The reason not to adopt IFRS or U.S. GAAP prematurely
Business leaders often wonder whether they should adopt IFRS or U.S. GAAP early in their business lifecycle. The question comes up frequently for founders of tech companies planning an exit from their earliest days, but it applies to all industries. Business leaders contemplate this because IFRS is accepted as a standard in Canada—and also gives companies flexibility to satisfy investors or lenders.
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 standard. Businesses often must make changes to accounting and other systems, or to personnel. Ongoing compliance with IFRS or U.S. GAAP will require a financial reporting team that is familiar with these standards. And the volume and pace of change for IFRS 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 standards 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.
When pursuing large amounts of financing, going public, or selling all or a portion of the business, you need at least two to three years of your company's financial statements. If you look to change from ASPE to IFRS 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 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 these financial statements, they form part of the backbone of any good business plan. Together they propel your company's strategic plan.