Chartered Accountants Carry the Torch - The Institute of Chartered ...

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Private Enterprise Accounting Standards cont’d continued from the previous page In most cases, this will be fairly straightforward, particularly for companies that are currently reporting using existing Canadian GAAP. Not all private enterprises do so, however, and over time a number of companies that use IFRSs may wish to change to using private enterprise standards (for example after a privatization). Section 1500 provides alternatives for several specific areas where requiring retrospective application would not meet a cost-benefit test. For example, a company may not have capitalized costs in a manner consistent with Section 3061, Property, Plant and Equipment. Restating the cost amount for an asset acquired 10 years ago might be difficult and, depending on the accounting records, could be impossible. Section 1500 permits a company to use the fair value of the asset as a deemed cost on adopting the new standards. This choice can be made on an asset by asset basis and does not imply that the asset has to be measured at fair value on an ongoing basis. (Section 3061 does not permit ongoing fair value measurement of property, plant and equipment.) Similarly, a company may not have accounted for a prior year acquisition of land from a related party in accordance with Section 3840, Related Party Transactions. Section 1500 permits the company not to restate the carrying amount of that land. The choices in Section 1500 can only be made at the time of adopting the private enterprise standards. It is therefore important for a company to review Section 1500 early in its planning for the adoption of private enterprise standards to see if some of the choices provided are relevant and to understand the implications of those choices. While the choices in Section 1500 were developed to address circumstances where it would be difficult to adopt the new standards on a retrospective basis, they can be used by any company when first adopting private enterprise standards. For example, a company that has previously applied existing Canadian GAAP and now adopts the private enterprise standards may choose to apply fair value to certain fixed assets. This choice exists even if the carrying amount under existing Canadian GAAP is fully consistent with the requirements of the new standards. Some companies may see a benefit in having the balance sheet more fully FOLIO 12 reflect the current value of their fixed assets. This comes, however, at a cost since a valuation will be required and it will result in increased depreciation (unless the asset is land which is not depreciated). What do financial statements for the year of adoption look like? Section 1500 also requires that financial statements for the year the new standards are adopted show comparative numbers for the prior year on the same basis. If a company adopts the new standards for calendar 2010, it will show comparative numbers for 2009 also prepared using the new standards. To prepare a comparative 2009 income statement, the company will have to prepare an opening balance sheet as at January 1, 2009 (effectively December 31, 2008) using the new standards, whis is to be included in the published financial statements. Section 1500 also requires certain disclosures in the year of adoption of private enterprise standards to help users bridge from the prior years’ financial statements. These disclosures include a reconciliation of the prior year income (2009 in the above example) as previously reported to the restated income using the new standards. Also required is a reconciliation showing all the changes to opening retained earnings as a result of changes to opening balance sheet amounts. For example, if a company makes the new accounting policy choice in Section 3461, Employee Future Benefits, to measure pension obligations using a funding valuation, the difference in the amount at which the obligation is reported is debited or credited to opening retained earnings. What about companies that have not been preparing GAAP financial statements? Some companies have felt that the cost and effort of complying with the existing GAAP standards and the related disclosures was not justified in their circumstances. The new accounting standards for private enterprises may change that judgment, given the simplifications and the reductions in disclosures. The transitional provisions in Section 1500 have been designed to facilitate the adoption of these standards by companies not previously preparing GAAP financial statements. Benefits of GAAP financial statements include the increased credibility of providing audited financial statements to bankers, other lenders, suppliers and other users of the financial statements. Also, users may place a greater value on such financial statements because they understand the basis on which they were prepared. Moving forward The new accounting standards for private enterprises should be a significant improvement for most private enterprises, simplifying the more complex accounting areas and reducing disclosures. Companies need to first determine which accounting standards best meet their needs — the new accounting standards for private enterprises or International Financial Reporting Standards. Those choosing IFRSs must move quickly to develop a transition plan. Private enterprises adopting the new private enterprise standards need to understand the specific changes and accounting policy choices contained in the new standards, including the one-time provisions in Section 1500. Based on this assessment, a decision can be made on whether to advance the benefits by early adoption of the new standards or to wait until 2011 to ensure that all aspects of the change are duly considered and effectively managed. To learn more about the new accounting standards for private enterprises or IFRSs, visit www.cica.ca/transition. This article was published in Report on Industry: Focus, a complimentary e-newsletter published for CAs in industry on specific topics of interest by the Canadian Institute of Chartered Accountants. To subscribe, go to http://www.cica.ca/roi. FAQs regarding the new Accounting Standards for Private Enterprises are posted on the Institute’s website at www.icam.mb.ca.
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