IFRS AND ASPE
SUMMARIES
High School
Accounting
Supplement
IFRS and ASPE Summaries
High School Accounting Supplement
Zach Witte, BCom
Research Assistant
Joseph L. Rotman School of Management
University of Toronto
Toronto, ON
Lisa Harvey, BBA, MAcc, CPA, CA
Lecturer in Accounting
Joseph L. Rotman School of Management
University of Toronto
Toronto, ON
© 2014
This summary was funded by the CPA/Rotman Centre for Innovation in Accounting Education
Introduction & Review
All companies are complex organizations with differing objectives, processes, resources, people etc.
Financial statements are a way to organize this complex information into a format that is
understandable for users who have a reasonable background in business and accounting. This is done by
following what is referred to as a financial reporting framework.
Financial Reporting Frameworks
A financial reporting framework is a set of standards under which financial statements should be
prepared and presented so that it the financial statements are standardized and comparable. Since
there are many users with differing degrees of financial information required, several different financial
reporting frameworks exist.
Types of Users
In general there are two main types of users: internal users and external users.
Internal Users
Financial statements help make decisions for many internal functions such as:
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Management – What is a reasonable bonus to be paid to employees and the senior leadership
team based on current year results?
Human Resources – What workforce size is needed to meet production forecasts?
Finance – How much debt will we need to finance our expansion?
Marketing and Operations – At what price will our new product turn a profit while remaining
competitive in the market place?
Internal users generally have direct access to those who prepare the financial information and are
therefore able to request additional or more detailed information if needed.
External Users
Financial statements help make decisions for many external users such as:
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Creditors – Does the company have enough cash flow to repay its debt?
Owners and Investors – Will the company continue to be profitable in the future?
Customers – Will the company have to reduce product and/or service offerings due to cash flow
or profit concerns?
Government – What is the amount of taxes owed?
External users generally only have access to financial information given to them by the business. This
information typically includes financial statements. As such, the information requested and/or required
by the users of a business determines the type and amount of an entity’s financial statements.
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Changes in the Accounting World
In Canada, formal accounting standards have been issued via financial statement frameworks since 1968
using what is now referred to as the Chartered Professional Accountants of Canada Handbook (CPA
Canada Handbook). A financial statement framework is a set of standards under which financial
statements should be prepared and presented so that it is standardized and comparable. This first set of
bulletins and guidelines organized as a framework were referred to as Canadian Generally Accepted
Accounting Principles (CGAAP).
Users’ needs are the primary motivation for the development of financial statement frameworks. This is
because providing useful information for the various users is one of the main reasons why financial
statements and financial information are created and presented in the first place. Therefore, as
business, politics, and technology changed, so did CGAAP. Users began to require more information and
financial statement frameworks had to adopt new ways of presenting increasingly complex information.
From 1968 onward, new standards were added, old standards were updated and obsolete standards
were removed.
One of the biggest changes to the Canadian financial reporting frameworks occurred in 2006 when the
Canadian Accounting Standards Board (AcSB) announced its intention to replace CGAAP with
International Financial Reporting Standards (IFRS). Since IFRS generally contained far more detailed
requirements than CGAAP, the move to IFRS was met with some resistance by users who required less
information to make informed decisions. As such, the AcSB decided that IFRS would only be required for
publicly accountable companies (generally companies whose stocks are traded on a stock exchange) and
optional for all others. The AcSB then developed additional standards to meet the needs of the other
types of users.
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Types of Financial Reporting Frameworks
In Canada, there are currently five distinct financial reporting frameworks. The first four are included in
the CPA Canada Handbook:
1. International Financial Reporting Standards (IFRS) is the framework required of all publicly
accountable companies. The most common publicly accountable companies are those that trade
their shares or bonds on a stock exchange. IFRS is the most detailed financial reporting
framework.
2. Accounting Standards for Private Enterprises (ASPE) is most commonly used by private
companies. ASPE is generally less detailed because private company users generally have the
ability to request additional and/or more detailed information from the company itself.
3. Accounting Standards for Not-for-Profit Organizations (ASNFPO) are used by charities and other
entities that are not profit driven such as hospitals and universities. These are generally the least
detailed financial statements because Not-for-Profit Organizations (NPOs) often do not have the
capacity to provide overly detailed financial information. They tend to focus their resources on
meeting their missions instead. ASNFPO is mentioned here to provide a complete list. Note that
this financial reporting framework is outside the scope of this resource.
4. Accounting Standards for Pension Plans (ASPP) are used by companies when they are reporting
their pension plans separately from the overall entity. ASPP is mentioned here to provide a
complete list. Note that this financial reporting framework is also outside the scope of this
resource.
