Analysing the Canadian Accounting system and standards

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Accounting standards are the official standards released by recognized standard-setting body, usually the Accounting Standard Board, to govern financial accounting and reporting. The standards should define transactions and other events in financial statements and explain how they are to be recognized, measured, presented and disclosed. The purpose for setting such accounting standards is to provide needed information to users of financial statements and help them to make sound decisions. These standards are the basis of Canadian GAAP. (About AcSB)

ii. The CICA Handbook

In general, accounting includes accounting standards that are applicable to both enterprises in pursuit of profit and non-profit organizations. Companies are required to prepare financial statements according to Canadian GAAP as published in the CICA Handbook by the Canadian Business Corporations Act and security's legislation's. The handbook provides updated information on accounting standards. It also includes information on the transition to IFRS, the Accounting Standards for Private Enterprises, as well as the new Canadian Auditing Standards (The CICA's Guide to Accounting Standards for Private Enterprises in Canada). This handbook is the primary source of GAAP, guiding federal, provincial, territorial and local governments. (Canadian Institute Of Chartered Accountants Definition)

iii.   The Accounting Standards Board (AcSB)

AcSB is an authorized independent body. As FASB is the accounting board of US, the Canadian Accounting Board has almost the same obligations. It develops and establishes the accounting standards of Canada. In addition, it provides guidance for governing financial accounting and reporting in the country.  In meeting its objectives, the AcSB:

Is committed to serve the public interest

Respects and encourages input from all its stakeholders

Brings objectivity to the consideration of issues

Respects the ability of its stakeholders to exercise professional judgment

Is committed to timeliness in its responses to stakeholder needs. (About AcSB)

iv.   Structure and Membership of the AcSB

Nine members from various backgrounds compose the AcSB and each of them have voting power. These members include the Chair, which is a full-time position, and eight volunteers, who constitute the other part of the board and these positions are only part-time. The AcSB members are carefully selected based on their competencies and experiences to meet an appropriate balance; thus, help the committee to meet its objectives (Canadian Accounting Standards Global Positioning: The New Direction). All the members usually volunteer for a three-year term with different expiration dates. The members can also renew their membership for one term.  There are also non-voting members of AcSB, consisting of the Vice-President, Standards, the Director, Accounting Standards and the individual appointed by the IASB to liaise with the AcSB. The AcSB is supported by a staff including the Director, Accounting Standards, 11 Principals, a number of consultants, and administrative support. (About AcSB)

  2. Cash vs. Accrual Basis

As well as all the other countries in the world, two primary types of accounting are used in Canada, cash and accrual based accounting. Generally speaking, cash based accounting is not being used as often as accrual based accounting, because of its nature of inaccurate and errors it presents in former practices. Also, accrual based accounting gives the company a clearer image of its current financial position. (Cash Vs. Accrual Accounting in Canada )

i. Assets

By definition, assets (revenue) are added into the financial statement when related actions occurs in accrual accounting. This principle is defined as revenue recognition. For example, if $800 of goods are sold to someone and you record "$800" even if you have not received the cash or cash equivalent. Your financial statements will reflect the fact that your business has done an additional $800 of business, despite the fact that you have not received a hard cash value. On contrary, assets won't be recognized until the money actually changes hands. This option makes it hard to track the health of business as well as the time when transactions take place. (Cash Vs. Accrual Accounting in Canada )

ii. Liabilities

Accrual based accounting can accurately show the financial status of the business, because firms record the amount of various payables (accounts like salary and other account payables) at the end of reporting period. These accounts will be moved from a liability to an equity as an expense. On the other hand, in cash based accounting, payables will not be recorded on the book unless there is an actual exchange of money. Therefore, cash based accounting can not truthfully represents the amount of money that the firms owes to other parties, and thus, won't be able to represent the financial situation of the firm. (Cash Vs. Accrual Accounting in Canada¼‰

