2.3 How Are Standards Set?

In Canada, the Accounting Standards Board (AcSB) sets accounting standards. The AcSB is an independent body whose members are appointed by the Accounting Standards Oversight Council (AcSOC). The AcSOC was established in 2000 by the Canadian Institute of Chartered Accountants (CICA) to oversee the standard setting process. Currently the AcSB receives funding, staff, and other resources from the Chartered Professional Accountants of Canada (CPA Canada).

Two distinct sets of accounting standards for profit-oriented enterprises exist in Canada: International Financial Reporting Standards (IFRS) for those entities that have public accountability and Accounting Standards for Private Enterprises (ASPE) for those entities that do not have public accountability.

The CPA Canada Handbook defines a publicly accountable enterprise as follows:

An entity, other than a not-for-profit organization, that:

• has issued, or is in the process of issuing, debt or equity instruments that are, or will be, outstanding and traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
• holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (CPA Canada, 2016).

Entities included in the second category can include banks, credit unions, investment dealers, insurance companies, and other businesses that hold assets for clients. For most of the illustrative examples in this text, we will assume that publicly traded companies use IFRS and that private companies use ASPE. Note that companies that do not have public accountability may still elect to use IFRS if they like. They may choose to do this if they intend to become publicly traded in the future or have some other reporting relationship with a public company.

ASPE are formulated solely by the AcSB and are designed specifically for the needs of Canadian private companies. IFRS, on the other hand, are created by the IASB and are adopted by the AcSB. The AcSB is actively involved with the IASB in the development of IFRS, and most IFRS are adopted directly into the CPA Canada Handbook – Accounting. In some rare circumstances, however, the AcSB may determine that a particular IFRS does not adequately meet the reporting needs of Canadian businesses and may thus choose to “carve out” this particular section before including the standard in the CPA Canada Handbook.

The IASB was formed for the purpose of harmonizing international accounting standards. This concept makes sense, as the past few decades have seen increased international trade, improvement of technologies, and other factors that have made capital more mobile. Investors who want to make choices between companies in different countries need to have some confidence that they will be able to compare reported financial results. The IASB has attempted to provide this assurance, and the use of IFRS around the world continues to grow, with partial or full convergence now in more than 140 countries.

For Canadian accountants, it is important to note that the United States still has not converged its standards with IFRS. Canada has a significant amount of cross-border trade with the United States, and many Canadian companies are also listed on American stock exchanges. In the United States, accounting standards are set by the Financial Accounting Standards Board (FASB), although the actual legal authority for standard setting rests with the Securities and Exchange Commission (SEC). The FASB has indicated in the past that it wishes to work with IASB to find a way to converge its standards with the international model. However, the FASB’s standards are quite detailed and prescriptive, which makes convergence difficult. As well, a number of political factors have prevented convergence from occurring. As this point, it is difficult to predict when or if the FASB will converge its standards with the IASB.