Canadian Financial Reporting Institutions

The recently published Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth lambastes virtually every aspect of Canadian financial reporting in exceptionally harsh terms. Although the authors' assertions about the implications of financial reporting violations they have seen are mostly unsubstantiated or overblown, publications like theirs are useful if they stimulate continual, thoughtful consideration of Canada's institutional arrangements. I discuss various methodologies for doing this and present some novel evidence indicating that some of the authors' assertions are simply incorrect. Canada's financial reporting institutions, like all institutions, are not perfect, so we must always listen to their critics' suggestions for reforming them; however, our institutions are in much better shape than Easy Prey Investors asserts.     

Warning Lights on the Dashboard

Many businesses operate legally while pushing the ethical values of society. This case follows the actions of a manager who uses particular metrics to improve his business at the cost of increasing the community's ethical concerns. The objectives of the case are to have students recognize ethical concerns arising from the metrics, assess how these impact business strategy, propose improvements while understanding the ethically sensitive environment in which the business operates, and devise an effective approach to persuade others to implement proposed changes. This case demonstrates to students the complexity of many ethical issues in business and challenges them to consider the interaction between ethical boundaries and a profitable corporate strategy. It highlights the importance of ensuring that both qualitative—here, ethical—and quantitative considerations are incorporated in any management accounting decision‐making tool.     

IFRS within the Multi‐GAAP Canadian Reality: A Teaching and Learning Imperative for Intermediate Financial Accounting

Intermediate accounting instructors need to be engaged in the specific complexities and challenges of the new international financial reporting standards (IFRS) reality within the Canadian multi‐GAAP environment. Intermediate accounting courses are directly affected because they represent substantive coverage of the corporate reporting environment. In this article I make the case that these courses should primarily reflect IFRS standards in order to entrench IFRS competencies in students who wish to pursue a professional designation, to prepare students for the global environment, and to concentrate IFRS expertise issues in a robust instructor group. The competency maps of each of the three Canadian professional accounting bodies clearly reflect IFRS. Students can analyze the implications of major areas of policy differences between IFRS and private enterprise GAAP (PEGAAP) through specific targeted course coverage, but also through active learning elements, particularly research elements. This commentary reflects some of the active debate occurring regarding postsecondary curriculum as Canada adapts to IFRS and PEGAAP, and encourages action.     

Canada Generators Limited*

This case depicts an armchair situation involving a newly formed small private Canadian company that has recently begun operations in Western Canada. Of concern to the owners is their understanding that Canadian generally accepted accounting principles (GAAP) are about to be replaced by International Financial Reporting Standards (IFRS) at the end of 2010, and so the statements in their present form will have to be conformed to the new standards if the company decides to go public with a share offering, which is an option it is considering. Other issues facing the company concern the appropriate accounting and reporting requirements that will be required in order to allow the company to secure additional financing and engage in some necessary research and development. This case is suitable for students who have progressed beyond the introductory financial accounting level; it involves adjustments to inventory and capital asset accounts as well as income effects including taxation, and it draws out some of the more important nontransitional differences between GAAP and IFRS.     

Accounting Standards and Earnings Management: Evidence from China

This article examines the effect of an asset impairment–related regulatory reform on earnings management in China. Chinese Accounting Standard No. 8 (CAS No. 8), which prohibits the reversal of long‐lived asset impairments, was promulgated to constrain managerial opportunism with respect to previously recognized impairment loss reversal. CAS No. 8 forbids the reversal of long‐lived asset impairment losses only, while allowing the reversal of short‐term asset impairment losses. Based on a sample of China's A‐share listed companies on the Shanghai and Shenzhen Stock Exchange during the period 2001–2008, we reveal that managers use less current asset write‐downs and more reversals in the post–CAS No. 8 period. However, such reporting practices do not appear to be influenced by managerial incentives to avoid reporting losses and/or for “big bath” accounting purposes.     

Virtually Perfect Corporation*

This case provides an example of a high technology company that is expanding and is facing cash flow constraints. It details financial reporting issues relating to the company’s most recent set of financial statements. It requires students to assume the role of a newly appointed auditor, to prepare a report analyzing the key issues and to provide advice to the owners of the Company. Students are faced with a set of integrated financial accounting and reporting issues. The case incorporates some overview audit issues, but it is most suitable as a capstone case in intermediate financial accounting, for use in either undergraduate or MBA courses.     

Collaborative Resource Solutions

Collaborative Resources Solutions (CRS) is based on a real situation outlining the issues related to buying a service organization. This instructional case requires students to provide advice to a client who is considering purchasing a 50 percent ownership of a similar consulting business with the vision of blending the two companies together and increasing the knowledge base of her current company; therefore improving the ability to target more to clients. The case requires the students to evaluate the strategic, valuation, and financial issues in considering the acquisition of the existing business. In order to do so, students are required to analyze the financial information provided, both historical and forecasted, as well as analyzing key internal operations issues that may impact the future success of the business. This case is suitable for use in upper‐level undergraduate business strategy courses and accounting courses, as well as in master‐level accounting courses. Assessment rubrics and teaching notes accompany the case for use by instructors.     

