Canadian companies have more flexibility than they realize when choosing which accounting standards to use.
Ultimately, the decision depends primarily on the company's core business strategy. Companies may typically select from three options for their external financial reporting: Accounting Standards for Private Enterprises (ASPE); International Financial Reporting Standards (IFRS Accounting Standards); and U.S. GAAP.
These sets of accounting standards, also known as accounting frameworks, differ from one another in many ways. Yet they share one key trait: their ideal fit for specific situations.
Many companies neglect to match their accounting framework to their unique business needs and life cycle. They also forget to consider their future plans. But financial statements are used by investors, buyers, and lenders, so picking the right accounting framework isn't just a compliance issue—it helps your company get to the next level.
GAAP and the choice of accounting standards
ASPE, IFRS Accounting Standards, and U.S. GAAP accounting frameworks all qualify as something called GAAP, or generally accepted accounting principles.
GAAP is a set of accounting principles and rules that are used to prepare financial statements. Almost every country has a definition of what it considers to be its GAAP. Canadian GAAP, for example, differs from U.S. GAAP.
Companies that receive investment or financing may need to engage a third-party firm to provide assurance on their externally provided financial statements. This requirement almost always goes hand-in-hand with a requirement to apply GAAP.
ASPE is the default financial reporting framework used by private for-profit companies in Canada. It is a made-in-Canada set of standards.
This set of standards came into force in 2011, a watershed year for Canadian financial reporting. That year also saw the adoption of IFRS Accounting Standards in Canada.
Together, ASPE and IFRS Accounting Standards now make up GAAP in Canada for for-profit companies. ASPE was designed for private companies; IFRS Accounting Standards is to be applied by public companies and other publicly accountable enterprises. However, private companies may choose to use IFRS Accounting Standards; they should adopt these standards when a business need arises or is anticipated in the near/medium term.
IFRS Accounting Standards are a set of standards used in more than 120 countries. Canada adopted IFRS Accounting Standards for publicly accountable enterprises in 2011. The U.S. is the most prominent jurisdiction that has not adopted IFRS Accounting Standards for domestic companies.
An investor, lender, or buyer may ask you to prepare financial statements using IFRS Accounting Standards, even if your entity is private and ASPE is otherwise sufficient. The larger companies these investors and lenders deal with tend to report using IFRS Accounting Standards. These stakeholders make decisions about your company by comparing your performance to that of other companies they do business with. They can compare more easily when all companies use the same accounting framework.
Should I use ASPE, IFRS, or U.S. GAAP?
To decide which accounting framework you should implement, the primary decision driver is how you use your financial statements and who else uses them. That's why choosing between ASPE, IFRS Accounting Standards, and even U.S. GAAP touches your most strategic business decisions. The accounting framework you choose should support your current business needs and your future business moves.
You might consider moving to IFRS Accounting Standards or U.S. GAAP if you see your entity doing one of three things in the medium term: seeking higher levels of financing, taking your company public, or selling your business.
Because ASPE is a Canadian standard, foreign stakeholders typically want to see financial statements based on IFRS Accounting Standards—for Europe and the rest of the world—or U.S. GAAP.
Foreign venture capitalists, private equity funds, institutional investors, strategic buyers, and banks all tend to prefer IFRS Accounting Standards or U.S. GAAP for larger entities to assess financial performance. Even the Canadian branch of a global entity may need to produce financial statements using IFRS Accounting Standards or U.S. GAAP.
If you take your company public—even in Canada—you can no longer use ASPE. IFRS Accounting Standards is a very common accounting framework for accessing public capital markets around the world, aside from the U.S.
The reason not to adopt IFRS Accounting Standards or U.S. GAAP prematurely
Business leaders often wonder whether they should adopt IFRS Accounting Standards or U.S. GAAP early in their business life cycle.
The question often comes up for founders of startups or emerging growth entities, such as tech companies planning an exit from their early days, but it applies to all industries. Business leaders contemplate this because IFRS Accounting Standards is accepted as an accounting framework in Canada—and also gives companies flexibility to satisfy investors or lenders outside of Canada.
Cost is the main disadvantage of switching accounting frameworks before your company needs to.
It's not just the one-time cost of converting to a new framework. Businesses often must make changes to accounting and other systems, and possibly to personnel. Ongoing compliance with IFRS Accounting Standards or U.S. GAAP will require a financial reporting team that is familiar with these frameworks. And the volume and pace of change for IFRS Accounting Standards and U.S. GAAP is substantial. In addition, you'll likely encounter a need to find professionals in Canada who provide first-class accounting advice on these frameworks to assist your internal financial reporting team.
When to change accounting frameworks
You should look at your two- to five-year timelines to consider whether switching accounting frameworks makes sense for your plans. By monitoring this medium-term horizon, you can catch any immediate needs—and also plan in advance for as smooth and cost effective a transition as possible.
When pursuing large amounts of financing, going public, or selling all or a portion of the business, you will generally need at least two to three years of your company's financial statements prepared under the same framework. If you look to change from ASPE to IFRS Accounting Standards or U.S. GAAP at the last minute, the process becomes more difficult, expensive, and unpredictable. Delays will keep your prospective investor, buyer, or lender waiting—first for you to change accounting frameworks and then for them to complete their financial due diligence. The delay may even jeopardize the transaction, as it stretches into weeks or even months.
Selecting an accounting framework isn't a ‘paint by numbers' exercise, nor is it a ‘set it and forget it' activity. The choice guides your financial reporting and shapes your financial statements. While companies often don't prioritize their external facing financial statements, they form part of the backbone of any good business plan. Together they propel your company's strategic plan.
The information in this publication is current as of Oct. 21, 2024.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.