We'll begin our chat on basic accounting concepts by:
Learning this stuff WILL make you a better bookkeeper! Grab a cuppa tea and get comfortable for today's chat.
The following acronyms will be referred to in this article. I know it sounds like a foreign language but this should help you sort it out, especially if you want to know what terms like ASPE stands for:
AcSB - Accounting Standards Board
AICPA - American Institute of Certified Public Accountants
ASPE - Accounting Standards for Private Enterprise
CICA - Canadian Institute of Chartered Accountants
FASB - Financial Accounting Standards Board
FAF - Financial Accounting Foundation
FRF for SMEs - Financial Reporting Framework for Small and Medium-Sized Entities (published by AICPA in June 2013)
GAAP - Generally Accepted Accounting Principles
IASB -International Accounting Standards Board
IFRS - International Financial Reporting Standards
ITA - Income Tax Act or The “Act”
ETA - Excise Tax Act (GST/HST is administered under this act)
PCC - Private Company Council
PE GAAP - Private Enterprise GAAP - see ASPE
Let's start with the difference between Canadian and U.S. GAAP for privately owned small businesses; next I'll look at how CRA views GAAP and your books.
For my U.S. visitors, a link to U.S. GAAP resources can be found further down this page. For small business purposes, Canadian GAAP is very similar to U.S. GAAP.
As I explain shortly, GAAP was initially designed to be used by large companies with third party investors and lenders. Often times, the rules are not relevant to a small business owner.
The framework for Canadian GAAP follows the FASB approach, but there are some differences. The biggest difference is that Canadian GAAP is principle based while US GAAP is rule based.
It is my understanding that principle based means judgment and flexibility can be used to ensure the substance, not the form, of the transaction is recorded. Principles are by nature general and require interpretation.
It is my understanding that accounting concepts and principles that are rule based means a rule guides behavior that can be acted on without contextualization.
Most home based small business in Canada will be using ASPE as their GAAP standard ... not IFRS as their GAAP standard.
The US ASPE is "intended for U.S. companies that have no intention of going public".
The US ASPE framework is completed and was released in the second quarter of 2013. It's titled, "The Financial Reporting Framework for Small and Medium-Sized Entities" and is available for free download at AICPA.
It will NOT be considered a substitute for U.S. GAAP but a viable reporting option for SMEs where GAAP lacks relevance and the cost of GAAP financial reports prohibitive.
It's interesting to note substantial portions of the CICA Handbook are reproduced (under license) ... once again demonstrating how similar our GAAPs for small businesses are. Canadian bookkeepers might want to download this guide instead of paying the large sum of currency the CICA wants in order for you to get a copy of the Canadian ASPE.
With all this talk about GAAP, some of you are probably wondering what GAAP is. It is the foundation for bookkeeping so you do need to understand this.
GAAP is a set of rules (based on accounting concepts) used in the preparation of financial statements by public accountants for companies who have investors or carry debt. It allows third parties to look at similar information in a comparable format ... basically making sure apples and oranges are not mixed together, so to speak.
The GAAP framework refers to guidelines, not rules, because judgement must be used in order to apply the accounting concepts and principles. Therefore the more a bookkeeper has studied and practiced exercising that judgement in a supervised environment before they go out on their own, the more likely they will be to make better decisions.
These basic accounting concepts and guidelines form the basis of all accounting training. If learned and understood, they will help you make better decisions when recording your transactions.
*resource used for the overview of this accounting training, Intermediate Accounting 7th Canadian Edition by Nelson, Conrod, Dyckman, Dukes, and Davis
**CGA Magazine Nov-Dec 2003 Generally Accepted Accounting Principles - An overiew of what you need to know about financial statement preparation and GAAP by Stephen Spector
There are three main bodies that have influenced or affected the development of the accounting concepts and principles that make up Canadian GAAP today.
AcSB stands for Accounting Standards Board and is the Canadian equivalent of the U.S. FASB (Financial Accounting Standards Board). It is operated and funded by CICA.
The Board works at harmonizing Canadian GAAP with international standards and U.S. GAAP.
The basic components of the financial statement and accounting concepts were developed in 1987 I believe ... and included in the CICA Handbook Section 1000 in 2003 (at least they used to be ... not sure now with the restructuring of the handbook).
The International Accounting Standards Board
The International Accounting Standards Board (IASB) replaced the International Accounting Standards Committee created in 1973 to address emerging needs of cross border business.
IASB was created in 2000 when the European Union announced it would adopt IFRS for publicly listed companies.
IFRS is now mandatory or permitted in more than 100 countries. China, Japan, India, Canada, Brazil, and South Korea are set to adopt IFRS in 2011. Companies using IFRS can list in the United States without preparing a costly reconciliation of their numbers to US GAAP.
IASB is responsible for setting IFRS.
It is funded by contributions from banks and companies who have an interest in promoting or using international standards.
Your bookkeeping resource for more information on IFRS can be found at IASB's website; located at ifrs.org.
IASB are holding a series of free wbinars between September 2013 and November 2013. Find more information here.
Bookkeeping resource used for IASB information: Origins and Rationale for IFRS Convergence by Peter Walton at qfinance.com.
