May 27, 2011
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On January 2, 2011 financial reporting in Canada underwent a significant transition in standards, as public companies were required to adopt International Financial Reporting Standards (IFRS) for the first time as a replacement for Canadian Generally Accepted Accounting Principles (GAAP). Changes in the global accounting landscape meant that financial statements prepared in accordance with Canadian GAAP were not consistent with the international movement towards a single standard.

Maybe your business’ financial statements are not closely scrutinized by investors and analysts. Maybe your business does not require an annual audit, but only a review for the chief financial institution you deal with. Do these new standards have any impact on your company? In this article we will take a closer look at what these standards mean for you.

The choice for private corporations

While the Accounting Standards Board (AcSB) mandated that all publicly-traded companies would be required to change their accounting standards to IFRS, there were concerns that such a transition would not benefit private corporations nor meet the needs of the statement users. After consultation with various stakeholders, AcSB released a separate set of accounting standards for private, profit-oriented companies: Accounting Standards for Private Enterprises (ASPE).  Private companies in Canada are now permitted to prepare financial statements using either set of standards, depending on their needs.

ASPE – what's changed?

ASPE is essentially traditional Canadian GAAP with more leniencies in some of the more complex measurement and disclosure requirements. Before the switch to IFRS, Canadian GAAP was becoming increasingly sophisticated, especially with regards to financial instruments. Since these standards were developed primarily for large public companies, there was not much sense in ASPE retaining them.

Here are some of the changes that may impact your company:

  • Measurement of financial instruments– While Canadian GAAP had been requiring a significant amount of fair value disclosure (in addition to disclosing the methods in determining fair value), ASPE only requires that instruments quoted in active markets need to be disclosed at fair value. All other financial instruments can now be measured at cost or amortized cost. In addition to this, the disclosure requirements relating to financial instruments have been greatly reduced. This is of great benefit as it can bypass the need for costly valuations during the preparation of your annual or quarterly statements.
  • Treatment of intangible assets – In the past, internally generated intangible assets (or start-up costs) were required to be expensed during the research phase and capitalized during the development phase. Under ASPE, companies now have the choice to expense or capitalize start-ups costs, as long as the same method is applied consistently to all internally generated intangible assets. This benefits companies as they are no longer required to distinguish between the research and capitalization phases.
  • Additional disclosure on payables – While most of the changes reduce the financial reporting burden, ASPE does require one significant new disclosure. Companies must now separately disclose the amount owing in government remittances (not including income taxes). This is an important requirement as it is seen by creditors as a key factor in determining the risk of bankruptcy.
  • First-time adoption – If you decide your company will adopt ASPE rather than IFRS, it is essential to be familiar with ASPE First-time Adoption standards. Companies applying ASPE for the first time are required to retroactively apply the new standards. This could potentially impact the prior years’ income statement, various balance sheet figures as well as opening retained earnings. There are however, exemptions from retroactive application which are outlined in this section.  The section also provides companies with one-time options to revalue certain assets, which could be advantageous. One example is companies have the opportunity to record fixed assets at fair value. If your company has real property on the balance sheet, this could be an opportunity to increase the carrying value, thus recognizing a gain on the asset before it is sold.

Reasons to adopt IFRS

Would it ever make sense for a private corporation to voluntarily adopt IFRS? In some cases, yes. Here are a few scenarios where it might be advantageous to do so:

  • Issuing an IPO – If you are planning on taking your company public in the future, then adopting IFRS will be a requirement. It may be beneficial to adopt early, as providing potential investors with consistent financial statements over a longer period of time paints a clearer picture of your company and can increase confidence in the statements.
  • Comparability to competition – If your company competes against public corporations, adopting IFRS means your company's financial statements can be more easily and accurately compared with your competitors. Even if you decide not to adopt, you should at least be cognizant of the differences that affect your industry.
  • Benchmarking – Similar to the  point on comparability to competition, if your company uses financial statements of publicly-traded companies as a benchmarking tool, then you may consider adopting IFRS in the interest of comparability.
  • Foreign investment – Some small to mid-size companies may wish to attract foreign investment either now or in the future. With most of the G20 now applying IFRS, foreign investors often prefer that financial statements be prepared using these standards as it provides a greater level of consistency.

As always, the most important consideration when making this decision are the expectations and requirements of the principal users of the financial statements.  It is recommended that you consult with the primary stakeholders to ensure you are clear as to what they expect and what their needs are.

When making any financial reporting decision a cost-benefit analysis should be performed; the decision to adopt IFRS is no different. If the users of your company's financial statements are satisfied with either option and you are not sure how to proceed, you should consult with your accountant and determine the cost of preparing statements in accordance with IFRS and if it is the right decision for your business.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Business Law