The Canadian Accounting Standards Board (AcSB) has finalized new, simplified accounting rules for private companies—GAAP (generally accepted accounting principles) for Private Enterprises.
These frequently asked questions about GAAP for Private Enterprises are condensed from a document posted on the AcSB website. They reflect the views of AcSB staff about some of the new rules and the transition.
1. What descriptor will be used when following GAAP for Private Enterprises?
Financial statements will have to describe the basis of financial reporting, (i.e., that "GAAP for Private Enterprises" has been followed). It is important to identify the basis of reporting since there will be more than one set of standards available to private enterprises - IFRSs and GAAP for Private Enterprises - and a reader will need to know which standards the enterprise is following.
2. If differences between IFRSs and GAAP for Private Enterprises are going to be reduced over time, then isn't GAAP for Private Enterprises a short-term solution?
The AcSB has no plans to adopt an IFRS-based approach to financial reporting standards for private enterprises. A separate and distinct Canadian set of standards will exist as long as there is a need for such a system. While changes to IFRSs will be considered in updating GAAP for Private Enterprises, the AcSB has not made convergence an objective for the private enterprise strategy. The AcSB will undergo a comprehensive evaluation of GAAP for Private Enterprises approximately five years after it has been in place and has been adopted into practice. If that evaluation concludes that GAAP for Private Enterprises is not meeting the needs of private enterprises, then the AcSB will revisit its overall strategy.
3. When will the final GAAP for Private Enterprises be available? When will it be mandatory?
The AcSB intends to make the final GAAP for Private Enterprises available for use in 2009 calendar year-end financial reporting. The AcSB plan to issue the final standards in the fourth quarter of 2009.
The existing standards in the CICA Handbook - Accounting will continue to be available until 2011, at which time they will cease to be an authoritative source of Canadian GAAP. Accordingly, an enterprise that wishes to adopt GAAP for Private Enterprises will be able to adopt the standards in 2009, 2010, or 2011.
4. What are some of the advantages of early adoption?
Early adoption will be beneficial to those enterprises that have transactions or issues that have been simplified in GAAP for Private Enterprises or that see significant benefit in the reduced disclosures. Enterprises may wish to consider the proposals set out in the Exposure Draft as a benchmark to guide their decision with respect to early adoption.
5. Will differential reporting be eliminated?
Yes, Section 1300, Differential Reporting, will be eliminated on withdrawal of the Handbook in 2011. This Section is not retained in GAAP for Private Enterprises because the new set of standards is designed for private enterprises. GAAP for Private Enterprises does not contain the unanimous consent requirements as under differential reporting, use of the new standards, both as a whole and the individual choices therein, are management policy decisions.
6. Can certain aspects of IFRSs and GAAP for Private Enterprises be selected, or is it a "one-or-the-other" choice?
An enterprise that wishes to follow Canadian GAAP must choose either IFRSs or GAAP for Private Enterprises. Creating hybrid standards would undermine the basic tenets of GAAP. Each represents a set of standards which operates as a whole - individual customization would defeat the purpose of standardization.
This approach will use information that is readily available (actuarial valuation for funding purposes) to perform the accounting and also simplify the mechanics of the accounting by eliminating smoothing techniques. Cash-based accounting was rejected as it would result in off-balance sheet liabilities, which financial statement users strongly oppose. In addition, while the obligation may be extinguished in the future, to the extent that it exists at the balance sheet date, it should be recorded.
7. In respect of classification of callable loans, some lenders believe that long-term classification is appropriate. Why does the proposed GAAP for Private Enterprises require current classification?
Section 1510, Current Assets and Current Liabilities, requires debt that is callable at the option of the holder to be classified as a current liability, unless certain requirements are met. Some practitioners and preparers have noted that the overall issue with current classification is the effect on the balance sheet - that management's view with respect to liquidity is not consistent with that reflected in the financial statements. In many cases, the borrower expects that the lender will not exercise the call feature as long as repayments are made as scheduled. It has been suggested that such debt be classified on the basis of management's expectations of the timing of repayment.
Users generally find current classification provides the most useful information. This is particularly the case for users other than the party to whom the debt is owed. Some lenders have been surprised to find amounts owing to them classified as current, but indicate that they can easily adjust for this in their analysis of the borrower's financial position. The AcSB confirmed that such debt meets the definition of a current liability and noted that there are no direct costs associated with presenting this debt as current rather than long term. There may be some additional communication required as a result of current classification but these costs should generally be non-recurring. The AcSB has concluded that there is no logical basis for classifying such debt as long term since no party other than the lender can determine whether the debt will be called in the current period or not.
8. In respect of asset retirement obligations, would it be acceptable for management to consider the fair value of the obligation to be nil on the grounds that they do not believe that a requirement will be enforced? For example, a landlord might not insist that fixtures be removed at the end of a facility's lease, even though this provision is in the lease contract.
If there is an obligation, then this should be recognized in the financial statements. Proposed Section 3110, Asset Retirement Obligations, simplifies the accounting for asset retirement obligations by requiring measurement (at the end of each period) on the basis of management's best estimate of the future expenditures required to settle the existing obligation. That estimate will incorporate uncertainties surrounding the amount of the expenditure required to settle the obligation, (i.e., it will be a weighted average of different outcomes, one of which may be that no expenditures will be required).
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