The fifth financial reporting framework in Canada is included in the CPA Canada Public Sector
Accounting Handbook:
5. Public Sector Accounting Standards (PSAB) PSAB are used by companies in the public sector such
as local, provincial or federal governments. However, certain public sector companies can
choose to use IFRS. PSAB is mentioned here to provide a complete list. Note that similar to
ASNFPO and ASPP, this financial reporting framework is outside the scope of this resource.
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IFRS and ASPE: The “Big 2” Financial Reporting Frameworks
The two most common financial statement frameworks are ASPE and IFRS. IFRS requires detailed
disclosures that generally require considerable financial and staffing resources to prepare. IFRS has
more required disclosures because it is used by a much larger group of users than that of a private
company. For instance, Bell Canada, a public company, has millions of shareholders whereas a private
company can have as little as one shareholder. Furthermore, when users of a private company require
additional information, it is generally much easier for them to get access to that information due to their
close ties to the company. For example, an owner of a private company could request more detailed
information than what is presented in the ASPE statements. In contrast, shareholders of Bell Canada
would be hard pressed to obtain more information they need because of their very small ownership
percentages in the company. Thus, IFRS attempts to provide most of the information a user could need
while balancing the cost of providing that information.
Both IFRS and ASPE are referred to as principles-based frameworks. In essence this means that instead
of being a series of rules that must be applied, both frameworks are made up of a series of ideas and
guidelines that must be applied. In plain English, this means that under both frameworks, transactions
should be presented in a way that reflects the true economic impact of the transactions (i.e. they should
show what actually happened). Whereas with a rules-based framework (as they have in the U.S.),
transactions that meet certain criteria must be presented a certain way. This can sometimes lead to
misleading financial statements and/or financial information.
Some key advantages and disadvantages to IFSRS and ASPE are presented below.
Advantages
IFRS
Comparable to other companies in other countries
because IFRS is used by the majority of the world
to prepare financial statements with the biggest
exception being the U.S.
More information is presented and thus the
financial statements are useful to more users
IFRS is generally supported by finance executives
across Canada and the world as it provides more
useful information
IFRS supports going public in the future (as it’s
required for publicly accountable entities) and is
generally the preferred framework for lenders
ASPE
Aligned with the Canadian environment where
there are a significant amount of private
companies
Based mostly on using historical cost which
reduces fluctuations in the balance sheet as
compared to fair value
Less disclosure requirements which saves time and
money
Most simple framework which is similar to
previous Canadian accounting standards
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Disadvantages
IFRS
Much more education and training of staff
required
IFRS has fewer rules and clear requirements which
can add a significant layer of judgement which
increases the time and cost of preparing financial
reports
ASPE
If the makeup of a company’s financial statement
users changes, ASPE may not provide sufficient
information for all users
If a company plans to expand globally, ASPE does
not provide a comparable framework for global
suppliers, customers, or competitors
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Accounting under IFRS and ASPE
To better understand the more detailed requirements under IFRS when compared to ASPE, this resource
will outline major accounts in financial statements and detail how they are accounted for under IFRS and
ASPE.
Inventory
Inventory is one of the best examples of where IFRS and ASPE have almost completely
converged. Under both frameworks, inventory is valued at the lower of cost and net realizable
value.
Cost: The cost paid to purchase the inventory from an outside vendor or the costs related to
purchasing raw materials and converting them into finished goods.
Net Realizable Value: This is the idea of the amount of money expected to be received
(realized) as a result of the sale of the inventory (i.e. it is the selling price of the inventory less
the costs to sell it).
For example, if you purchased inventory for $50 and are only going to be able to sell it for $25
presenting it on the balance sheet at a value of $50 is misleading to users.
Accounting for Investments and Subsidiaries
Under both ASPE and IFRS there are 3 main accounting treatments for accounting for
investments and subsidiaries. They are consolidation, equity method and fair value.
Consolidation: This method requires that the financial statements of both companies be
combined together line by line on the financial statements of the parent. For example, if the
parent had $1,000 in cash and the subsidiary had $500 the total balance of cash on the parent’s
consolidated balance sheet would be $1500.
Equity Method: The investment is originally recorded at the cost of purchase on the parent’s
balance sheet and then is adjusted by its ownership percentage of the subsidiary’s net income.
For example, a 40% share of a subsidiary purchased for $1 million would initially be recorded by
the parent at $1 million. If in the next year the subsidiary earned income of $100,000, the value
of the subsidiary on the parent’s balance sheet would increase by $40,000 ($100,000 x 40%).
The ending value would be $1,040,000 on the parent’s books.
Fair value method: This method requires the investment to be initially reported at the cost to
purchase and then adjusted to its fair market value at each balance sheet date.
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Both ASPE and IFRS have all 3 accounting treatments, but they differ significantly in their application.
As discussed, users of ASPE financial statements generally have access to more detailed
information when needed. Therefore, ASPE allows a choice in accounting treatments. Under
ASPE there is a choice between 3 accounting treatments for subsidiaries/investments. They can
be held at fair value, recorded as an equity investment, or consolidated.