A Proposal for Teaching Introductory and Intermediate Accounting in an Environment of International Financial Reporting Standards and Generally Accepted Accounting Principles for Private Enterprises*

Teaching introductory and intermediate financial accounting in an environment of international financial reporting standards (IFRS) and generally accepted accounting principles for private enterprises (GAAP for PEs) is an issue facing faculty at Canadian universities and colleges. We present a number of options and then propose an approach that we believe provides a balanced treatment of accounting standards for both publicly accountable and private enterprises. This approach focuses on the concepts and principles that are common to both IFRS and GAAP for PEs. We argue that this approach encourages deep learning resulting in students’ better understanding of accounting standards and their application.     

Accounting Students’ Planning,Writing, and Performance on a Time‐Constrained Case Analysis: Effects of Self‐Talk and Prior Achievement

When writing a case analysis, most students first allocate time to plan the content and structure of their response, and then proceed to write with differing degrees of urgency, the outcomes of which are case responses of differing quality. This study examines the extent to which planning time influences writing urgency and, ultimately, the quality of case responses in a time‐constrained setting. It also investigates whether these behaviors and outcomes depend on students’ frame of mind, by experimentally inducing differing types of pre‐examination self‐talk. Analyses show that planning time was negatively associated with writing urgency; students who spent more time planning subsequently wrote with less urgency. Writing urgency was positively associated with case response quality and, after controlling for differences in writing urgency, planning time was positively associated with response quality. Results indicate that different planning and writing behaviors can be induced by different forms of self‐talk prior to the writing task. Relative to interrogative self‐talk (“Will I …?”), exclamatory self‐talk (“I will …!”) caused higher‐achieving students to spend more time planning, but then write with less urgency and subsequently produce lower‐quality case responses. Conversely, after engaging in exclamatory rather than interrogative self‐talk, lower‐achieving students spent less time planning but then wrote with greater urgency and produced higher‐quality responses. These results indicate that (i) planning significantly affects writing and performance, (ii) students can influence their own planning behavior through pre‐task self‐talk, but (iii) pre‐task self‐talk can be beneficial or detrimental depending on students’ prior achievement.     

Improving Ethical Attitudes or Simply Teaching Ethical Codes? The Reality of Accounting Ethics Education

ABSTRACT

Ethical instruction is critical in accounting education. However, does accounting ethics teaching actually instil core ethical values or simply catalogue how students should act when confronted with typical accounting ethical dilemmas? This study extends current literature by distinguishing between moral/ethical and legal/ethical matters and then re-evaluating the effectiveness of ethics training. A cohort of final-year accounting students with significant ethical training evaluated ethical scenarios. Half were moral (non-legal) and half contained legal as well as moral components. After further ethical instruction they re-evaluated the scenarios. Ethical attitudes towards legal/moral issues improved, but attitudes towards moral-only issues did not. This questions previous studies which purport to demonstrate the effectiveness of ethical instruction and queries the benefits of accounting ethics education. Are fundamental ethical principles being ignored in an effort to prevent more obvious accounting wrongdoings? Accounting ethics training needs to be reassessed if true ethical improvement is to be achieved.     

Depreciation in the Canadian Airline Industry

This case is designed to help students enhance their analytical skills and link accounting policy choices with corporate strategy. Written initially for MBA students and senior analysts attending executive education sessions, it provides participants with 1) industry background for the Canadian airline sector, and 2) historical and selected financial and non‐financial information from the annual reports and initial public offering documents of three players in this industry. Participants are invited to reflect on the theoretical and practical reasons underlying the choice of a depreciation method by airline companies, to find ways to quantitatively compare companies that use different depreciation methods, and to link these policy choices to possible strategic considerations. This case is based on a unique situation prevailing in 2009 where financial information was available for all three airlines which were using different approaches for aircraft depreciation.     

An examination of ethical standards for tax issues

This study examines the extent to which educational background and demographic factors are associated with students' personal standards for ethical issues involving tax professionals. Two hundred and twenty-three students about to complete an introductory tax course were given ten brief scenarios focusing on the ethical and professional responsibilities of CPAs with tax practices. For each scenario, the students were asked whether they believed the opinion or the situation described was considered appropriate under existing professional standards, and whether they personally believed the opinion or situation described was appropriate. They were also asked whether they believed evading taxes was immoral. The results indicated that female students had higher personal ethical standards for issues involving tax professionals than did male students. Exposure to a course in auditing (the accounting course generally having the most extensive coverage of ethical issues) was associated with higher ethical standards, but exposure to a general course on ethics was not. Students aspiring to be tax professionals had higher ethical standards for issues involving tax professionals than those that did not, but their beliefs about the morality of tax evasion were not significantly different. The implications of these and other results are discussed.     