iii. Equity

Equity differentiates accrual accounting from cash basis accounting. It is also the basis of the accounting system. Two basic laws that monitor accrual accounting are revenue recognition and the matching principle. The two laws interact with each other by recording expenses at the time the expenses happens and the revenue as well. "For example, if a company sells $2,000 of merchandise, which cost $400 to purchase wholesale, then $2,000 of revenue will be recorded at the same time that $400 of expense is recorded on the financial statements, reflecting the fact that that expense happened to generate that revenue." (Cash Vs. Accrual Accounting in Canada)

iv. Usage

Since it is more accurate than cash based accounting, accrual accounting is used by all  official organizations, including all first and third world countries. Cash based accounting is more commonly used in sole proprietorships and in personal finances. "Though it isn't always wise, due to the fact that it is harder to keep track of what is owed if it has not yet been paid." (Cash Vs. Accrual Accounting in Canada)

v. Legality

Another reason causing cash basis accounting to be less popular among formal organizations in Canada is that it is illegal, according to both national and international laws. This is because it is easier for the company to hide its illegitimate activities when it is using cash based accounting, as expenses do not have to be recorded with the incurred revenue and therefore can be manipulated. Thus, using cash method will misrepresents the health of the company. (Cash Vs. Accrual Accounting in Canada )

3. GAAP vs. IFRS

i. General Issue

International Financial Reporting Standards (IFRS) are principle-based Standards, Interpretations and the Framework adopted by the International Accounting Standards Board (IASB) (International Financial Reporting Standards). IFRS is based on a set of principles that establish broad rules and specific treatments when dealing with every country's financial makeup (Difference between IFRS and Canadian GAAP).

Generally Accepted Accounting Principles (GAAP) of Canada provides the framework for broad guidelines, conventions, rules and procedures of accounting (Generally Accepted Accounting Principles (Canada)). It was designed to make Canada's financial sector more unified (Difference between IFRS and Canadian GAAP).

IFRS includes four main elements: the International Financial Reporting Standards, the International Accounting Standards (IAS), the Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC), and the Standing Interpretations Committee (SIC) (International Financial Reporting Standards). Another important element of IFRS is the Framework for the Preparation and Presentation of Financial Statements, which states basic principles of the IFRS (International Financial Reporting Standards). This framework is the foundation of accounting standards in  all the countries on earth. It explains that the main purpose of financial statements is to provide information about the financial standing, performance and changes of the entity. Also, information from these financial statements must be provided to the public and the shareholders of the entity (Difference between IFRS and Canadian GAAP). Compared to IFRS, Canadian GAAP is founded on a more traditional interpretation of GAAP, with the purpose of preparing financial statements more accurately. Canadian GAAP is formed with regularity and conformity to the rules and guidelines of the particular company, sincerity, permanence, and continuity (Difference between IFRS and Canadian GAAP).

Generally speaking, IFRS and Canadian GAAP are closely related. But there are still significant differences between the two standards. Following ,we list three of the differences that we think are most significant differences:

Impairment - Under IFRSs impairments will generally be triggered more often but unlike Canadian GAAP, impairments under IFRS can be reversed

Securitization - IFRSs are fundamentally different in this area from Canadian standards

Revaluations - Some IFRSs accounts, including Property, Plant and Equipment,Investment Property and Intangibles allow the re-valuation of assets under certain circumstances.

(Canadian GAAP - IFRS Differences).

  ii.  IFRS or GAAP

In February 2008, the Canadian Accounting Standards Board (AcSB)  released guidelines for adopting International Financial Reporting Standards (IFRS) for all Canadian enterprises.  These guidelines define the tasks that need to finish before the AcSB moves toward the adoption (Canadian Accounting Standards Global Positioning: The New Direction).

The released guideline of AcSB presented an initial timeline, helping Canadian enterprises to begin measuring the influence that IFRS will bring to their businesses. AcSB is allowing sufficient time for the companies to complete the significant initiatives. Starting in 2011, most Canadian public entities will be required to prepare their financial reporting using IFRS instead of Canadian GAAP (Canadian Accounting Standards Global Positioning: The New Direction).