IFRS or ASPE for Canadian Startups?

As CPAs we are bound by the pronouncements of the Chartered Professional Accountants of BC. CPA firms that provide what are known as “assurance services” are required to have their clients adopt 1 of 2 competing financial reporting regimes:

  1. Accounting Standards for Private Enterprises (“ASPE”)
  2. International Financial Reporting Standards (“IFRS”)

According to a brochure put out by PwC LLP in 2011 – ASPE or IFRS?  – 

Private enterprises should consider ASPE as the best
alternative if they have:
• No plans to access public equity markets
• No plans to access public debt markets
• Signifcant domestic competitors, customers and suppliers that
are private
• Current reporting that is relatively simple with minimal accounting
complexities
• Minimal reliance on benchmarking and comparative analysis
• No immediate transition plans; goal is to maintain business within
family or private individuals
• Minimal or no external equity investors who may have different
views of the enterprise’s future
• A mentality of ‘simpler the better’
• Minimal accounting resources to spend on training, education
and compliance
• An intention to stay within a familiar principles-based
conceptual≈framework
• Prepare fnancial information principally for owners, lenders and
tax compliance

Private enterprises should consider IFRS as the best
alternative if they have:
• Signifcant competitors, suppliers or customers in jurisdictions that
already adopted IFRS
• Plans to issue equity for growth or expansion through an Initial
Public Offering
• External fnancing and the enterprise’s intentions are to provide a
consistent platform for bankers and credit analysts
• Sophisticated users of fnancial statements
• Plans to expand operations globally
• Complex operations dealing with fnancial instruments or
tradeable instruments
• Signifcant partnership with foreign companies, investors or public
companies
• An intention to hold themselves to public company standards
• Competing against public companies for access to credit
• A transition plan that includes a possible sale to a private equity
investor or public company
• A foreign parent company or foreign subsidiaries who already
report in accordance with IFRS
• Plans to access capital or debt markets outside of Canada
• Plans to maintain fnancial reporting on the same basis as their
public company competitors to help with benchmarking

So Which Framework Should Your Company Choose?

For most of the 98% of BC companies that have fewer than 50 employees (and many of the ~7,500 “large” private companies as well), assurance services are seen to be too expensive. Hence most CPAs prepare “non-assurance” compilations for the majority of their clients (aka “Notice To Reader” financial statements). When we compile financial statements for our clients, we’re expected to refrain from implying that the statements were prepared in accordance with Canadian GAAP (either ASPE or IFRS).

So until your company is prepared to pay the price for assurance services, you’ll not actually be using either standard. In fact you might be better to embrace a completely different non-GAAP framework.

US TINY “GAAP”

In 2013 the American Institute of Certified Public Accountants (“AICPA”) introduced a Financial Reporting Framework for Small and Medium-Sized Entities. Much of it was based upon Canadian GAAP which was more principles-based than US GAAP. Presumably the new framework was in response to complex financial reporting requirements mandated in 2002 by Congress and the SEC in response to earlier financial scandals (Enron and Worldcom).

The “FRF for SMEs” accounting framework draws upon a blend of traditional accounting principles and accrual income tax methods of accounting. It utilizes historical cost as its primary measurement basis. In addition, it provides management with a suitable degree of optionality when choosing accounting policies to better meet the needs of the end users of the fnancial statements. The framework eschews prescriptive, detailed standards and voluminous disclosure requirements. Being a more intuitive and understandable framework for small business owners and the users of their financial statements, the framework lays out principles that encourage the use of professional judgment in the particular circumstances of a transaction or event.

While the AICPA is quick to point out that the framework is not GAAP in the US, it seems likely that it will eventually take hold there as a kind of “tiny GAAP”.

WHAT REPORTING FRAMEWORK SHOULD STARTUPS USE?

The trouble with startups is that most aren’t yet businesses. They are more likely to be in the process of defining their core business. Before you know exactly what you are, choosing a financial reporting framework based upon PwC’s decision tree (above) is a bit premature.

Since a startup is expected to spend at least 4 to 7 years in the wilderness without preparing audited (or reviewed) GAAP financials, whatever option is eventually chosen will require a re-statement. This will invariably be needed to comply with whatever flavour of GAAP is selected.

However the chances are that most startups won’t produce an exit for its founders by way of an IPO. Faced with the precipitous decline in the number of US pubco listings since 1996, an article published in Bloomberg View mused:

Are small closely held companies looking for an exit via acquisition or merger rather than an initial public offering?

If an acquisition is the far mare likely route, startups must consider whether their acquirer will be US-based. In fact it also quite likely that some investors will be US-based as well. In any event using the AICPA’s FRF for SMEs won’t be much of an impediment for most startups. It’s not that you will likely provide fully compliant financials in any event. However, you should probably avoid financial statement presentation that is clearly at odds with that framework.