By: Andrew Bryden
Effective January 1, 2011 private entities will be required to adopt new accounting standards for private enterprises or international financial reporting standards. The large majority of private entities will select private enterprise standards. Many private entities which use current Canadian standards to prepare financial statements will have relatively few adjustments to be made in order to comply with the new standards, but some changes will be severe. Some of the significant changes which relate to private enterprise reporting have been presented below, though the impact on individual entities will need to be examined on a case by case basis.
Property, Plant and Equipment
Under current accounting standards, Property, Plant and Equipment are presented at their cost less accumulated amortization. At the time of adopting new accounting standards, an entity may elect to measure an item of property, plant and equipment at its fair value, and use that fair value as the items cost. This revaluation will strengthen the balance sheet immediately, and could allow for increased borrowing based on the net assets of the company. Furthermore, the re-valued balance sheet could help to improve key financial statement ratios and certain debt covenant calculations.
It should be noted that a re-valuation of the company assets may increase depreciation taken in the future on depreciable assets, which may decrease future earnings. Applying this standard to non-depreciable assets, such as land, would allow for a stronger balance sheet, and would avoid the adverse effects of higher depreciation in the future.
Under old Canadian accounting standards, financial instrument accounting was complex. Under the new accounting standards, these complexities have been streamlined and simplified. New standards allow for an entity to account for certain assets or liabilities at fair value. As indicated above for Property, Plant and Equipment, an increase in the fair value of an entities investments will improve the balance sheet and therefore, the borrowing power of the entity.
Remember that during market downturns, classifying investment as fair value through profit and loss may result in increased unpredictability to the balance sheet, as fluctuations in fair value will be recognized in income on each balance sheet date.
Upon the adoption of accounting standards for private enterprises, an entity has the option to re-challenge and re-select all of its accounting policies. There is no requirement for an entity to retain pre-changeover accounting policies.
Nearly all prior accounting policy choice options which were available under prior Canadian standards have been made available under new accounting framework.
This presents entities with the opportunity to reassess all prior chosen accounting policies and to determine whether those policies continue to be the most appropriate to reflect the current and future operations of the entity and to meet the needs of the stakeholders.
The changes which have been presented by new accounting framework may not require a significant change to the majority of our small to medium sized private entities, though specific entity scenarios should be discussed independently with your Wilkinson representative.