Accounting Standards and Financial Statements

For many organizations, a Chartered Professional Accountant (CPA) has a vital role because they:

  • interpret, classify, analyze, summarize, and
  • report

financial data to stakeholders. In contrast, this role goes beyond bookkeeping which, in the simplest of terms, is limited to the role of recording of financial transactions. A typical bookkeeper usually follows a daily routine of recording sales invoices, purchase invoices, cheques received, and cheques issued and does not normally enter non-routine transactions or ensure the accounts used to classify transactions are appropriate.

Accounting Standards

The accounting profession is well organized and has authoritative accounting standards for financial reporting, which acts as the basis of accounting. Accounting standards help guide professional accountants fulfil their vital role.

For-profit businesses in Canada may use either of two classes of accounting standards as an accounting basis for any financial statements they will produce. The two classes and related options are:

  1. Generally Accepted Accounting Principles (GAAP)*
    1. International Financial Reporting Standards (IFRS)
    2. Accounting Standards for Private Enterprises (ASPE)
  2. Non-GAAP reporting (for tax or management purposes)
    1. Accrual basis
    2. Cash basis – for Canadian tax purposes, only available to farming or fishing businesses, or those who are self-employed commission sales agents.
* Canadian and/or USA. ASPE is Canadian version

Financial Statements: Do you Need Assurance?

There are two classes (assurance and non-assurance) and three types of financial statements (audit, review, notice to reader) in Canada.  Assurance means a professional accountant is expressing an opinion on whether the financial information is materially correct.

Financial statements that have some level of assurance are audited or reviewed by a CPA and includes a report by the CPA expressing a conclusion designed to enhance the degree of confidence in the financial statements, in accordance with an accounting standard.  Certain investors or lenders require an audited or a reviewed financial statement in return for their involvement.  CPA’s are required to follow and use GAAP when involved with audited or reviewed financial statements.

A non-assurance type financial statement is called a compilation or notice to reader statement.  This type of financial statement may be collated, adjusted and prepared by any accountant, and does not require the use of GAAP.  This type of financial statement has limited use because it is based on the information provided by the company or management and is often used only for tax purposes.

Financial Statements: Audited

An audited financial statement and accompanying disclosures have been examined by an independent auditor using generally accepted auditing standards. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. An audited financial statement is the highest level of assurance an accountant, as an auditor, can express.

Financial Statements: Review

The next level of assurance is a review. A financial statement review is another examination service by an independent accountant who obtains limited assurance that there are no material modifications that need to be made to a financial statement for it to be in conformity with the applicable financial reporting framework, such as IFSR, ASPE, or US GAAP.

Financial Statements: Notice To Reader

This is a financial statement prepared without an audit or a review and therefore does not have any level of assurance or reliability associated with audited or reviewed financial statements. This type of financial statement may be prepared by uncertified accountants or bookkeepers typically using accounting software and they do not need to be independent. When a CPA, a professional independent accountant, is involved with this type of financial statement, a notice to reader letter discloses they are not expressing any assurance, and the financial statements are simply collated and adjusted based on the information provided by the company. While there is no assurance, the standards and experience provided by a CPA is likely to lead to a better quality financial statement compared to one produced by uncertified individuals.

International Financial Reporting Standards (IFRS)

IFRS was adopted in Canada in 2011 and is designed to provide a level of consistency across multiple jurisdictions primarily involving multinational and public corporations with large or complex organizations and/or with complicated situations. The implementation of this standard is considered costly and therefore may not be practical or beneficial to small businesses. Additionally, the United States has not yet adopted this standard and therefore a Canadian business with a US interest would be better served using US GAAP rather than IFSR.

Accounting Standards for Private Enterprises (ASPE)

ASPE was adopted in Canada in 2011 as a transition from the previous Canadian GAAP to the newly adopted IFSR standard. While publicly accountable enterprises are now required to use IFSR, private enterprises may use ASPE as an alternative. ASPE is like ISFR in many ways except it is more flexible and offers alternatives that are adaptable in relation to the size of the business.

Non-GAAP (accrual basis for tax or management purposes)

When audited or reviewed financial statements are not required, and therefore GAAP is not required, the only applicable accounting standard is the tax reporting requirement. In Canada, tax reporting requires accrual accounting, unless exempt by law, which means GAAP applies in many, but not in all instances. Tax reporting usually involves a simple reporting format with no or very limited disclosures and given the limited information in this type of financial statement, it might not meet the needs of all readers or third-party users.

Selecting an Accounting Standard and Financial Statement

Accounting standardBeneficial or required when:Typical Financial Statement
IFRSPublicly accountable in Canada Audit
Plan to list stock on a Canadian stock exchange
Need additional credibility
Being acquired by a company that already reports under IFRS.
Cost-benefit advantage
Readers want this standard
Business goals are better served
ASPENo specific reason to use IFRS or non-GAAP reportingAudit or Review
Need additional credibility
Readers want this standard
Business goals are better served
Non-GAAP (accrual basis)Very early-stage of operationNotice to Reader
No added benefit with IFSR or ASPE
Shareholders are active, involved or aware of business operations
Current or potential investors or financers do not require IFSR or ASPE