The Accounting Standards Board recently published new simplified rules for private companies, known as GAAP (generally accepted accounting principles) for Private Enterprises.
Greg Edwards, a principal at the Accounting Standards Board, led the development of the new standards. He answered some questions about them and what entrepreneurs and their advisors should be doing to prepare for the transition.
Q. Why was it necessary to introduce new accounting standards for private companies?
A. The board decided several years ago that public companies would be required to adopt International Financial Accounting Standards (IFRS). At the same time, the strategic direction for private enterprises was re-evaluated. We asked the question: what standards would best serve the needs of private companies? In 2007, a discussion paper and invitation to comment were issued. We went around the country and talked to a lot of stakeholders. The consensus was to make a made-in-Canada solution. We started with our existing Canadian standards and made appropriate simplifications and modifications from there.
Q. What were the principal areas of concern that led to the revision of the standards?
A. There was a concern that there were far too many disclosures - that the disclosures in the handbook were geared to meeting the needs of public companies. Then from a recognition, measurement and presentation perspective, there were about 10 key issues of concern. Those areas included financial instruments, employee future benefits, stock compensation, leases, and asset retirement obligations.
Q. Now that the standards are finalized what are the biggest changes that entrepreneurs and their accountants should be aware of?
A. I would say the 2 biggest things are disclosures and financial instruments. We cut the number of specific disclosure requirements in our handbook, in the standards, by about 50%. As for financial instruments, this was clearly No. 1 on everyone's complaint list. And we've really rewritten the standards for financial instruments and they're quite different from what they would be for a public company.
Q. How would you characterize the standards that have resulted from this process?
A. The accounting standards for private enterprises have been developed to meet the specific needs of stakeholders in the private enterprise sector. On the whole, we've made a lot of simplifications and the end result should be welcomed in this sector.
Q. What is it about private companies that has allowed for these simplifications?
A. It's the type of stakeholder that looks at the financial statements. If you're a public company, your users will consist of creditors and equity investors. We understand that there can be equity investors in private companies, but they're far less prevalent and they also tend to have the ability to obtain further information directly from the company. So creditors are the primary users of private company financial statements. In private companies, it's accepted that if the only user is your banker, all you really need to do is give enough information for them to know what other questions they need to be asking. There's a different assumption about the ability of users to get more information from a company.
Q. You're saying the level of upfront disclosure doesn't have to be as complex or exhaustive as for a public company?
A. Yes. For example, in financial instruments, we previously required a lot of disclosures about analysis related to certain degrees of risk. Well, the bankers and users that we spoke to who are involved with private companies said: "We just don't need that information. And in the rare case that we do need it, we'd prefer to do it ourselves."
Q. Private companies have the choice of opting for the private enterprise standards or IFRS. What are some of the reasons that a company would choose IFRS?
A. If you have plans to go public, you will probably want to adopt IFRS. Another good reason would be if your parent company, or related companies, report under IFRS and you want to be consistent. Another reason might be if you want to be internally comparable with public companies in your sector. Aside from that, there will be individual rationales, but those are the top three I would put my finger on.
Q. What should entrepreneurs be doing now to get ready for the transition to the new standards?
A. Even though a company can adopt the new standards immediately we are being sensitive to change management and not making adoption mandatory until 2011. Now that the standards are available, people should start looking at them and evaluating where they want to go. They need to have that discussion with their accountant and make an informed decision. They have to figure out, first, whether to adopt them and when. As well, in many cases the simplifications we've made involve a choice. So if you want to adopt that simplification you have to decide to make that choice.
Q. Is this going to be a complex or expensive transition?
A. We started with the existing set of standards, the existing handbook, and all the changes we made are to simplify things. I, being an optimist, truly believe that if you're familiar with and have been reporting under Canadian GAAP in the past, it should be fairly straight forward to understand the differences. And because of the nature of the changes - to make things simpler - I believe that people aren't going to have to make a whole raft of system changes and it's not going to be very expensive to adopt. We've made a number of concessions with respect to transition. There's a whole section devoted to the topic. Do you have to go back and change your previous book balances? In some cases you do. But we have made exceptions to that rule.
Q. So you're saying business owners should be sitting down with their accountants and making a plan?
A. Yes. And entrepreneurs should also be consulting with their financial statement users and asking them what they think, not only of the package as a whole, but some of the individual choices and options. Are there some things that my bank doesn't like, doesn't want me to do? That's certainly a question that people should ask. So not only liaise and discuss with accountants but also financial statements users and everyone else who's involved in the entire process.
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.
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