Accounting for subsidiaries under IFRS is quite different. The required treatments are
determined by the influence or control the parent company has. In general, a company has
significant influence if it has between 20% to 50% ownership of its investment and control if the
parent company has an ownership of greater than 50%. If there is no significant influence, the
investment should be carried at fair value. If there is significant influence but not control, the
investment (referred to as an associate) is required to be accounted for using the equity
method. Finally, if the parent controls the company it has invested in (referred to as a
subsidiary), consolidation is required.
Property, Plant and Equipment (PP&E)
ASPE requires PP&E to be measured at cost at recognition and then at cost less depreciation
subsequently. Cost is a much simpler method to prepare than fair value and thus the reason for
use in ASPE. If there is a significant decline in the value of the PP&E (i.e. it breaks, become
technologically outdated, etc) ASPE requires the value of the PP&E to be written down to the
fair value in this case. If the value subsequently rebounded, under ASPE you are not allowed to
reverse the write down.
IFRS generally does not allow for choice in accounting policies. However, PP&E is an area where
choice exists. PP&E must be measured at cost upon recognition and subsequently there is the
choice to measure using cost less accumulated depreciation or at fair value less depreciation.
PP&E has generally been measured at cost less accumulated depreciation in most countries
before IFRS. However, IFRS favours the use of fair value generally as it shows the clearest
picture of the entity at that point in time. This is one of the main reasons for the choice
between cost and fair value under IFRS.
If there is a significant decline in value of PP&E in IFRS, it too must be written down to fair
value, however, unlike ASPE, the write down can be reversed in the future if the conditions that
caused the value to drop also reverse. For example, if a piece of PP&E was no longer useful
because a technological process changed the PP&E would be written off in value. However, if a
new use for the equipment was found, the PP&E could be written back up to the value before
the write off. This follows the idea under IFRS that fair value is the most representationally
faithful presentation.
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Revenue
Under ASPE, revenue is recorded at the time of performance assuming ultimate collection is
assured. This means that to record revenues, you need to have performed the action required
to earn revenue and you have reasonable assurance that you will collect from the customer. In
plain English this would mean the following for the sale of a boat:
1) Performance – When the boat has been constructed and transferred from the seller to
the buyer, performance has been met.
2) Collection – if the deal was paid for upfront then collection is assured once the payment
is received by the seller.
Accounting for revenues under IFRS follows the same basic principal – performance and
collection, but is organized into 5 requirements. The chart below will show which IFRS criteria
can be mapped to the two ASPE criteria of performance and collection.
IFRS Criteria
ASPE Criteria
the entity has transferred to the buyer the significant risks and
rewards of ownership of the goods;
Performance
the entity retains neither continuing managerial involvement to
the degree usually associated with ownership nor effective
control over the goods sold;
the amount of revenue can be measured reliably;
Collection
it is probable that the economic benefits associated with the
transaction will flow to the entity; and
the costs incurred or to be incurred in respect of the transaction
can be measured reliably.
As you can see the recognition criteria for revenue is in essence very similar under both IFRS
and ASPE, however they are explained using slightly different terminology.
Income Taxes
Accounting for income taxes is another area where there is a significant difference between
IFRS and ASPE. ASPE again allows preparers of financial statements a choice. Income taxes can
either be presented using the income taxes payable method or the future income taxes
method. The income taxes payable method is the most simple. At year end a company is
required to accrue the amount of taxes required to be paid to the government for the current
year’s operations. The future income taxes method requires the recognition of income tax
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assets and liabilities relating taxes due in the current year and in future years that relate to
current operations. For example, when you are getting a loan you can deduct the legal costs
associated with obtaining the loan under both ASPE and IFRS in the year paid. However for tax
purposes you can only deduct one fifth of the costs each year, over 5 years. Thus there is a
difference in accounting income and tax income that would have a future income tax effect.
IFRS requires the use of the future income taxes method (referred to as deferred tax method
under IFRS) as it shows a more accurate and faithful picture of all the taxes incurred or that will
be incurred related to current operations.
Disclosures
An area of significant difference between IFRS and ASPE is in disclosure. Disclosure means
additional information required to support the financial statements. This is generally in the
form of notes to the financial statements. As discussed earlier, ASPE is the closest Canadian
financial reporting framework to the old CGAAP. In 2011, the transition from CGAAP to either
IFRS or ASPE was undertaken. Updating financial statements from CGAAP to ASPE required very
little additional disclosure. However, the transition from CGAAP to IFRS required abundant
additional disclosure. This is because IFRS requires additional disclosure in almost every section.
Disclosures encompass one of the starkest differences between IFRS and ASPE. Since users of
ASPE statements generally have more access to information, they tend to require less
information in the financial statement disclosures. IFRS users generally have less access to
information and thus require much more information to be presented in the financial
statements in order to make informed decisions.
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