Since the mid 90s there has been debate within accounting circles on whether there should be two versions of GAAP â€“ one for public companies and one for private companies. Big GAAP and little GAAP. The logic is that there are sections of GAAP that do not apply to non publicly accountable entities, and time and money is wasted complying for little benefit.
In 2002 differential reporting became available for private companies which allowed management, with the unanimous consent of shareholders, to choose how they accounted for certain financial statement items from among options. For example, subsidiaries and joint ventures can be accounted for using the equity or cost method, in addition to full consolidation.
IFRS presented the next challenge. Canada will adopt IFRS for public companies for years beginning on or after January 1, 2011. But what about private companies? The AcSB decided to tailor existing Canadian GAAP to the needs of private companies.
The following removed sections, for example, didn’t apply to private companies:
- Earnings per share, as the measure is primarily used by public companies
- Interim and segment reporting, for the same reason
- Most EICs, which are mostly very detailed rules for special, specific situations
Differential reporting options were maintained for the most part, including:
- Income taxes, which can be accounted for under the future income taxes or taxes payable method
- Subsidiaries, joint ventures and investments, which can be accounted for under the equity or cost method
Note disclosure is being simplified. For example, property, plant and equipment, which previously required more detail in the notes, will no longer require it. The reasoning was that most third party users of private company financial statements look to key ratios calculated from the financial statement numbers to judge a company’s financial health rather than details on line items.
Financial instruments have been significantly simplified. All will be measured at historical cost, with two exceptions measured at fair market value:
- Equity investments for which market price is readily available
- Derivatives not qualifying for hedge accounting
IFRS adoption will be optional for private companies, and will make sense for those that plan to go public in the near future and possibly for those that compete against public companies to aid investors looking to compare their figures. Of course there are already private companies in Canada that are subsidiaries of European entities and have been reporting under IFRS for years now. (I work for one.)
All these changes should lower compliance costs for private companies, which should include lower audit fees. An article on private company GAAP in the current CA Magazine mentions lower costs three separate times. These will be realized primarily thanks to easier to audit information (cost vs. fair value) and lower disclosure requirements.
I hope all the accounting firms are getting ready to lower their prices now that the audit costs will be reduced.
5 thoughts on “Changes to GAAP for private companies in Canada”
Just a little. Actually it’s more that the writer of the CA Magazine article is a little out of touch or deliberately BSing.
Yeah, I’ve thought about the writers they have on ‘staff’, mostly freelancers I gather, writing there. Makes me think “huh, I could do that…” ;)
For those businesses that do not have to follow IFRS in Canada, what will they have to follow?
There are standards available for use by businesses not required to follow IFRS in Canada.
Comments are closed.