Generally Accepted Accounting Principles
An overview of what you need to know about financial statement preparation and GAAP.
Quick now, if someone asked you to define what constitutes generally accepted accounting principles (GAAP) in Canada, could you do it? Could you cite the appropriate sources for GAAP and the manner in which inputs are used to determine the appropriate treatment for a particular set of circumstances? Could you tell whether a proposed method of presentation in your company's financial statements is consistent with GAAP? You couldn't? By the end of this column, you should be able to.
In July 2003, the Accounting Standards Board approved two new sections in the Handbook — Section 1100 and Section 1400 — to be effective October 1, 2003.
Section 1100, Generally Accepted Accounting Principles, lays out what constitutes GAAP in Canada, with specific direction on the relative authority of the various pronouncements and other sources of direction within GAAP. Section 1100 takes into account developments in the United States and at the international level and formally creates the notion of the primary sources of GAAP.
According to Section 1100, one must now apply primary sources of GAAP (as listed below) in descending order of authority when preparing financial statements:
||Handbook Sections 1300 to 4460, including appendices and board notices; |
||Accounting guidelines, including appendices and board notices;|
||Background information and basis for conclusions documents, including appendices; |
||Emerging issues committee abstracts, including appendices;|
||Illustrative examples of those pronouncements described in paragraphs 1100.02(c)(i)-(iv); and |
||Implementation guides authorized by the board. |
Italics vs. Non-italics
Section 1100 eliminates one of the more troublesome aspects of the structure of the Handbook. It states that both italicized and non-italicized paragraphs in the Handbook sections have equal authority. While there has been an understanding that the recommendations in italic type generally indicate the main principles, and the non-italicized paragraphs tend to explain the recommendations or their application to a particular situation, Section 1100 points out that to be in accordance with GAAP, an entity must comply with the non-italicized paragraphs as well as the italicized paragraphs.
Section 1100 also removes a long-standing escape clause for dealing with conflicts between statutory requirements and Handbook recommendations. Sometimes an entity is required to prepare financial statements in accordance with regulatory, legislative or contractual requirements. In the past, when regulatory or legislative requirements were in conflict with GAAP, one could prepare the financial statements in conformity with the statute and still obtain an unqualified audit opinion. Indeed, the Introduction to Accounting Recommendations stated that "no Recommendation is intended to override the requirements of a governing statute." This clause acknowledged that bodies establishing governing statutes were not bound to establish requirements that fell within GAAP.
With the elimination of the clause, Section 1100 indicates statements prepared using regulatory or legislative statutes that conflict with Handbook recommendations are not in accordance with GAAP. In other words, if the basis of accounting used to prepare the financial statements is not in accordance with the requirements of Section 1100, that basis cannot be described as being in accordance with GAAP.
To deal with such circumstances, the Assurance Standards Board released Section 5600,Auditor's Report on Financial Statements Prepared Using a Basis of Accounting Other Than Generally Accepted Accounting Principles.
On a positive note, Section 1100 sets out a structure to enable an entity to address any matters not explicitly dealt with in the primary sources of GAAP. In such instances, an entity is to adopt accounting policies and disclosure requirements that are consistent with the primary sources of GAAP and have been developed using professional judgment in applying the concepts contained in section 1000'sFinancial Statement Concepts. However, industry practice will not be an acceptable source of GAAP unless all other sources have been consulted and found wanting.
Section 1100 also introduces Board Notices as a new source of GAAP. The purpose of these notices is to "clarify certain aspects of a Handbook section or Accounting Guideline when it becomes apparent that the text does not adequately convey the Board's original intent." A Board Notice is to be withdrawn as soon as the underlying Handbook Section or Accounting Guideline that gave rise to it is revised or the circumstances are no longer relevant. While the intent is admirable, it seems to me that the Emerging Issues Committee (EIC) performs the same function. Section 1100 does not explore the possibility of delegating that responsibility to the EIC; instead, the section specifies that Board Notices require the same due process as any other primary source of GAAP.
The second section released by the Accounting Standards Board in July is Section 1400. Entitled General Standards of Financial Statement Presentation,Section 1400 replaces the current Section 1500. Its two key recommendations are as follows:
- Financial statements should present fairly in accordance with Canadian GAAP the financial position, results of operations and cash flows of an entity; and
- Fair presentation in accordance with GAAP involves not only applying section 1100, but also providing sufficient information about certain transactions or events of such size, nature and incidence that their disclosure is necessary to understand an entity's financial statements, and providing information in a manner that is clear and understandable.
Section 1400 clarifies the original intent of the now-supercededSection 1500 to require financial statements to include all information necessary for fair presentation in accordance with GAAP. Also, Section 1400 clarifies the circumstances in which financial statements are to be prepared on a comparative basis.
The new sections are effective for fiscal years beginning on or after October 1, 2003. Entities are required to adopt the new standards prospectively for events and transactions occurring after the date of adoption and to any outstanding related balances existing at the date of adoption.
[ TOP ]