2 course of the first few weeks of the course, in order to give the students practice at application. Other students may be quite experienced at case analyses that emphasize financial reporting objectives. For these students, this chapter will constitute a review and an update for the introduction of IFRS in Canada. For case-experienced students, coverage of one or two cases may be sufficient to reinforce prior learning.

Most chapters have at least one multi-competency case. In this chapter, the multi- competency cases are Case 1-2, Smith & Stewart, and Case 1-4, W&K Gardens.These two cases have much different scenarios, as Smith & Smith is a partnership while W&K Gardens is a private enterprise. These multi-competency cases have been introduced in response to the multi-competency evaluation systems that are now being used in the profession.

When assigning these cases you will need to decide if you want to assign part of the required only, such as by instructing students to ignore certain issues or some aspects of the case (for example, auditing issues or tax issues).

Whether the students are experienced or new to this material, Chapter 1 should not be skipped. It is important material to which reference is made throughout the text.

SUMMARY OF ASSIGNMENT MATERIAL

Case 1-1: Capricorn Carpet Corporation

In this case, the company is a publicly-held Canadian corporation that is a newly- acquired subsidiary of an overseas parent. The two types of owners lead to conflicting reporting objectives that must be resolved. The case focuses on the acceptability of parent-directed changes in accounting policies for the Canadian subsidiary.

Case 1-2: Smith and Stewart

This is a multi-competency case that requires students to consider the appropriateness of using a disclosed basis of accounting (DBA) for a partnership. The case has some unique valuation issues that must be addressed using market values as a DBA. This case includes assurance issues.

Case 1-3: Renaud Development Corporation

Private companies often have quite specific reporting objectives, objectives that are tied both to the needs of the individual shareholders and to accounting-based measurements that are often specified in the shareholders’ agreement. This case requires the student to discern the reporting objectives of a private company, including the use of share book value to set the selling price of shares. A “dump” of standard reporting objectives will not work in this case. Two different lines of business are described in the case, each requiring accounting policy recommendations.

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Chapter 1 – Setting the Stage

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Case 1-4: W&K Gardens

This is a multi-competency case that includes business advice, accounting policy advice, and advice on how to structure the new entity. The students must consider the objectives of each of the partners in determining the initial set-up of the new business and other alternatives besides GAAP in determining the appropriate accounting policies.

ANSWERS TO REVIEW QUESTIONS

Q1-1: Some nations require that new and/or changed standards issued by the IASB be approved by that nation’s legislators or regulators before they can go into effect in that country. In some places, selected provisions in a standard may be denied acceptance while the rest of the standard may be approved. Even if the new or revised standard is approved in its entirety, its implementation may be delayed to a date following the general date that the standard takes effect.

Q1-2: The four general types of organization to which accounting standards apply are (1) publicly-accountable enterprises, (2) private enterprises, (3) not-for-profit organizations, and (4) governments and other public sector entities. The four accounting regimes (or “threads”) that apply to each are (1) the CICA Handbook, Part I, (2) the CICA Handbook, Part II, (3) CICA Handbook, Part III, and (4) the Public Sector Accounting Handbook.

Q1-3: Governmental accounting standards are the recommendations issued by the

Public Sector Accounting Board, which is a unit of the Canadian Institute of Chartered Accountants. The board does not have the authority to impose its recommendations, but governments often voluntarily choose to follow the PSAB’s recommendations, particularly the senior governments – the federal, provincial, and territorial governments.Generally, municipalities and other more local governments are governed by provincial statute and/or regulations.

Q1-4: Even when an accounting standard prescribes only one accounting policy,

judgement still must be applied in determining if the policy is appropriate, and if it is, then measurement estimates still underlie its application.

Q1-5: To have quality accounting, a nation must have a strong infrastructure consisting of (1) preparer professionalism, (2) audit quality, and (3) an effective enforcement mechanism. Without these three ingredients, there can be little confidence in financial reports. The preparers (accountants) must be capable of applying accounting standards in an ethical manner, including a good understanding of professional judgement. Secondly, the quality of audit staff and audit overview must be strong in order for a user to have confidence in the auditor’s report. Third, without robust enforcement, there is no penalty for companies that prepare misleading financial statements, either through lack of professionalism or with fraudulent intent.

Q1-6: Some factors are as follows (two required; others may apply):

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