Email this Page to a FriendASPEThe New Canadian Accounting Standards for Private Enterprises (ASPE) Why the need for ASPE? In 2006 the Accounting Standards Board (AcSB) decided to adopt the International Financial Reporting Standards (IFRS) specifically for publicly accountable enterprises. It was at this time the AcSB realized that IFRS would not be suitable for private enterprises as the cost to adopt these complex standards provided little benefit to financial statement users. The AcSB defined a private enterprise as a profit oriented enterprise that has not issued, and is not in the process of issuing debt or equity instruments in the public market, and does not hold assets in a fiduciary capacity for a board group of outsiders as its primary business operation. Given that the majority of companies in Canada meet these criteria, the AcSB decided they would require their own set of accounting standards. The AcSB had the following objectives in mind when developing the new ASPE:
In 2009 the Accounting Standards for Private Enterprises became Part II of the CICA Handbook. When do the new accounting standards come into effect? Early adoption of the new standards is permitted for fiscal years ending on or after December 31, 2009. Adoption is mandatory for all fiscal years beginning on or after January 1, 2011. At this time, companies will have to choose between the adoption of IFRS or ASPE. Some of the main reasons why a company should choose ASPE over IFRS are as follows:
What has changed? The AcSB used the existing CICA Handbook as a starting point when developing the new standards. The old standards included differential reporting options which were developed to simplify compliance for private entities. For the most, part differential reporting options have been incorporated into the new ASPE handbook as accounting policy choices. Going forward, there will no longer be any reference to differential reporting in the notes to the financial statements, and unanimous consent of the shareholders will no longer be required to make policy choices. The differential reporting options that have been incorporated include financial instruments, goodwill and intangible assets, income taxes, share capital, investments, and subsidiaries. Financial Instruments Under ASPE, several of the existing handbook sections have been replaced by the new section 3856 – Financial Instruments. The new section states that private entities must initially measure financial assets and liabilities at fair value. Subsequently, all financial instruments must be measured at amortized cost except for investments in equities that have prices quoted in an active market, and derivative contracts (unless they are designated as a hedge). ASPE does, however, provide one optional exception, the option to elect to measure financial instruments at the fair value upon initial recognition. The decision to designate an instrument using fair value is irrevocable. Any changes in fair value will be recognized on the income statement. Any financing fees or transaction costs relating to financial instruments recorded at amortized cost must be adjusted against the financial asset or liability. Where fair value is used, the costs must be expenses as they are incurred. Where the entity is measuring a financial asset or group of assets using the amortized cost, it must assess whether or not events have occurred that would have caused impairment. Where impairment has been identified, the asset must be adjusted to the highest of the following:
Under ASPE, entities will be required to disclose either on the face of the balance sheet or in the notes, the carrying amounts of financial assets measured at amortized cost, fair value, and investments in equity instruments measured at cost less any reduction for impairment. Accounts and notes receivable must be disclosed separately so that the user is able to differentiate between trade receivables, amounts owed by related parties, and other unusual items of a significant amount. Any amounts and maturity dates that exceed one year shall also be disclosed separately. Private entities must also disclose significant exposures to risks relating to financial instruments, and how each risk arose. If there are any concentrations of risk relating to currency, credit, interest rates, liquidity, prices, markets, cash flow etc. they must also be disclosed. Goodwill and Other Intangible Assets ASPE has not changed the definition of goodwill and intangible assets. Goodwill is still an asset representing the future economic benefits arising from the purchase of another company, and is generally recorded as the difference between the amount paid to acquire another company less the fair value of the its net assets. Intangibles assets must also provide future economic benefits and usually arise when a company acquires a legal right, or incurs development costs of some kind. Common examples include franchise rights, patents, or development costs of a new product or service. Goodwill continues to be unamortized as it was under the differential reporting option, while intangible assets are to be amortized if a useful life can be determined. Under the old standards, companies that didn’t adopt the differential reporting option were required to perform complicated annual impairment testing to determine if the carrying value exceeds the fair value. The new standard requires that impairment testing on goodwill and unamortized intangible assets be performed when there are events or changes in circumstances indicating that the carrying amount may exceed the fair value. ASPE has carried forward the same disclosure and presentation requirements except for the requirement to disclose the aggregate amount of intangibles assets and goodwill acquired in the period. Income Taxes ASPE includes the option to choose between the taxes payable method and the future income taxes method. Under the previous handbook, the taxes payable method could only be used if the company adopted the differential reporting option. For entities choosing the taxes payable method, the requirement still exists to provide a detailed reconciliation of the income tax expense using the statutory tax rate. Disclosure will no longer be required for the expiry of any unused tax losses. Share Capital The existing handbook requires that the characteristics of both authorized and issued share capital be disclosed, unless the entity adopted the differential reporting option to only disclose the characteristics of issued shares. Under ASPE, private entities will only be required to disclose information regarding issued share capital, while the option is still available to disclose details on the authorized shares. The current standards require that any preferred shares that in substance are really liabilities, be presented that way unless they were issued in a tax planning arrangement and the entity adopted the differential reporting option to present the shares as equity. Under ASPE there is no longer an option. All preference shares must be presented as equity even if they have the characteristics of a liability, and were issued in a tax planning arrangement. Asset Retirement Obligations The definition of an asset retirement obligation remains the same under ASPE, which is a legal obligation associated with the retirement of a tangible long lived asset that an entity is required to settle (e.g. landfills, and pits). The costs associated with returning the asset to an acceptable state must still be recognized in the financial statements; however the requirements on measuring and disclosing the liability have been simplified. The old standard states that the obligation must be recorded when a reasonable estimate of fair value can be made. The new standard states that the amount must be based on management’s best estimate of the cost to settle the present obligation at the balance sheet date. ASPE does not require that the key assumptions in which the carrying amount is based be disclosed, nor does it require a reconciliation of the aggregate carrying amount, including detail regarding changes to the liabilities incurred, and the accretion expense for the period. All ASPE requires is a description of the obligation and associated asset, the amount of the obligation at the end of the year, the amounts paid towards the liabilities during the year, and, if available, the fair value of the assets that are legally restricted for the purpose of settling the obligation. If the fair value is not available, then the carrying value can be used. In the event that a reasonable estimate of the obligation cannot be made, that fact and reasons must be disclosed. Property, Plant & Equipment Upon adopting ASPE, private entities have the option to elect to increase the carrying amount of property, plant and equipment to fair value on the date of transition. The bump in fair value will be recorded as an increase in the equity section of the balance sheet. Entities can select all assets or only certain assets. There are many reasons why a company may or may not decide to elect. In making the decision management should consider if the cost of engaging a third party to value the asset(s) as at the date of transition, is worth the benefit. The increase in the carrying value will also increase the annual amortization expense. This is a one-time opportunity and if management does not elect in the year of transitioning to ASPE, the option will no longer be available for future years. Government Remittances Any amounts owing to the government are one example of where ASPE requires additional disclosure not previously required under the current standards. Private entities will be required to disclose either on the balance sheet or in the notes to the financial statements the amounts payable at the end of the period in respect of government remittances. Remittances include amounts payable to the federal and provincial government for payroll deductions, sales taxes, health tax, workers safety insurance premiums etc… Conclusion Overall the new ASPE will benefit private entities in Canada by simplifying accounting requirements, and minimizing financial statement disclosures. In making the decision between ASPE and IFRS, management will have to consider the strategic direction in which the company in heading. Will the cost of adopting IFRS outweigh the benefits received, or will the needs of financial statement user be satisfied if the company chooses to adopt ASPE? Our firm can provide valuable assistance in making this very important decision. |
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