GAAP-PE: The bottom line for private companies

Unfortunately due to the short conversion timeline, private companies must decide soon which accounting standards they will adopt. The first step in this process should be evaluating the differences between the new standards and the companies’ existing policies as well as the impact that those changes will have across the organization. The following are some of the advantages and disadvantages to help inform this decision:

A deeper look at IFRS

Advantages

• Your statements will be more comparable to those of other companies using IFRS throughout the world;
• There are more accounting policy choices than with GAAP-PE;
• It is the standard which will be used by Canadian public companies;
• The Securities and Exchange Commission may require U.S. public companies to implement IFRS by 2014.

Therefore the trend to adopt IFRS throughout the world is continuing.

Disadvantages

• Significant costs may need to be incurred to convert to IFRS. These costs can include staff retraining and updating or modifying information systems;
• IFRS is more principles-based and therefore there are fewer rules. This increases the potential time that will be required to select accounting policies;
• Changing disclosure to adhere to IFRS requirements can be onerous and therefore costly;
• Terms of contracts which specify financial measures may need to be renegotiated or adjusted because of the differences that result from applying new IFRS accounting policies.

A deeper look at GAAP for private enterprises
A brief overview of some of the significant advantages and disadvantages for private companies to implement GAAP-PE, and in particular compared to IFRS is as follows:

Advantages

• The standards are based on the current Canadian GAAP. Therefore this is likely to be the simpler option of the two choices available and should be easier to transition from the current standards;
• The options which were available under differential reporting are possible accounting policy choices under GAAP-PE. There are no similar differential reporting options available under IFRS;
• Any private company is able to use GAAP-PE regardless of size;
• There are fewer disclosure requirements than under IFRS. For example, there is no requirement to disclose details of management compensation, which is mandatory under IFRS

Disadvantages

• If there is an intention to access public debt or equity markets in the future a second conversion from GAAP-PE to IFRS will be required as GAAP-PE is not an option for public companies;
• Converting to GAAP-PE will still be time consuming due to the different disclosure requirements as there are changes from existing standards;
• The sustainability of maintaining a separate set of stand-alone Canadian standards will be re-evaluated after five years therefore GAAP-PE standards may not be permanent.

Lessons learned
The good news for companies that must, or decide to, convert to IFRS, is that they can learn from the experience of the European Union (EU). The EU converted to IFRS in January 2005. The following are a few of the key issues identified and the lessons learned from the EU conversion to IFRS based on the CICA Publication 20 Questions Directors and Audit Committees Should Ask About IFRS Conversion:

• The complexity and time frame required for the conversion were underestimated. Key lesson: Start early and conduct adequate planning, including considering functional changes which will be required.
• The technical issues encountered were more complicated than anticipated. Key lesson: It is important to develop IFRS technical knowledge early in the process.
• Small changes in accounting policies can have a significant impact on financial results. Key lesson: Consider and anticipate the changes that will result from the switch in accounting policies and whether there are any contracts which will need to be adjusted or users who will need to be consulted.
• The impact of changing to IFRS standards were not incorporated into the computerized accounting systems. Therefore, manual records and spreadsheets were used. Key lesson: There may be a delay until all of the conversion is fully reflected in computerized accounting systems. Alternatively, if the change is to be reflected in the computerized systems additional planning and time will likely be required.

The new regime of Canadian accounting standards is now upon us. Whether converting to IFRS or adopting GAAP-PE, companies must decide which option they will use, and ensure they have teams that are prepared, educated and have proper systems in place to manage the change. The impact of these changes and the resources required to make this adjustment should not be underestimated.

Lorne Lebow is an assurance partner at Stern Cohen LLP and responsible for the firm’s professional standards and quality control.