The Bragg Group of Companies had to make a choice, and in the next few months so could your business: New Canadian accounting rules launch next year and there are two methods for private companies to consider.
There’s the simpler, more limited version of Generally Accepted Accounting Principles (GAAP), as well as the International Financial Reporting Standards (IFRS), which all publicly traded companies must adopt in 2011.
“When we looked at what IFRS would mean to us, we didn’t see the benefit,” said Rick Cecchetto, chief financial officer of Bragg Group, an Oxford, N.S.-based conglomerate with telecom, frozen-foods and environmental businesses. “It was the cost-benefit analysis, and we got down to what would our users require and be comfortable with … we thought these (new private-company) standards were a perfect fit for us.”
The Canadian accounting standards-setters realized IFRS, with its expanded disclosures and other sophisticated reporting requirements, might not make sense for private companies, which include the vast majority of small and medium-sized businesses. So it set out to develop a sort of “GAAP light” based on current Canadian GAAP.
“The transition should be relatively easy,” said Mark Walsh, senior principal with the Accounting Standards Board and leader of the project. “You’re going from something you know – maybe love or hate – but it’s designed to be easy for you.
“Most people say a Canadian company moving to IFRS from Canadian GAAP will have a significant increase in disclosure,” Mr. Walsh said. But a company moving to the new private-enterprise standards should have “significantly less disclosure.”
Brian Drayton, a chartered accountant in Regina at Meyers Norris Penny LP and a member of the accounting standards board, one of two rule-setting bodies appointed by an offshoot of the Canadian Institute of Chartered Accountants, said he estimates the new private-company standards will reduce disclosure by as much as 40 per cent.
Some of the specific differences between the new Canadian standards and IFRS come under headings that only an accountant could love: the use of fair value on the balance sheet for derivatives such as interest-rate swaps and currency hedges, as one example. Methods for testing the impairment of goodwill is another.
Another difference may be closer to the heart of management: The new “GAAP light” standards do not require the disclosure of any management compensation information, just like current Canadian GAAP for private companies. IFRS requires all companies, private or public, to disclose compensation for key management in the footnotes.
Drafters of the new Canadian rules initially required a disclosure of “group” management pay, but the rule was excised before the standard became final.
Mr. Walsh said in creating a simplified set of rules, the board “was able to focus the discussion on what the prime users of the financial statements need, and those primary users are typically lenders. They’re much closer to the company.”
Bragg Group includes Eastlink, a small telecom company with about 500,000 subscribers for cable and Internet, Oxford Frozen Foods, and Inland Technologies, a company that collects and recycles icing fluids at airports. The company uses KPMG as its auditor. The stock is 100-per-cent owned by the family of founder and chairman John Bragg, so there’s no disparate group of shareholders to inform. No customers require IFRS reporting. So it comes down to the company’s lenders.
“If they require further information, they can get it,” Mr. Cecchetto said.
Centra Industries, a Cambridge, Ont.-based maker of airframe and landing gear components for aircraft manufacturers, might have had a more difficult choice. The company has a group of private shareholders that includes both employees and non-employees, as well as a U.S. private-equity firm. The company’s customers include major manufacturers such as Boeing and Lockheed Martin that have stringent vendor requirements that include some form of financial reporting.
Yet Centra, which has 270 employees and would not disclose its revenue, is also opting for the leaner private-company rules.
“We looked at both sets of standards – what would change under both – and looked at the users of our financial statements, who needed to know what,” said Peter Voss, Centra’s chief financial officer. “We couldn’t see a lot of value-added there.”
Steve Lawrenson, an audit partner at Centra's accounting firm Deloitte who co-leads Deloitte's client transition solutions for the new private-enterprise standards, said Mr. Voss “provides very, very detailed operational information to his owners and lenders that is far beyond what current Canadian GAAP and IFRS would require. This monthly financial and Management Discussion and Analysis information already exceeds IFRS disclosures.”
Certain customers also get basic quarterly financial statements.
So why not just go ahead with IFRS? Cost.
“Adopting a robust system like IFRS and setting up the controls to capture and track the information becomes expensive, as do the annual audit fees,” Mr. Voss said.
Mr. Cecchetto of Bragg Group also cited cost as a reason for avoiding IFRS. But while his firm has chosen the new private-company standards, “it doesn’t preclude us from making a change later – it’s not an irreversible move for us.”
Special to The Globe and Mail