Basic Accounting
Concepts and Principles

Canadian GAAP is both IFRS and ASPE
U.S. FRF for SMEs is an available option to U.S. GAAP

Published September 2010 | Updated June 4, 2024  |  Revised August 19, 2024

Learning this stuff WILL make you a better bookkeeper! Grab your jug of water and get comfortable for today's chat.

We'll begin our chat on basic accounting concepts by:

• looking at the differences between U.S. and Canadian GAAP; or put another way, the differences in American bookkeeping standards versus Canadian bookkeeping standards;
  
• understanding CRA's position on GAAP; then
  
• laying the conceptual framework around which Canadian GAAP was developed ... the foundation for all bookkeeping and accounting training;
• updating you on new Accounting Standards For Private Enterprise (ASPE) in Canada

We'll also look at ASPE changes from the "old" Canadian GAAP that affect small business reporting requirements along with the role of the three accounting bodies that set these standards.

Acronyms

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, especially if you want to know what terms like ASPE stands for:

AcSB - Accounting Standards Board

AICPA - American Institute of Certified Public Accountants

ASPE - Accounting Standards for Private Enterprise (effective January 1, 2011)

CICA - Canadian Institute of Chartered Accountants now rebranded to CPA Canada

FASB - Financial Accounting Standards Board

FAF - Financial Accounting Foundation

FRF for SMEs - Financial Reporting Framework for Small and Medium-Sized Entities (published by AICPA in June 2013 as an alternative to U.S. GAAP)

GAAP - Generally Accepted Accounting Principles

IASB -International Accounting Standards Board

IFRS - International Financial Reporting Standards

ITA - Income Tax Act or The “Act”

ETA - Excise Tax Act (GST/HST is administered under this act)

PCC - Private Company Council

PE GAAP - Private Enterprise GAAP - see ASPE

Let's start with the difference between Canadian and U.S. GAAP for privately owned small businesses; next I'll look at how CRA views GAAP and your books.

What's New With ASPE

AcSB is in the process of reviewing certain emerging issues with private companies since ASPE went into effect. Here are a few:

• Effective for 2024, AcG-20 provides guidance on customer's accounting for cloud computing arrangements. It "provides guidance on accounting for a customer's expenditures in a cloud computing arrangement; and determining whether a software intangible asset exists in the arrangement."
• Under review is the impact of private equity investing. BC CPA* states, "In Canada, this trend has put a new focus on ASPE, because creditors are no longer the main recipients of the financial statements of private enterprises. ... Given that all companies have the option of implementing IFRS, those who want to be considered for equity investments can just adopt the standards on their own."

*Source: BC CPA, ASPE and the changing world by Martha Okot Thomas Love 28, 2023

What Is GAAP?

With all this talk about GAAP, some of you are probably wondering what GAAP is. It is the foundation for bookkeeping so you do need to understand this.

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 when booking transactions.

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.

Who Develops These Accounting Concepts and Principles?

There are three main bodies that have influenced or affected the development of the accounting concepts and principles that make up Canadian GAAP today.

• 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 International Accounting Standards Board

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.

IASB are holding a series of free wbinars between September 2013 and November 2013. Find more information here.

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 TechTarget WhatIs? has an excellent March 2022 article titled GAAP (generally accepted accounting principles). The image below is from their article. Click on it to go to the article as it also discusses the four additional guidelines to support the consistency and accuracy of financial statements.

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.

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.

PWC started a new publication in the Fall of 2012 titled US GAAP Today. I don't know if it is still being published. What's important to understand is why they started the publication. They began the publication because some Canadian companies use US GAAP as their financial statement standard because they are a U.S. subsidiary or are SEC issuers electing US GAAP over IFRS reporting perhaps because they have significant U.S. operations or U.S. competitors. 

One Global Standard?

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 still working towards converging with this accounting standard.

In 2015 it was announced by IFAC (International Federation of Accountants) that "Declaring (and rightfully so) that their main goal is to protect US investors’ interests, the SEC notes that IFRS lacks consistent application, allows too much leeway with judgment, and is underdeveloped in many specific areas, for which the US GAAP has detailed and accepted guidance and established practice".

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. With the introduction of ASPE in Canada and FRF for SMEs in the U.S., the gap is still very narrow.

New Accounting Concepts and Principles
This One Takes A Bit To Get Your Mind Around It!

Canadian GAAP is Now IFRS and ASPE

Canadian GAAP changed in 2011. Let's look at a brief history so we can understand the change.

The Canadian Institute of Chartered Accountants (CICA), now rebranded as CPA Canada, developed a handbook in 1968 which contained Canadian GAAP: guidelines and recommendations for accounting.

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 since the change:

• 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 required 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 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 businesses were eligible to make in 2010 in this forum posting as well.

The 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 (see below) ...

Quick Links to GAAP Update ... ASPE (PE GAAP)

When learning basic accounting concepts and principles, you need to understand GAAP ... and therefore how GAAP has changed under the new guidelines.

I have been placing bookkeeping resource notes on any changes I am aware of at this time throughout this website.

To find the ASPE / PE GAAP updates, follow these links ... and you will see the actual application of the accounting concepts discussed above. I will also work on introducing FRF for SMEs updates.

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
• Basic revenue recognition criteria

Just an interesting tidbit that is more tax related than bookkeeping ... in the U.S. taxpayers get to deduct the interest on their first $1.1 million of their mortgage debt annually, which reduces the tax they pay.

However, when Americans sell their principal residence, Americans pay capital gains tax on profit over $250,000; $500,000 for couples. In Canada, we don't have the have annual mortgage interest deductiblity. The plus side is our principal residences do not attract a capital gains tax upon sale.

So Why Do I Want To Know This Stuff?

My suggestion to you ... enjoy a tall cool glass of lemon water while you click and poke and peek and snoop this site ... perhaps start with the blog which lists the most recent updated articles.

I Hope You Enjoy Your Visit Today,
Your Tutor

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