Farmer Crosby had a successful mixed farming operation called Penguin Inc., which had accumulated a sizable land mass and investment portfolio. As the farmer and his accountant met to review the company's year-end financial statements, a familiar topic came up.
"It drives me crazy that you accountants have to record everything on a historic-cost basis," said the farmer. "My land and buildings are worth substantially more than the financial statements indicate. I tell my banker that every year but I don't know if he listens, and if he does I certainly don't think he takes it into consideration,"
And every year Farmer Crosby's accountant nods his head in agreement and wishes something different could be done. This year, however, he was ready for the question.
"There may be something we can do to help that situation," he said, causing Farmer Crosby to straighten up in his chair. "We have some new rules called Accounting Standards for Private Enterprises, or ASPEs. They allow for a few changes to financial statement presentation, including a one-time bump-up to fair value of your land, buildings and equipment."
"What led to this sudden change?" Farmer Crosby, now all ears, asked.
"Canada's adoption of International Financial Reporting Standards (IFRS)," the accountant said, adding that the reporting and disclosure requirements, though, are only for publicly accountable entities. It's their introduction that led to the release of ASPEs, which are designed with the cost-benefits of financial reporting in mind for owner-managed businesses.
"How do they work and when can we get started?" asked the farmer.
"Private companies with year ends that begin on or after January 1, 2011 must implement these new standards or choose to adopt IFRS, although earlier implementation is possible," the accountant replied. "Choosing IFRS - unless you plan on taking your operation public or have a large number of financial statement users - is not a preferable alternative."
"What kind of information will you need?" asked Farmer Crosby.
"For your July 31, 2012 year end, we need the value of the assets you want to bump as at August 1, 2010, which is the beginning of the fiscal year used in your comparative financial statement numbers. Although this information will be two years old at the date of your 2012 financial statements, it will still reflect a large increase over the original cost of the assets.
"Given that we are preparing review engagement financial statements, we would need some type of information to support the plausibility of the numbers, such as an appraisal. Also keep in mind that the assets can be looked at on an asset-by-asset basis, so you don't need to revalue everything: equipment, for example, does not commonly increase in value."
This prompted Farmer Crosby to ask, "Are there any other potential adjustments that would positively affect Penguin Inc.'s financial statements?"
"The other change that could significantly affect your financial statements is that your stock portfolio will now have to be recorded at market value as at the date of your financial statements," the accountant explained. "Similar to the increase in value of your land and buildings, we will need to go back to August 1, 2010 for your investments to restate the comparative numbers.
"The way the market is these days, this standard may both positively and negatively affect your balance sheet and income statement and, unlike the property, plant and equipment one-time bump-up, must be adjusted annually. The annual adjustment would, however, result in an unrealized gain or loss on the income statement. Because this is a non-cash transaction, financial statement users should be able to remove it from the net income when assessing normal operations."
"When all this is done, what positive benefits will I see from these changes?" asked Farmer Crosby, still not fully convinced.
"There are a number of financial statement ratios that could be enhanced," said the accountant. "For example, your debt- to-equity ratio, net tangible worth and working-capital ratio are three of the main ratios that could be positively affected by the restatement. It would also be a good opportunity to sit down with your banker with the restated financial statements to see if the bank could improve any future credit facilities."
Farmer Crosby then said, grinning, "I suppose my neighbours with the large quota will really be able to take advantage of this."
"Actually, no," said the accountant. "The quota doesn't fall into these new rules and is considered an intangible asset and not property, plant or equipment."
Farmer Crosby, always the cautious one, finally got around to asking his standard question: "Are there any negative things that could come out of implementing these new standards?"
"There are certainly items we would need to consider," the accountant replied. "If you increase the value of the buildings, the effect of an increase in amortization would have to be taken into account. Also, although these changes will not affect your current tax liability with the Canada Revenue Agency, we need to monitor what the increase in assets might have on the Large Corporations Tax. There could also be an increase to the future income tax disclosure on your financial statements, although the option will exist to record your taxes as per the taxes payable method.
"Finally, in the year of transition there is a rather significant first-time adoption note, as well as the requirement to disclose the policy choices made. I can assure you, however, that the disclosure required is a lot less than that required to implement IFRS."
Farmer Crosby sat quietly reflecting for a moment and then remarked, "I can't imagine that we wouldn't at least explore the opportunity to make our financial position look better."
The accountant gave farmer Crosby a list of items to begin compiling for his July 31, 2012 year end and sent a much happier client on his way.
For advice relating to the affect of ASPE on your operations, please contact your Collins Barrow adviser. §
Rob Fischer, BCom, CFP, CA, is a Partner in the Red Deer office of Collins Barrow.