U.S. FASB GAAP
FASB is the Financial Accounting Standards Board within the U.S. It is a private, not-for-profit organization created in 1973. The Canadian equivalent is the Accounting Standards Board (AcSB).
FASB is independent of professional organizations and businesses. It is funded through an accounting support fee paid by mutual funds and public companies.
If you are looking for a bookkeeping resource on the Generally Accepted Accounting Principles set by FASB, the Bean Counter has an excellent article titled Financial Reporting and GAAP.
A 2007 paper entitled, "IFRS vs. US GAAP: A Sixty Minute Waltz in the Classroom" (you can google it) makes suggestions for incorporating significant aspects of international standards in the accounting classroom prior to 2014. This paper explains that ...
International accounting standards were designed to be flexible and are principle-based while US GAAP standards were designed with the goal of protecting investors through conservative accounting practices. Its rule-based construction provides comfort to a profession that operates in a highly litigious environment.
The U.S. is moving towards convergance with IFRS in 2014. In August 2008, the Securities and Exchange Commission put forth a timetable to move U.S. GAAP towards a more principle based accounting system that is more in line with IFRS and the creation of a global standard.
PWC started a new publication in the Fall of 2012 titled US GAAP Today. They began the publication because some Canadian companies use US GAAP as their financial statement standard because they are a U.S. subsidiary or are SEC issuers electing US GAAP over IFRS reporting perhaps because they have significant U.S. operations or U.S. competitors.
One Global Standard?
Many countries have already made the changeover. Public companies in Canada switched to this accounting standard in 2011, which means companies started reporting IFRS standards in 2010 so they had their comparatives for 2011. The U.S. is converging with this accounting standard ... most likely around 2014.
As of December 2009, Canada adopted Accounting Standards for Private Enterprise (ASPE). These good bookkeeping rules will be used by most small businesses instead of IFRS ... which will be the accounting standard for publicly traded companies, companies who seek to do business outside Canada or need international financing.
Most of the articles on this site were written for Canadian GAAP. As I learn how the accounting concepts, principles and standards, if any, change with ASPE, I will edit the articles as needed. For the most part, I will not address IFRS as this website is for small business.
Prior to Canada's adoption of ASPE,
there was very little difference between Canadian GAAP and US GAAP for
small business. Most of the differences between the two standards arose
when dealing with the more advanced reporting required of publicly
Canadian GAAP changed in 2011. Let's look at a brief history so we can understand the change.
The Canadian Institute of Chartered Accountants (CICA) developed a handbook in 1968 which contained Canadian GAAP ... guidelines and recommendations for accounting.
In 1975, the handbook was incorporated in the Canada Business Corporations Act. It is now the reference all accountants use to ensure external financial statements are prepared in accordance with GAAP.
The CICA Handbook was restructured in 2009. It now reflects different standards for different categories of entities. All the standards now reflect Canadian GAAP.
So in a nutshell, here is what I think you need to be aware of since the change:
If you are looking for more information on the new Canadian Accounting Standards for Private Enterprise (also referred to as Private Enterprise GAAP) released in December 2009 ... I have listed some resources I have found useful in the comments section of IFRS and ASPE.
You will find a link to transitional elections you are eligible to make in 2010 in this forum posting as well. I am not certain if there is any wiggle room ... but these elections had to be made in 2010. If you didn't make the elections, you should be talking to your accountant NOW.
The forum posting also has information on how to decide whether your business should be adapting IFRS or ASPE (PE GAAP).
... and I have been inserting some notes throughout the site (see below) ...
When learning basic accounting concepts and principles, you need to understand GAAP ... and therefore how GAAP has changed under the new guidelines.
I have been placing bookkeeping resource notes on any changes I am aware of at this time throughout this website.
To find the ASPE / PE GAAP updates, follow these links ... and you will see the actual application of the accounting concepts discussed above. I will also work on introducing FRF for SMEs updates.
These links are in no way all the changes that could affect small business owners who work from home. These are just the ones I thought would be most relevant to site visitors.
Just an interesting tidbit that is more tax related than bookkeeping ... in the U.S. taxpayers get to deduct the interest on their first $1.1 million of their mortgage debt annually, which reduces the tax they pay.
However, when Americans sell their principal residence, Americans pay capital gains tax on profit over $250,000; $500,000 for couples. In Canada, we don't have the have annual mortgage interest deductiblity. The plus side is our principal residences do not attract a capital gains tax upon sale.
Taking the time to have a general understanding of the basic accounting concepts and principles ... will help you prepare a better and more accurate set of financial records ... as they are the foundation and structure behind every bookkeeping entry you make.
GAAP has changed ... but the basic conceptual framework around which it was built ... the accounting concepts and principles are still being maintained ... and will continue being its foundation.
You should be aware that there is now more than one GAAP standard in Canada ... but they are all considered Canadian GAAP. Many small businesses don't have GAAP financial statements at all ... but base the bookkeeping work done in accordance with tax accounting principles ... whose starting point is rooted in basic accounting concepts and principles.
While accounting concepts are fairly stabilized, accounting standards are currently under review in the U.S., so expect changes over the next two to three years (2013-2015).
If you are new to Bookkeeping Essentials ...