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FROM: SEP-OCT 2007 ISSUE | BY STEPHEN SPECTOR
My March-April column looked at the International Accounting Standards Board (IASB)’s exposure draft on international financial reporting standards (IFRS) for small and medium-sized enterprises (SMEs). The IASB project is intended to decrease the burden on SMEs by reducing the detail and complexity of IFRS applicable to SMEs. If public entities are required to adopt IFRS, then the IFRS for SMEs standard might be appropriate for non-public entities. With that in mind, in May 2007 Canada’s Accounting Standards Board (AcSB) released a discussion paper and invitation to comment on the way financial reporting should be carried out by private companies in Canada.
The Options
The invitation to comment proposed three approaches for private company reporting:
- A top-down approach based on public company GAAP/IFRS. This approach would entail eliminating and modifying a limited number of IFRS requirements, much as is done under the current differential reporting model, although not necessarily with the same results.
- Adoption of the standard proposed by the IASB for SMEs with some modification to address Canadian circumstances.
- An independently developed set of Canadian accounting standards for private entities. This approach could involve a fresh start but it would share the same conceptual framework as GAAP and IFRS.
The Arguments
The invitation to comment questioned how much linkage is needed between reporting standards for public entities and for non-public entities. It can be argued that the Canadian financial reporting system would benefit if differences in standards were restricted to those justified by sector-specific needs. Users, preparers, auditors, and educators would need to be familiar with only one basis of accounting and, if necessary, with the specific differences related to private entity financial reporting. Also, costs incurred by private entities that decide to adopt the standards for publicly accountable entities would be minimized. Finally, the possible development of a second GAAP on the grounds that different standards for different types of businesses are necessary may confuse financial statement users.
It can also be argued that there is no compelling reason for any close link between financial reporting by publicly accountable entities and private entities. The decision to adopt IFRS for publicly accountable entities is intended to promote easier capital flows within global capital markets. However, private entities rarely want access to global capital markets, and the cost of conformance easily outweighs any benefits derived from having a single set of reporting standards.
The Timing
If option one were chosen, the AcSB would begin developing the new set of standards immediately, but preparers and users might find it impracticable to apply them until publicly accountable entities had implemented IFRS.
Timing of the second option would depend on when the IASB finalizes the IFRS-SME. This is currently expected to be in the second half of 2008, but it could be later. The AcSB would then need time to identify and develop any necessary modifications to suit Canadian circumstances. Furthermore, application of this alternative would likely be deferred until publicly accountable entities have implemented IFRS.
The third option would require a significant amount of time to implement, as it would entail creating an entirely new set of standards. However, using current Canadian GAAP as a starting point would take considerably less time.
The Requirements
The AcSB is seeking feedback on whether GAAP-based financial statements are even required for smaller private entities. Paragraph 23 of the discussion paper notes that of the approximately 2.2 million private entities in Canada, about 1.7 million entities (86 per cent of all SMEs) borrowed less than $250,000. If the purpose of GAAP-based financial statements is to provide information that is useful for decision making by investors and creditors, and if creditors do not rely on private entity financial statements, then why bother with GAAP financial statements? A case could be made for developing non-GAAP standards or guidance designed for these entities expressed in a basic fashion.
Responses to the invitation to comment and the accompanying discussion paper are requested by October 31, 2007.
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