The Canadian accounting landscape changed dramatically on Jan. 1.
As lawyers advising your business clients on issues like corporate structure and reorganizations, it’s important to understand upcoming changes to financial statement disclosures as they affect the balance sheet, income statements, and notes.
Financial statement users and stakeholders are probably aware that the Canadian accounting profession has adopted new international financial reporting standards known as IFRS for publicly accountable enterprises.
What many people may not be aware of, however, is the release of new accounting standards for private enterprises (ASPE). Those companies now have the choice of whether to adopt IFRS or ASPE for fiscal year-ends beginning after Jan. 1, 2011.
Why was there a switch to ASPE? In Canada, there was always a need for reporting standards to meet the requirements of private enterprises. Over the years, various changes were put into place to meet these needs.
As far back as 1999, the Accounting Standards Board concluded that accounting standards were becoming too complex for smaller privately held enterprises. This led to the first major change in 2002 with the implementation of differential reporting for private entities.
When Canada decided to adopt IFRS, consideration of a revamp of accounting standards for private enterprises became more pronounced. Many of the existing accounting standards remained unnecessarily complex, and financial statement disclosures were overwhelming and becoming increasingly expensive to prepare.
In 2008, the board established an advisory committee of financial statement preparers and users of those statements to address issues related to the complexity of financial reporting for private enterprises. Following a few years of research, dialogue, and debate, a new made-in-Canada accounting standard resulted.
The new standards introduce several significant changes. Of particular importance is the reduction in financial statement disclosure requirements. Also noteworthy is the fact that equities quoted in an active market must be measured at fair value under ASPE. There is now an option to measure other financial instruments at fair value as well.
Another major change with ASPE is the optional bump to fair value for fixed assets. This one-time revaluation may be very desirable for businesses that have been carrying land and buildings on their financial statements for many years at a low book value.
The bump to fair value of fixed assets and the corresponding increase to shareholders’ equity can have a very positive effect in enhancing certain bank covenant ratios such as debt to equity.
Other changes involve accounting for an investment in subsidiaries at fair value where there is a quoted active market, a simplified defined-benefit plan measurement, and simpler rules in accounting for goodwill impairment.
Lawyers’ business clients may want to adopt ASPE early. One significant reason for doing so would be to take advantage of the one-time bump to fair value of certain property, plant, and equipment. But in doing so, there would be a need to determine the fair value of those assets as of Jan. 1, 2008.
This may be advantageous if some of those assets became impaired during the 2008 economic downturn.
Overall, the decision of which accounting standards to adopt should consider users of financial statements, future plans, financial resources, and personnel available to implement the changes.
These decisions should not be made without consulting various stakeholders, including lenders and shareholders.
Above all, clients should be consulting with their lawyers as well as soliciting the resources and expertise of other financial advisers to make the transition to ASPE or IFRS as seamless as possible.
Hartley Cohen is a partner at Kestenberg Rabinowicz Partners LLP in Markham, Ont.
