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Fair Value Increase on Adoption of New Accounting Standards for Private Enterprises

01/12/2010


​After choosing whether to adopt International Financial Reporting Standards (IFRS) or the newly developed Canadian accounting standards for private enterprises (ASPE), the most important financial reporting decision a private enterprise must make is whether to “fair value” its property, plant and equipment upon adoption of its new accounting framework. Our clients have asked us what they need to consider before making that choice. This is what we tell them…

Recognizing items of property, plant and equipment at fair value – “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction ” – has a number of benefits, including providing lenders and investors with a more accurate picture of the overall current value of the business, financial performance and condition. However, there are also potential drawbacks. With a bump in value of any depreciable item of property, plant and equipment comes higher amortization expense, which reduces a private enterprise’s accounting net income. This decrease in net income can subsequently impact compensation based on an enterprise’s financial results. From a tax perspective, if a private enterprise is a Canadian controlled private corporation eligible for a reduction in tax through the use of the small business deduction, this tax deduction may be compromised. Specifically, if a private enterprise’s taxable capital exceeds $15 million stemming from a fair value adjustment of any item of property, plant and equipment, the small business deduction would be completely eliminated.

In addition to the weighing these pros and cons, there is another important matter to consider – can the private enterprise determine appropriate fair values in a timely and cost-effective manner? In accordance with the first-time adoption standards under IFRS (IFRS 1 First-time Adoption of International Financial Reporting Standards) and ASPE (Section 1500 First-time Adoption), fair value of the property, plant and equipment must be determined as at the date of transition to IFRS or ASPE. For a private enterprise with a December 31st year-end and one year of comparatives presented in its financial statements, fair value measurement would be required as at January 1, 2010. Any private enterprise contemplating recording its property, plant and equipment at fair value should be working on these measurements now, as attempting to calculate fair value after-the-fact may prove difficult.

For more information regarding transitioning to IFRS or ASPE and the impact on your business now and in the future, please feel free to contact me or your local MNP advisor.