Financial accounting choice and earnings management

This paper presents a case that exposes students in graduate accounting or MBA financial accounting classes to the concepts of accounting choice and earnings management. In the case, students role-play as a manager who, facing conflicting incentives, must make and defend three expense estimates for a hypothetical company. Students also read selected business press articles that introduce earnings management and that highlight the importance of the issue to the business community. The articles give students some background from which to approach the choices they will make with respect to the financial statements.     

Financial accounting choice and earnings management

This paper presents a case that exposes students in graduate accounting or MBA financial accounting classes to the concepts of accounting choice and earnings management. In the case, students role-play as a manager who, facing conflicting incentives, must make and defend three expense estimates for a hypothetical company. Students also read selected business press articles that introduce earnings management and that highlight the importance of the issue to the business community. The articles give students some background from which to approach the choices they will make with respect to the financial statements.     

Assessing professional ethics in tax: A case on uncertain tax positions

We develop and present an ethics case dealing with an uncertain tax position. The case can be used to assess professional ethics as part of an assurance-of-learning (AOL) plan as well as a component of a course grade. We present data on student performance on this case over a 5-year period. Students consider existing ethical frameworks to identify and frame the potential ethical “dilemmas” they might face in addressing whether to countenance a client’s suggested treatment and disclosure of an uncertain tax position. In addition, students evaluate the AICPA guidance and U.S. Treasury standards on taking and reporting uncertain tax positions in the tax return and the FASB and PCAOB standards on reporting and auditing uncertain tax positions in the financial statements. The case allows faculty to assess students’ ability to frame potential ethical dilemmas when clients engage in aggressive tax behavior, to recognize with whom and with what professional reference documents they should consult when an uncertain tax position arises, and to choose among alternative actions when faced with client/preparer conflicts.     

TEACHING RESOURCE Using MONOPOLY TM and Teams-GamesTournaments in accounting education: a cooperative learning teaching resource

A three-week financial accounting simulation was conducted using university accounting majors (n=36) in one section of a junior-level financial reporting issues course. The curriculum involved using the board game Monopoly as a teaching resource in cooperative learning teams. Findings indicate students' attitudes toward financial accounting and learning, mutual concern for fellow students and perceived achievement were very positive upon completion of this cooperative learning exercise. Additionally, gender and student ability were found to impact the level of some measures of student attitudes and perceived achievement.     

An Instructional Case Comparing the Accounting Policies and Financial Results of Online Retailers

In the role of financial analyst for a venture capital firm, you are assigned the responsibility of evaluating two online retailers who have applied for financing to build a distribution center in western Canada. Based on your developing knowledge of Canadian accounting standards for private enterprises (ASPE), you evaluate the financial reporting policies and financial results of the two companies to identify the company that is best suited for your firm's support. Through this case, you will refine your understanding of ASPE and you will exercise your reasoning and analytical skills.     

Stock recommendation of an analyst who trades on own account

This article analyzes the provision of information acquisition and truthful reporting incentives to a financial analyst who can privately trade on own account. In a binary message and state space, I show that the analyst's reward scheme essentially provides him with a portfolio endowment traded in the market. Regardless of the true signal, the analyst issues the report that corresponds to the portfolio endowment with maximum market value, given security prices. The analyst's information acquisition incentive is driven only by private portfolio considerations: he acquires information only if he will be holding a large enough position in the stock he covers.     

Capitalized customer acquisition costs and earnings quality: A case study of PhotoWorks,Inc

This case examines issues related to accounting method choice, earnings management, and earnings quality. Specifically, the case examines a company (PhotoWorks, Inc.) that chose the less conservative approach of capitalizing and then amortizing a certain type of advertising expenditure rather than expensing the costs as incurred. The primary purpose of this case is to illustrate the role of judgment in accounting method choice and how it provides potential opportunities for earnings management. The case also allows students to explore the multi-dimensional nature of financial reporting decisions and to develop a greater appreciation for how their accounting coursework relates to important “real-world” issues. After completing this case, students should be able to do the following: (1) describe factors that are involved in accounting method choice and support the appropriateness of an accounting method choice based on a search of the accounting standards; (2) understand and evaluate the effects of accounting method choice on the financial statements; (3) describe the conflicting motivations managers face when deciding on financial accounting methods versus tax accounting methods; (4) explain what is meant by earnings management, factors that motivate managers to manage earnings, methods they can use to manage earnings, and how earnings management affects earnings quality; and (5) describe the role of auditors in analyzing a company’s accounting method choices and in assessing the quality of a company’s earnings.