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Financial Statement Requirements and Private Enterprise Transactions in Public Markets


​Whether you are undertaking an initial public offering, business acquisition of a private company or a reverse takeover, determining the permitted accounting framework for financial statements to be included in your public document is complex. Companies that are planning to undertake these transactions should take care to ensure the available financial statements have been prepared in accordance with an accounting framework that will be acceptable to the securities authorities. Identifying financial statement requirements in advance of your transaction will facilitate the timely completion of your transaction.

For year ends beginning on or after January 1, 2011, private companies are required to adopt either International Financial Reporting Standards (“IFRS”) or Accounting Standards for Private Enterprises (“ASPE”). It is widely expected that the majority of private companies will adopt ASPE due to the less onerous reporting requirements. At the same time, public companies are required to adopt IFRS. As a result, when a private company undertakes a transaction in the public market, the securities regulatory authorities generally require financial information that is consistent with what is required of a public company, unless an exemption exists. Private companies may be required to present their financial statements in accordance with IFRS or reconcile their ASPE financial statements to IFRS. There are a number of considerations that should be explored prior to your transaction.

Acquisition statements

In situations where a public company is acquiring a private company and interim or annual financial statements must be included in the public document for periods starting on or after January 1, 2011, a private company will need to report in accordance with either IFRS or ASPE. As such, a private company will need to undertake all work necessary to adopt and disclose its new selected accounting framework. Initially, conversion to ASPE may appear to be the most expedient however, there are a number of requirements to consider before making this decision:

  • If the public company acquirer is not a venture issuer, a reconciliation to IFRS will be required. In effect, a private company may undertake all of the work required to transition to ASPE but would subsequently be required to reconcile these balances with IFRS. In these circumstances it may be more expedient for the private company to adopt IFRS from the outset.
  • If the ASPE framework is selected, the securities authorities require the private company to consolidate all subsidiaries and account for significantly influenced investees and joint ventures using the equity method. Although alternative acceptable accounting treatments exist within ASPE, the securities authorities have specified this as the only acceptable accounting policy in accounting for subsidiaries, significantly influenced investees and joint ventures.
  • The ASPE financial statements must include a notice, in prescribed form, describing certain differences between ASPE and IFRS.

Initial public offerings and reverse takeovers

For initial public offerings and reverse takeover transactions the private company will be considered to be the primary business or continuing entity for reporting purposes. As such, the private company will be required to report in accordance with IFRS for annual and interim periods beginning on or after January 1, 2011. In many cases the securities authorities require three years of financial statements to be included in your offering document. Although the securities authorities permit the use of Canadian GAAP financial statements for years where IFRS financial statements have not been prepared, there are multiple options around what years can be presented and care must be taken to ensure the appropriate year-ends and financial statement frameworks are disclosed.

Other considerations

For private companies involved in transactions in the public market that have never reported under a prescribed accounting framework, consideration should be given to adopting IFRS from inception. As all of the accounting records will need to be compiled in accordance with a recognized accounting framework, preparing the accounts in accordance with IFRS will provide the company with the information required for the public documents with an added benefit that the company would not be required to undergo an IFRS conversion or prepare reconciliations to IFRS from another accounting framework.

In conclusion

It has become increasing difficult to identify the financial information that is required when a private company is part of a transaction in the public markets because of the transition to new accounting frameworks and the number of exemptions that exist. Private and public companies planning to undertake transactions in the public market should seek advice from a competent advisor who is able to provide guidance based upon your specific circumstances.

This article has been prepared for informational purposes only and is not intended for any other purpose. We do not assume any responsibility or liability for losses occasioned by you in reliance on this information. We would be pleased to discuss with you the issues raised within the context of your particular circumstances. Please contact your local MNP Public Companies advisor.