private enterprise GAAP?

A client of mine just met with their auditors in order to prepare for their 2009 audit.  One of the questions the auditors asked was:

are you going to embrace International Financial Reporting Standards (”IFRS“) in 2010 or will you move towards private enterprise GAAP?

As many of you know IFRS is mandatory for Canadian publicly traded companies as of January 1, 2011 (which because of year on year comparisons means they need to adopt IFRS as of January 1, 2010).  But what about private companies?  Private companies must choose between adopting IFRS or what is called Private Enterprise GAAP starting 2011 (Note I did not say Canadian GAAP).

hmmm, what is private enterprise GAAP?

When the Canadian Accounting Standards Board (”AcSB”) decided to move towards international accounting standards they realized that “one size does not fit all” and broke out public company vs. private company options - this is when private enterprise GAAP emerged (which uses the CICA Handbook as its starting point).  Per the AcSB, the key differences between Canadian GAAP today and private enterprise GAAP are in the areas of:

• recognition, measurement and presentation simplification in the following areas:
  

  —	financial instruments;
  —	asset retirement obligations;
  —	employee future benefits;
  —	goodwill and other intangible assets;
  —	income taxes;
  —	stock-based compensation;
  —	subsidiaries;
  —	investments; and
  —	joint ventures;

• required disclosures that are appropriate for private enterprises and meet the needs of users — as a result, the number of required disclosures has been reduced by about half; and
• elimination of EIC Abstracts as they currently exist in the Handbook. (Certain guidance that is important to this sector has been embedded in the standards).

I would highly recommend that you read the private enterprise GAAP guidance in order to fully understand the differences.  As well, because the guidance is out you can adopt private enterprise GAAP for your 2009 audit year if you choose.  Talk to your auditors about the options.

So, what is the best choice?

The choice really depends on who the users of the financial statements are going to be and the cost/benefit analysis (I’ve heard of small private companies paying a minimum of $25K to just get their systems ready for IFRS let alone maintaining it).

For many private companies that are closely held, financed locally and are not planning to access public equity or debt, private enterprise GAAP is probably best.

However, IFRS should be considered if:

• you are thinking about going public;
• your exit strategy involves being acquired by a company that already has adopted IFRS (e.g. publicly traded);
• you have international operations with multiple financing options.

Eventually all private enterprises will move to IFRS so there is consistency in reporting but this is a nice interim step to try to reduce the burden of cost to implement a complete solution.   It should also be noted that there is IFRS for small and medium enterprises but Canada has not adopted that yet for private enterprise.