Simplified accounting rules for small business

The CICA announced late last year a draft version of a new accounting framework for small, owner-managed businesses. The framework is being developed because these types of companies don’t have complex reporting needs like public companies, non-profit organizations, or private companies with significant third party investors or creditors.

I haven’t begun working on public company clients yet, although I have a couple equivalent-to-public companies currently. I have made it known in the office that I want to work on public companies in the future, so hopefully I will be scheduled on one or two soon.

Canada is moving towards international accounting standards (IFRS) for publicly accountable enterprises. The decision has been made and the process of reconciling Canadian GAAP to IFRS is in motion. Word around the office is that IFRS is very similar to Canadian GAAP in terms of the financial statements, but much more developed (read: verbose) when it comes to note disclosure.

But back to small business, or Owner Managed Enterprises (OMEs) as the framework calls them. The framework’s Foreword offers a glimpse into the thinking behind the endeavor:

Such a system could share some of the basic requirements of GAAP financial reporting … but expressed in a basic fashion.

You aren’t going to hear me complain if we can make accounting standards more understandable and accessible. In fact, I would consider it a prime concern if we want to create a more robust, entrepreneurial economy, here and around the world in the future. Such a milieu would help developing countries pull themselves up and improve their lot the only surefire way: through the expansion of trade.

A non-GAAP solution opens up a wide range of possibilities. A tax basis of accounting, a modified cash basis of accounting, a less complex version of GAAP – all are possible.

This is really interesting. I can’t say as I think these bases would provide better information, but they would be easier in many ways. The tax basis would obviously make filing a snap, and minimizing taxes is a key concern for small business owners. As for modified cash basis, there’s not enough information here to comment. Modified how?

Concerns were about the loss of a well-known frame of reference for financial statements [due to the transition to IFRS].

IFRS is great for the global economy. You want to tap into the global markets, you gotta play by the global rules (regardless of how dubious the model for the setting of those rules happens to be at this point in time). The conclusion of the CICA stems from the above quote – keep the accounting standards we know, just cut out the complicated stuff that small businesses don’t need. In their words (again):

The existing financial reporting framework in the Handbook represents … the collective intellectual capital of the accounting profession in Canada.

That is the best reason I can think of for reusing the standards for Owner-Managed Enterprises.

The CICA sought comment from interested parties on the framework by January 31, 2008. They recently posted an update on those consultations.

4 thoughts on “Simplified accounting rules for small business

  1. I got halfway through this post before hitting the thought, “oooh, one-line audit reports”


    Seriously, though, this “small GAAP” vs. “big GAAP” has been bandied about for ages – I wonder what’re the odds they’re going to settle on something sometime soon? Perhaps IFRS will be the catalyst that finally gets it settled after all indeed.

  2. Neil, at first I thought this was an April Fools joke.

    The frustrating thing about producing GAAP statements for a SME is that I am writing many notes that will possibly never be read, probably never be understood, and certainly never be relied upon in a decision making context. If we go back to the definition of materiality how much of GAAP is immaterial for SME’s? The fact that technically better work or disclosure may be unappreciated or irrelevant is not motivating.

    I haven’t read the framework or comments so I may be repeating, rather than plagiarizing. SME GAAP should be less complex than big company GAAP as the users are both less complex and able to obtain information directly. A public company’s financial statements will be studied in depth by professional analysts who often donèt have access to other information. The potential users of a SME’s statements usually discuss them with management and have access to whatever they want for their due diligence process. The person who is going to buy a business from my client will usually know that business rather than GAAP.

    With a public entity, everybody has access to the financial statements and can use them for decision making purposes. The statement of an SME are generally private, with management granting access to not only the statements, but also other resources as requested.

    The key is that we need to look at what information various SME decision makers utilize, and greatly simplify the areas of GAAP that are not relied upon.

  3. Neil, Modified cash basis of accounting as a specific meaning. The modified cash basis is a hybrid method such combines features of both the cash basis and the accrual basis. Modifications to the cash basis accounting include such items as the capitalization of assets and the accrual of income taxes. If these modifications are made, the resulting balance sheet would include long-term assets, accumulated depreciation, and a liability for income taxes. The income statement would report depreciation expense and income tax expense. Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.

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