Key Changes from the ASPE 2017 Update

Accounting Standards for Private Enterprises (ASPE) provides the financial reporting framework for Canadian private companies. These standards, maintained by the Accounting Standards Board (AcSB), undergo periodic updates to address new business complexities. A set of amendments became effective for fiscal years starting on or after January 1, 2017. These changes provided new accounting options and clarified existing rules, impacting how companies report their financial activities.

New Accounting Choices for Subsidiaries and Joint Arrangements

A major change from the 2017 update involved Section 1591, which introduced new flexibility in accounting for subsidiary investments. Previously, the standard practice was for a parent company to consolidate its subsidiaries, meaning it would combine the assets, liabilities, and results of operations of the subsidiary with its own. This approach treated the parent and its subsidiaries as a single economic entity.

The amendments provided private enterprises with an accounting policy choice to select one of three methods for each subsidiary: consolidation, the cost method, or the equity method. Under the cost method, the investment in the subsidiary is recorded at its original purchase price and is only adjusted downward for impairment. The equity method involves adjusting the investment account for the parent’s share of the subsidiary’s profits and losses each period.

This flexibility allows a company to choose the method that best reflects its relationship with the subsidiary. For instance, a company might choose the simpler cost method for a subsidiary over which it exerts little day-to-day influence, avoiding the complexities of consolidation. The choice must be applied consistently to all subsidiaries.

The updates also introduced Section 3056, which replaced the previous guidance on joint ventures. This section requires an entity to assess its rights and obligations to determine the type of joint arrangement it is a party to. The two classifications are joint operations and joint ventures. This distinction is based on whether the parties have rights to the assets and obligations for the liabilities (a joint operation) or rights to the net assets of the arrangement (a joint venture).

For an interest in a joint venture, an entity has the choice to apply either the cost or equity method. For an interest in a joint operation, the entity recognizes its direct share of the assets, liabilities, revenues, and expenses related to the arrangement in its own financial statements.

Revised Classification of Financial Instruments

The 2017 amendments addressed an issue within Section 3856, “Financial Instruments,” concerning the classification of certain types of shares. Many private enterprises issue retractable or mandatorily redeemable shares. Before the update, these instruments were required to be classified as financial liabilities on the balance sheet because the company had an obligation to pay cash to redeem them at a future date.

This liability classification could skew a company’s financial ratios, particularly the debt-to-equity ratio, making the company appear more leveraged than it was in substance. The amendment provided an exception allowing such shares to be classified as equity if specific conditions are met. These conditions require that the redemption amount is within the company’s control or that the obligation can be settled with a fixed number of the company’s own equity instruments.

Moving a large redeemable share issuance from the liability section to the equity section of the balance sheet can improve a company’s perceived financial stability. This can be a factor for lenders and investors who rely on financial statements to make decisions. The updates also brought in amendments focused on transparency for related party transactions. These changes mandate enhanced disclosures for financial instruments involving related parties that are not measured at fair value, with the goal of providing users more information to understand the risks from these transactions.

Presentation and Disclosure Clarifications

Clarifications were made to Section 1540, “Statement of Cash Flows,” to improve consistency in reporting. A change involved how companies present and reconcile their cash balances. The amendment requires that the statement of cash flows explains the change during the period in total cash, which includes cash, cash equivalents, and amounts described as restricted cash.

A clarification was that transfers between these components are not to be reported as operating, investing, or financing activities. For example, if a company moves funds from its main operating bank account to a separate restricted cash account required by a lender, this internal transfer is not presented as a cash outflow or inflow on the statement. Instead, it is simply a non-cash transfer that is disclosed, ensuring the statement only reflects transactions with outside parties.

The 2017 package also included a clarification related to the measurement of interests that an entity retains after transferring financial assets to another party. This amendment to the financial instruments standard was designed to align the measurement principles within the standard.