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FROM: JAN-FEB 2010 ISSUE | BY STEPHEN SPECTOR
In November 2009, the Accounting Standards Board (AcSB) issued the text of its version of generally accepted accounting principles for private enterprises (PE GAAP). These standards are effective for fiscal years beginning on or after January 1, 2011. However, in order to facilitate transition, the AcSB permitted early adoption. The standards were issued late in the fourth quarter of 2009 so they could be used for 2009 calendar year-end reporting.
Readers may recall that my July-August column discussed the reasons the AcSB took the approach they did for PE GAAP, but there was no specific coverage of the proposed standards. The final version of the standards is more or less the same as that proposed in the May 2009 exposure draft. However, there were four areas where changes were made:
Financial Instruments
A fair value option has been added permitting an enterprise to elect fair value measurement for any instrument. This election will be made on initial recognition and is irrevocable. This amendment will permit “cherry picking” in that it is item-specific rather than class-specific. Note that any gains and losses arising from a change in the fair value must be recognized in profit and loss (there is no comprehensive income for private enterprises), so there likely will not be a rush to adopt this option.
Enterprises will have to capitalize transaction costs for financial instruments measured at amortized cost. This change reflects the fact that the transaction costs are part of the instrument, in that they affect the ultimate yield. Mind you, this is inconsistent with the treatment for equity instruments, where transaction costs are an expense of the period in which the instrument is acquired.
Employee Future Benefits
The scope of the simplified approach for defined benefit plans has been widened to include all defined benefit plans. The change reflects the fact that many small enterprises have minority owners that would not be able to take advantage of the private enterprise GAAP option available to the majority owner. Since there are no size tests for applicability of PE GAAP, it seems reasonable that there should be no ownership tests for applicability of sections. Note however, that enterprises adopting the simplified approach must use this approach for all defined benefit plans. Unlike the fair value option for financial instruments, it is an “all or nothing” approach.
EIC Abstracts
The May 2009 exposure draft noted that the AcSB wished to limit the extent to which it mirrored public company GAAP, and in particular, limited the extent to which it embedded EIC Abstracts outcomes into the private enterprise GAAP. However, feedback from respondents convinced the AcSB to incorporate principles from several EIC Abstracts relating to financial instruments, revenue, income taxes, and related party transactions into the standards.
Disclosures
The AcSB made a number of changes regarding the disclosures required of private enterprises. The most significant change was that the requirement to disclose management compensation and amounts of government remittances in arrears has been eliminated.
For a more detailed description of the requirements, visit PD Net and review the latest articles dealing with PE GAAP. Note that compliance with PE GAAP is optional, not required. The private enterprise standards give Canadian businesses the ability to choose to adopt these new “made in Canada” standards or International Financial Reporting Standards. As noted at the outset, affected enterprises must decide which of the sets of standards to adopt for years beginning on or after January 1, 2011.
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