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); and U.S. GAAP.
These sets of accounting standards 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 lifecycle. They also forget to consider their future plans. But financial statements are used by investors, buyers, and lenders. 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, and U.S. GAAP 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 accepts as GAAP. Canadian GAAP, for example, differs from GAAP in the U.S.
Companies that receive investment or financing may need to engage an external firm to provide assurance on their external financial statements. This requirement almost always goes hand-in-hand with a requirement to apply GAAP.
Accounting Standards for Private Enterprises (ASPE)
ASPE is the default financial reporting framework used by private 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 in Canada.
Together, ASPE and IFRS now make up GAAP in Canada for private companies. ASPE was designed for private companies; IFRS is to be applied by public companies and other publicly accountable enterprises. However, private companies may choose to use IFRS. They should adopt IFRS when a business need requires it.
You can find a technical comparison of ASPE and IFRS here.
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards are a set of standards used in more than 120 countries. Canada adopted IFRS for publicly accountable enterprises in 2011. The U.S. is the most prominent jurisdiction that has not adopted IFRS for domestic companies.
An investor, lender, or buyer may ask you to prepare financial statements using IFRS, even if ASPE is otherwise sufficient. The large companies they deal with tend to report using IFRS. 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 framework.
Most Canadian companies use ASPE or IFRS for financial statements. However, some companies must report with U.S. GAAP to satisfy an investor, buyer, or lender based in the U.S.
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 uses them. That’s why choosing between ASPE, IFRS, 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 or U.S. GAAP if you see yourself 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—for Europe and the rest of the world—or U.S. GAAP. Foreign venture capitalists, private equity funds, institutional investors, strategic buyers, and banks: they all tend to prefer IFRS or U.S. GAAP to assess financial performance. Even the Canadian branch of a global institution may ask to see financial statements using IFRS or U.S. GAAP.
If you take your company public—even in Canada—you can also no longer use ASPE. IFRS is the default standard for accessing capital markets around the world, aside from the U.S.
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.
To learn how BDO’s Accounting Advisory Services can help you select the right accounting framework for your business, reach out to:
Armand Capisciolto, National Leader, Accounting Advisory