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What's on your balance sheet?

01/01/2008


What You Should Know About New Financial Instruments Standards

As an owner-manager of a small- to medium-sized enterprise, you may have to re-examine how you prepare your financial statements this year. Don’t get caught in the gap; ask the right questions about your financial statements now.

If you’ve been preparing financial statements accompanied by a Notice to Reader (NTR) report, deciding to change to financial statements that comply fully with the requirements of Canadian Generally Accepted Accounting Principles (GAAP) may be a question of what financial information your financial statement users require.

According to Jody MacKenzie, an advisor with MNP’s Assurance Professional Standards Group, GAAP statements are often desirable where complex financial information needs to be presented.

“If a small- to medium-sized enterprise has a lot of investors or a significant amount invested through debt, an NTR may not meet the user’s needs.” To find out for certain, you may want to talk with an advisor about implementing GAAP standards in your financial statements.

If this type of change to your financial reporting is appropriate, you should be aware that new GAAP may have a significant effect on the way your financial information is presented.

New financial instruments (FI) standards released recently by the Accounting Standards Board dictate that as of Oct. 1, 2007, you must identify all of your financial instruments and determine their fair values.

These new FI standards are aimed at creating standardized, understandable financial statements that address users’ needs.

“The financial instruments standards are part of a movement to provide users a better way to evaluate what happened in the past. This helps them make more informed decisions about a business’ future performance,” explains Jody.

Do you need to implement financial instruments standards?

If you are issuing financial statements that must follow GAAP, you will be required to implement the FI standards.

Identifying financial instruments. According to Jody, your first step should be to examine your operations to identify whether you have financial instruments. GAAP provides this definition: “A financial instrument is any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party.”

Although there are many types of financial instruments, common examples include:

Cash
Accounts receivable
Accounts payable
Arm’s length debt

If these are the only FI you have, the impact to you may be minimal. Jody notes however, “If you have related party debt, futures contracts or derivatives, or have investments in common shares, you may want to consult your advisor. Determining fair values can be more complex.”

Selling your business. Preparing your business for sale is another instance where a privately held small- to medium-sized enterprise should consider implementing GAAP and the new FI standards. In this situation, says Jody, you need to think about the purchaser’s needs.

“If you’re considering selling your business, you’re looking to attract a high-calibre purchaser. You need to be aware of how they’ll want information presented to them through financial statements.”

Financial statements can be seen as a forecasting tool, a method of determining the future value of a business. Jody believes the new FI standards may be viewed as beneficial by potential purchasers in determining the value of a vendor’s business.

“Providing GAAP statements may attract different buyers. If you’re seeking buyers with more money to spend in different markets, they’ll require more investment information to base those decisions on.”

Prepare early. Because implementing the new FI standards may be costly to your business, you should start thinking about your next steps as soon as possible. You should also consider speaking with an experienced advisor – especially if you lack internal expertise.

“The sooner you get started, the easier it is to determine which approach will work best for you,” says Jody.

To find out more, contact Jody MacKenzie, CA, Assurance Professional Standards Group at 1.877.500.0792 or your local MNP advisor.