Financial Reporting for Private Companies: The Canadian Experience*

Abstract

The issue of whether small and /or private companies should be allowed to use simplified accounting standards in financial reports has concerned the accounting profession for decades. It has been argued that preparing financial reports in accordance with the large volume of promulgated standards contained in generally accepted accounting principles (GAAP), some of which are relatively complex, has put a significant strain on the resources of small / private business. Moreover, information produced and presented in accordance with at least some accounting standards within GAAP may not be relevant for the users of small /private companies' financial statements.In this paper we look at differential reporting in Canadian GAAP, which gives nonpublicly accountable enterprises the ability to opt out of certain CICA Handbook requirements with unanimous consent of the shareholders. We look at lobbying activity in response to the proposed differential reporting standard and at nonpublicly accountable company experience with the differential reporting opportunity in the period since the standard was promulgated. InFoRmATIon FInAnCIèRE ET soCIéTés FERméEs : l'ExPéRIEnCE CAnAdIEnnE RésuméLa question de savoir s'il devrait être permis aux petites entreprises et (ou) aux sociétés fermées de faire usage de normes comptables simplifiées dans leurs rapports financiers préoccupe la profession comptable depuis des décennies. À l'appui de cette simplification a été invoqué le fait que la préparation des rapports financiers conformément aux multiples normes établies que renferment les principes comptables généralement reconnus (PCGR), dont certaines sont relativement complexes, grève sensiblement les ressources des petites entreprises et des sociétés fermées. De plus, l'information produite et présentée en conformité avec au moins certaines des normes comptables contenues dans les PCGR risque de ne pas être pertinente pour les utilisateurs des états financiers des petites entreprises et des sociétés fermées.

Practitioners' participation in the accounting standard-setting process

“…Practitioners believe that private enterprises need accounting standards better adapted to their needs and to those of their financial statement users (Paradis et al 1999, Rennie andSenkow 2009), which is consistent with agency theory that surmises that auditors would favour rules that benefit their clients since their own wealth is linked to their clients' wealth.…”

“…In Australia, the Australian Accounting Standards Board is currently seeking views on the use of a reporting framework based on IFRS for SMEs (AASB 2009) and it is expected that the Financial Reporting Standards Board in New Zealand will seek views on the use of IFRS for SMEs in this country (Sealy-Fisher 2009). 2 Since 2002, Canadian non-publicly accountable enterprises have been allowed limited differential reporting options, that is, simplified accounting treatments or reduced disclosures (Rennie and Senkow 2009). In 2006, the Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) decided to adopt IFRS for public enterprises starting in 2011 (AcSB 2006).…”

“…The 'Big GAAP -Little GAAP' controversy has been under debate since the 1980s (Campbell 1984, Knutson andWichmann 1984). As accounting standards become increasingly complex, it is generally admitted that financial reporting requirements impose a significant burden on smaller enterprises (Page 1984, Keasey and Short 1990, Paradis et al 1999, Evans et al 2005, Rennie and Senkow 2009, Sian and Roberts 2009). …”

New Canadian Accounting Standards for Private Enterprises and the Adoption Timing Decision

“…Canadian public and private enterprises used the same set of accounting standards until 2002, after which non-publicly accountable enterprises, with their owners' unanimous consent, could opt for certain differential reporting options, that is, simplified accounting treatments or reduced disclosures (Rennie and Senkow 2009). For example, they could account for subsidiaries with either the equity or the cost method, and account for income taxes with the taxes payable basis.…”

“…Managers' perceptions of behavioural control may also be fashioned by cost considerations, an ongoing issue with private firms (Paradis et al 1999;Rennie and Senkow 2009). The perceived costs of preparing financial statements under ASPE and to have them compiled, reviewed or audited are expected to affect the adoption timing decision.…”