What sources should you consult when a matter is not dealt with explicitly in ASPE?
Accounting standards for private enterprises (ASPE) were designed to reduce the costs associated with financial statement preparation and assurance work, while making sure they provide sufficient information to users in their decision-making. When ASPE were developed in 2008-2009, the Accounting Standards Board (AcSB) wanted the costs of applying the standards to continue to outweigh by the benefits for financial statement users, given that most users can ask for and obtain additional information, if they believe it to be relevant, due to their direct link to the enterprise. Thus, in comparison with the pre-changeover standards in Part V, which contained numerous guidelines and abstracts of issues discussed by the Emerging Issues Committee (EIC), ASPE appear to lack precision.
In its recommendations to the AcSB, the Private Enterprise Advisory Committee stated that ASPE should be principles-based rather than rules-based, remain straightforward and leave more room for professional judgment. It is in this spirit that ASPE now contain only few examples and specific rules unlike the former standards in Part V and the EICs. Accordingly, when an issue can be resolved through professional judgment, the AcSB does not add any rule to ASPE.
An article published in the September 2013 CPA Newsletter gives an eloquent example of the simplification of ASPE. In the pre-changeover standards in Part V of the CPA Canada Handbook, the revenue-related guidance totaled more than 33,000 words, many of which were in EICs. In ASPE, only Section 3400 deals with revenue recognition, and it includes fewer than 3,000 words. It is not surprising, then, that many financial statement preparers and practitioners are noticing more and more that ASPE allow for professional judgment.
The use of professional judgment can, in some cases, be unsettling, since two equally competent professionals can, in the same circumstances, arrive at different conclusions. As a result, when justifying an accounting treatment, many CPAs instinctively refer to the guidance included in the EICs in Part V of the Handbook, IFRSs or US generally accepted accounting principles (US GAAP) to compensate for the lack of precision in ASPE.
Is it acceptable to use another framework?
Section 1100 in Part II of the Handbook states that when ASPE are silent on an issue, CPAs can refer to another framework provided the proposed accounting method is:
• consistent with the primary sources of GAAP; and
• developed through the exercise of professional judgment and the application of concepts described in Section 1000, Financial Statement Concepts.
Therefore, the first thing a CPA should do is make sure the reference—whether it is an EIC, IFRS or US GAAP, or any other source—is consistent with ASPE and the ASPE Conceptual Framework.
EICs come from Part V of the Handbook, which was based on a conceptual framework that hardly changed when Section 1000 in Part V was carried forward into Part II. The only notable difference is that ASPE put greater emphasis on the cost/benefit equation. EICs included many explanations and rationales, which were based on the Part V conceptual framework and issued to help address specific application issues. The conclusions they contained resulted from deliberations by experts who based themselves on this conceptual framework and the standards then in effect. During the development of ASPE, many principles included in EICs were directly incorporated into the standards. It should be noted, however, that the disclosure requirements in ASPE were completely reviewed, and those included in EICs, while potentially still relevant, sometimes no longer apply. Also, CPAs must exercise caution when using EICs, since they have not been updated for several years and some are no longer consistent with the existing primary sources of GAAP.
The IFRS conceptual framework puts significant emphasis on measurement of wealth, as defined in economic theory. In economics, wealth, which is a measurement of net income, is equivalent to the difference between net assets at the beginning and at the end of a period. That is why the international conceptual framework places a great deal of importance on the measurement of assets and liabilities—for instance by allowing the use of fair values in many situations. IFRSs therefore propose a number of accounting treatments that are inconsistent with ASPE, which is why it can be very risky to use IFRSs to compensate for the lack of precision in ASPE without a good understanding of IFRSs. Moreover, the cost-benefit aspect of IFRSs takes into account the fact that publicly accountable enterprises generally have more resources available to prepare financial statements.
Since the adoption of ASPE, some of the AcSB’s positions have contradicted IFRSs. For example, consider the expected ASPE standards on biological assets, which, according to the AcSB’s preliminary view, would be recognized at cost and not at fair value, as is prescribed in IFRSs. Also, even though the new standards on consolidations (Section 1591) and joint arrangements (Section 3056) are based on the fundamental principles of IFRS 10 and 11, they do not reiterate all the guidance provided therein and include choices that are not allowed under IFRSs.
US accounting standards
Lastly, US GAAP are known for being a highly detailed framework that leaves little room for professional judgment. Looking back at the financial scandals of the early 2000s, we can presume that financial statements that are prepared in accordance with very specific standards do not necessarily reflect the true economic reality of enterprises. Still, some recently issued US standards, developed in collaboration with the IASB, do put more emphasis on professional judgment. As for the AcSB, it chose to adopt principles-based rather than rules-based standards. Consequently, CPAs who use US accounting standards to assist them in the application of ASPE must understand them well to determine whether or not they are consistent with ASPE.
The main risk of using other frameworks is the false sense of compliance this may create. In preparing financial statements in accordance with ASPE, preparers who apply a standard from another framework might be under the impression that they are doing a good job since that standard was duly approved by prominent experts. However, it might not be the case, since their main task is to prepare financial statements that reflect the entity’s economic reality while ensuring compliance with ASPE. As we all know, no standard can be a substitute for professional judgment.
In the article published in the CPA Newsletter mentioned earlier, the author also suggests taking into consideration the future needs of the enterprise. Of course, a Canadian private enterprise that is planning an IPO in the medium term would do well, to the extent possible, to make policy and disclosure choices that meet the requirements of both ASPE and IFRSs.
In conclusion, although it is not prohibited to refer to EICs, IFRSs and US GAAP, using them to prepare financial statements in accordance with ASPE is not without its risks. The greatest danger is the false sense of security CPAs can have faced with financial statements that are partly based on other sources of GAAP. In closing, it is important to remember the caution put forth by the AcSB at the time ASPE were adopted: there is no obligation to comply with IFRSs, and it is forbidden to apply the international framework piecemeal if the proposed accounting methods are not consistent with ASPE.
The Technical working group on ASPE – Financial accounting – Part II of the Quebec CPA Order