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Chapter 1 Solution

Memo To : Phirst Pass

Subject : IFRS and the implications for Canco

  1. Existing fame work

In Canada effective January 1, 2011 we have two separate sets of generally accepted accounting principles ( GAAP) that can be used. Generally Accepted Accounting Principles are the rules which a company would apply to the recording, measuring and reporting of its business transactions. Properly applied they determine the form and content of the Financial Reports generated by the company.

Publically accountable companies are required to use the International Financial Reporting Standards ( IFRS). Privately held corporations, basically any corporation that does not meet the test of being publically accountable can elect to use Accounting Standards for Private Enterprises ( ASPE).

The important question then is whether or not Canco qualify as a publically accountable enterprise and be required to use IFRS. To answer this you need to determine what qualifies as a publically accountable enerpirse.

A publically accountable enterprise is one other than a not-for-profit organization, that:

•(i) has issued, or is in the process of issuing, debt or equity instruments that are, or will be, outstanding and traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or

•(ii) holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.

Canco currently qualifies as a private enterprise consequently it would have the option of using either ASPE or IFRS.

  1. Impact of the choice between ASPR and IFRS

While there are a great many similarities between ASPE and IFRS, the recording and reporting requirements of ASPE are not as stringent as those required by IFRS. ASPE offers choices in a number of circumstances as to how you can record, measure and report transactions, where IFRS does not.

The users of the financial reports of the company can be divided into two broad groups, internal and external users. The goals and objectives of the two groups are not always convergent. Tilting the balance in the near term to favour of one group over the other can have serious longer term consequences for the company.

The external stakeholders must have confidence in the corporate entity or it will be very difficult for that entity to survive, one need only look to the sovereign debt crisis in Europe for an example of what can happen when you lose that confidence and credibility. Canco’s external stakeholders provide credit and a marketforits products. Both of these are critical tothe success and survival of Canco.

The internal stakeholders, shareholders and management, must also have a reliable tool to measure performance. This measurement tool should allow them to gauge how the company is or is not meeting its goals and objectives and to evaluate the impact on Canco of decisions they have made.

Financial statements prepared on a consistent basis, using recognized and properly applied accounting principles, is a sound basis for that confidence. These statements also provide a solid platform from which to measure performance.

The Corporate entity needs both groups to survive and prosper. At times a delicate balance between conflicting goals and objectives must be maintained.

Because Canco has a choice, which set of GAAP principals should it apply?

  1. Which option to chooser

The demands, present and anticipated, of the external stakeholders will in large measure determine whether or not Canco has to adopt IFRS.

In the short run applying ASPE may be more cost effective, however if a change is required at a later date, the costs of a subsequent conversion to IFRS standards may quickly exceed the short run cost benefit. What might precipitate this conversion? Credit grantors may require IFRS if the demands for credit by the company accelerate to accommodate growth. They may require a statement that is comparable to thosepresented by larger organizations to facilitate credit reviews and lending decisions. If the company at some point in time determines that it will go to the public market for equity investors that would also trigger the need for IFRS based statements.

The owners and management, aware of the relevant risks and rewards, will have to make a choice between the two alternatives.