Currently Canadian business must follow Generally Accepted Accounting Principals or GAAP. You may have been hearing over the past couple of years talk about International Financial Reporting Standards or IFRS, and talk of businesses in Canada converting to this reporting standard. Do you as a small business have to convert out IFRS? That’s what we’ll talk about here.
What is IFRS?
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.
The IASB is an independent accounting standard-setting body, based in London. It consists of 15 members from nine countries, including the United States. The IASB began operations in 2001 when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, national funding regimes, and other international and professional organizations throughout the world.
A financial statement should reflect a true and fair view of the business affairs of the organization. As statements are used by various constituents of the society / regulators, they need to reflect a true view of the financial position of the organization, and they are very helpful to check the financial position of the business for a specific period.
IFRS authorize three basic accounting models:
I. Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm.
II. Financial Capital Maintenance in Nominal Monetary Units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm.
III. Financial Capital Maintenance in Units of Constant Purchasing Power – CMUCPP – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power paradigm.
Sounds complicated, doesn’t it. It is much more involved than GAAP for sure. It will take time for enterprises to convert to IFRS.
Currently, financial statements reflect, historically, a moment in time rather than what may, or may not, happen with the company. IFRS allows for the probable future economic benefit will flow to or from an entity to be recognized in the financial statements.
Do I have to implement IFRS in my business?
In Canada, The use of IFRS became a requirement for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”
So, unless you’re a public company you do not have to follow IFRS. This may change over time. Should I ever convert to IFRS? I would say no, not unless you have to for regulatory reasons or you wish to sometime in the future take your company public. Converting to IFRS can be a costly and time-consuming practice and requires the skills of an accountant who’s worked in the IFRS arena.
What Small Businesses can do to Survive the Pandemic
How the Pandemic is Affecting Canadian Businesses
Will Covid-19 Relief Measures Affect my Taxes?
How to Manage Flexible Work Arrangements for your Business
Planning for the Future of Your Business
Charging PST on Online Sales
How to Close your GST Account with the CRA
What are Input Tax Credits?