Regulation of financial reporting
The principal source of authoritative guidance on generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) is found in the Canadian Institute of Chartered Accountants (CICA) Handbook. Although there are other accounting bodies in Canada, the CICA is the recognized organization for establishing standards. The CICA Handbook contains the pronouncements of the Accounting and the Auditing Standards Boards, the Emerging Issues Doing Business in Committee and the Public Sector Accounting and Auditing Board, issued under the authority provided by the CICA Board of Governors. Accounting principles are also established by industry practice, research studies and other CICA publications, pronouncements and research in the US and internationally, and by federal or provincial legislation governing specific industries such as banking, insurance and trust companies.

Statutory reporting requirements
Financial reporting is required by federal and provincial corporation legislation and by the securities legislation and policy statements of the provincial securities commissions. Companies are governed by the corporations act under which they decide or are required to incorporate (that is, federal or provincial). Note that there is neither federal securities legislation nor a Canadian stock exchange. These functions are regulated at the provincial level. Major stock exchanges are located in Toronto, Montreal and Vancouver. Both corporate and securities legislation require companies to follow the pronouncements of the CICA Handbook in preparing financial statements.

Books and records
The books and records that a business is required to maintain and the length of time those records must be retained are dictated by a number of federal and provincial acts. In addition to the general requirement to maintain adequate accounting records, corporate documents to be retained would include incorporation documents, minutes of director and shareholder meetings, by-laws and contracts.

Auditors and auditing requirements
Publicly-held companies are usually required to file annual reports containing audited financial statements with the applicable provincial securities commission and to furnish shareholders with a similar report. For privately held companies, provincial and federal legislation generally requires the appointment of an auditor at the first annual meeting of shareholders. However, most jurisdictions provide an exemption from this audit requirement, subject to a size test in some cases. For details of specific exemptions, reference should be made to the legislation under which the company is incorporated. In spite of these legislative exemptions for smaller companies, audits may still be required by banks and other credit agencies.

A company’s independent auditors, who must be licensed public accountants, normally are appointed by the company’s management and directors, whose decision must be ratified by the shareholders. Auditors are subject to strict independence rules prescribed by the relevant provincial institute or order. These regulations are harmonised among all provinces except Quebec and are intended to ensure that the auditor is independent in both fact and in appearance. This allows the Canada auditor to be in a position to issue an unbiased opinion on the financial statements. Direct and indirect financial interests in audit clients are prohibited. Bookkeeping services may be provided to privately held companies without impairing independence, provided the services are not tantamount to making management decisions.

The auditor’s report on the client’s financial statements is based on reporting standards established in the CICA Handbook. The report states whether, in the auditor’s opinion, the financial statements are presented fairly in all material respects, in accordance with GAAP. In certain circumstances, the auditor may be unable to render an unqualified opinion on the financial statements. In this case, either a qualified or adverse opinion would be issued, or the auditor may deny an opinion. A qualified opinion may be issued when the scope of the auditor’s examination was restricted, the financial statements were not fairly presented or all the necessary disclosures were not made. A separate paragraph would be included in the auditor’s report to explain the reasons for the qualification. When the auditor decides that the financial statements are so misleading that a qualified opinion is not sufficient, an adverse opinion, stating that the financial statements are not fairly presented, would be issued. The auditor would deny an opinion on the financial statements when the limitation on the audit scope is such that there is insufficient evidence to conclude that the financial statements are prepared in accordance with GAAP and the effect on the financial statements of possible departures from GAAP is believed to be pervasive or significant.

Form and content of financial statements
Financial statements should be prepared in accordance with GAAP, whereby a company’s financial statements should, at a minimum, contain the following elements:
• balance sheet;
• income statement;
• statement of retained earnings;
• statement of cash flows, and
• notes to financial statements (including a summary of significant accounting policies).

It is also required (unless not meaningful) to present the financial statements with comparative figures for the previous period. The contents of the financial statements, including the notes, are the responsibility of management, regardless of who has actually prepared them or whether they are audited.

Consolidated financial statements
Consolidated financial statements are generally required if a company controls another company. Control in this case means the continuing power to determine the subsidiary’s strategic operating, investing and financing policies. In determining whether Doing Business in consolidation is appropriate, the goal should be to provide the most meaningful financial presentation in the circumstances. In effect, substance should prevail over form. For example, even though a company owns less than 50% of the voting stock of another entity, it may have effective control if it holds notes which will be converted into a majority of the voting stock in the future.

The consolidated financial statements should disclose the parent company’s consolidation policy. Inter-company transactions and balances should be eliminated in the consolidation process and any non-controlling interest should be stated separately, in both the consolidated income statement and the consolidated balance sheet. Subsidiaries’ year-ends should coincide with that of the parent. Where there are different year-ends, appropriate disclosures should be made. In certain cases, it may be acceptable to prepare non-consolidated financial statements, such as where the company itself is a wholly owned subsidiary. In such situations, the reasons for non-consolidation should be disclosed in the notes to the consolidated financial statements and the auditor’s report is amended to state that the financial statements are prepared in accordance with GAAP, except that they are prepared on a non consolidated basis.

Where control does not exist, but the investor has significant influence over the investee’s strategic operating, investing and financing policies, the investment should be accounted for by the equity method. Under this method, the investment is initially recorded at cost and subsequently adjusted for the investor’s proportionate share of the investee’s profits or losses, which should be disclosed in the investor’s income statement. Dividends received should be treated as a reduction of the investment.

When there is no significant influence or where consolidation or use of the equity method is not appropriate, the investment should be accounted for under the cost method, where the investor does not record its share of the investee’s profits or losses, but records any dividends from the investee as income. However, any permanent impairment in the carrying value of the investment should be charged to income.

Valuation
Financial statements in Canada are based normally on historical cost and are prepared on an accrual basis. Acquired assets are recorded at their original cost, which is then amortized over their estimated useful lives. Certain assets, such as inventories and marketable equity securities, are stated at the lower of cost or net realisable value.

Notes to the financial statements
Items that would require disclosure by way of notes to the financial statements would include policies for or details of:
• revenue recognition;
• inventory valuation;
• amortization methods for capital assets;
• long-term contracts;
• foreign currency translation methods, and
• consolidation principles.

Book and tax differences
The income tax provision in the financial statements is based on accounting profits which may differ substantially from taxable income on which a company’s tax liability is calculated. These differences may either reverse in future years (temporary differences) or may be permanent in nature. Future income tax assets and liabilities will be recognized on the financial statements depending on the nature of the temporary differences and whether certain recognition criteria are met.

Copyrighted 1999-2008 All Rights Reserved
  Privacy Policy    Terms of Use   Most Recent Traffic Information

This page last modified: 15 Mar 2008