Basic Accounting
Concepts and Principles

Canadian GAAP is both IFRS and ASPE

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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:

AcSB - Accounting Standards Board

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.

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.

Who Develops These Accounting Concepts and Principles?

Canadian AcSB

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 framework for Canadian GAAP follows the FASB approach, but there are some differences. 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 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.

Here is an example of the IFRS balance sheet format ... and the IFRS income statement format.

Your bookkeeping resource for more information on IFRS can be found at IASB's website; located at ifrs.org.


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.

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.

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.

Each country, in the past, has had their own set of accounting standards and principles. Currently, there is a general trend in our global economy of every country switching to an international financial reporting standard (IFRS).

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 traded companies.

Accounting Concepts and Principles
Canadian GAAP is Now IFRS and ASPE

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:

• The new standards still maintain the common accounting concepts and principles framework discussed above.
• ASPE (PE GAAP) acknowledges and reflects that private enterprise has different reporting needs than publicly accountable entities. The CICA Handbook was used as the starting point and foundation for the development of ASPE (PE GAAP).
• Small businesses in Canada switched to the new standards in 2011 where a choice was made to follow ASPE (PE GAAP) or IFRS. There were transitional rules and elections that had to be made when switching to the new accounting standard, particularly IFRS. These are found in Section 1500 First Time Adoption.
• Business owners should have spoken with their accountant in 2010 about what information they needed to obtain to make the transition ... as it requires a restatement of prior year figures. New accounting policies and elections were available to business owners. Some elections had to be made in 2010 if a reduction in the cost of applying the new rules was desirable.

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 think but am not certain if there is any wiggle room ... that these elections had to be made in 2010. If you didn't make the elections, you should be talking to your accountant NOW.

This 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 ...

Accounting Concepts and Principles
Quick Links to GAAP Update ... ASPE (PE GAAP)

To find the ASPE / PE GAAP updates, follow these links ... and you will see the actual application of the accounting concepts discussed above.

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.

• Cash Flow Statement
• Callable Debt
• Disclosures and Fair Presentation
• Employee Bonus
• Government Remittances
• Income Tax Payable
• Inventory
• Property, Plant and Equipment
• Temporary Investments

Understanding CRA's Position on GAAP

The Income Tax Act (the “Act”) does not specify that financial statements must be prepared following any particular type of accounting principles or standards to determine profit. As the Supreme Court of Canada stated in Canderel Limited. v. The Queen 98 DTC 6100, the determination of profit is a question of law.

Accounting standards are not law. In seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer's profit, for purposes of section 3 of the Act for the given year. The Supreme Court stated that a taxpayer is free to adopt any method which is not inconsistent with: (a) the provisions of the Act; (b) established case law principles; and (c) well-accepted business principles. It is our view that financial statements based on IFRS would be an acceptable starting point to determine income for tax purposes.

In addition, where IFRS financial statements are used by a particular entity, it is our position that references to GAAP in the Act can be read as references to IFRS and all references to GAAP in any Agency publication can also be read as references to IFRS for those entities that report under IFRS.

You can see by the above statement that GAAP is a starting point to determine income for tax purposes ... so you do need to understand basic accounting concepts and principles even if your financial statements are prepared on a tax basis.

So Why Do I Want To Know This Stuff?

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.

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