Tax Question:
What financial reporting rules are followed in Canada?
Facts:
Financial information is generally prepared in accordance with a country’s Generally Accepted Accounting Principles (GAAP). GAAP are the rules that govern how the financial results and position of corporations are displayed. They dictate what goes on a balance sheet and income statement; what the definition of assets, liabilities, income and expenses are and how they are recognized, measured and disclosed. Traditionally, countries have developed their own rules independently. A lot of the rules will be similar across the globe but each country will have its own treatment for certain items. This means that a corporation could have different results if it prepared its financial statements under the rules of two different countries.
In an attempt to eliminate differences between different countries’ GAAPs so that corporations can compare financial statements on a global basis, there has been a push to adopt International Financial Reporting Standards (IFRS) and harmonize financial reporting from country to country. IFRS are accounting standards set by the International Accounting Standards Board, based in London, England, and currently, over 100 countries have elected to adopt the rules in place of their own GAAP. Canada looked at these rules and decided to use them only for publicly accountable corporations. This is because the required disclosure information is quite detailed, extensive and time-consuming to collect and present. The vast majority of corporations in Canada are private, owner-managed businesses with a restricted user base of usually just the owners, the banker and the Canada Revenue Agency. The type of information needed by these users is not as rigorous. As a result, Canada developed its own GAAP; Accounting Standards for Private Enterprises (ASPE). ASPE permits simpler disclosure of financial information and consequently, the financial statements are a lot more relevant and practical to the requirements of the owner-manager entrepreneur. However, if a privately owned corporation wants to report under IFRS, they can elect to do so. Publicly accountable companies cannot elect to report under ASPE, they have to report under IFRS. Both ASPE and IFRS are designed to be used for profit-orientated corporations. Not-for-Profit Organizations have their own GAAP to follow.
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Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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