Accounting standards: A key step for compliance

Accounting standards tell companies how to report their financial results. They help create a standardized system of reporting so that analysts, lenders and other financial professionals and investors can compare companies and their performance on an “oranges to oranges” basis.

Accounting standards cover everything from how assets, liabilities, revenues and expenses are recognized, to how profits and losses are measured and reported, to what information needs to be shared and how it’s presented.

Public companies in Canada are governed by the International Financial Reporting Standards (IFRS). Canada switched to IFRS from the traditional Canadian GAAP for publicly listed companies in 2011, but the U.S. still relies on the U.S. GAAP. To make things easier, some Canadian companies that report in the U.S. will work under the U.S. GAAP when filing in the States.

Private and not-for-profit organizations can also use IFRS, or they can opt for a standard like ASPE, the Accounting Standards for Private Enterprises. APSE is similar to IFRS but more geared toward smaller companies than huge multinationals, so its requirements are easier to implement for that size of business. The Accounting Standards Board sets the standards for all non-public entities in Canada. Pension plans also fall under separate accounting standards.

Accounting standards are one component of financial compliance, or all the external rules and internal controls companies must follow to ensure they’re playing by the rules. They’re important because having independent financial standards, transparency and accountability when it comes to reporting financial information are crucial for creating confidence in the overall financial system and the individual companies within it.

If a company fails to report information following the appropriate standards, business deals or lending agreements could fall through because stakeholders could be unsure about the reliability of the information they’ve been given. For public companies, reporting errors can also lead to a drop in stock prices, fines or other sanctions.

7 months ago