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It’s official! The new generally accepted accounting principles for private enterprises (PE GAAP) have been released. The date you need to mark in your calendar is January 1, 2011, when your private enterprise must choose to adopt either the new PE GAAP or International Financial Reporting Standards (IFRS). That’s right - you have been given the choice to adopt whichever set of standards proves to be the best option for your company.
But how do you choose? While there are several factors to consider, it’s important to remember that no matter how cost effective one option is or how easily your staff members may familiarize themselves with a particular set of standards, your decision should reflect the future direction of your business. You should assess who will be using your financial statements and which set of accounting and disclosure standards will best suit their needs.
What if you’re the owner of a small Canadian business with a focus on sustaining your operations, and the company’s financial statements are used only by your bank for lending decisions and by yourself for managing your business? In this case, PE GAAP may be your best option. However, suppose you’re planning to sell your business in a few years - how will potential buyers and investors analyze your business? One of the easiest ways for them to do this is to compare your financial statements to those of similar companies listed on a stock exchange, which will be reported under IFRS in 2011. Therefore, it may be beneficial to present your company’s financial statements using IFRS to ease comparability. Consider also whether you will want to list your company on a stock exchange in the near future. Listed companies must report under IFRS and having to convert from PE GAAP to IFRS may be more costly than initially adopting IFRS in 2011.
You should also contemplate the avenue you plan to use to obtain financing in the future. If you think you may be looking to raise foreign capital, you’ll probably want to adopt IFRS. PE GAAP is unfamiliar to foreign lenders; however, there’s a good chance they are familiar with IFRS. Accessing Canadian–only investor capital through a public offering in the Canadian markets will require financial statements prepared in accordance with IFRS. On the other hand, if you are a local business raising capital in Canada from a local bank, your lender will likely be more familiar with PE GAAP and will want to compare your results to similar companies’ financial statements prepared using PE GAAP.
The bottom line is, when you sit down to decide which accounting standards your company will adopt at January 1, 2011, keep in mind where you want to go and who the users of your company’s financial statements will be.
For more information on the right solution for you and your business, please feel free to contact me or your local MNP advisor.
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