Academic journal article Journal of Small Business Management

Financial Reporting of Small Business Entities in Canada

Academic journal article Journal of Small Business Management

Financial Reporting of Small Business Entities in Canada

Article excerpt

Financial reporting for small business entities (SBEs) has been the subject of much debate and concern by the accounting bodies (institutes) in Canada, the United States, the United Kingdom, Ireland, Australia, New Zealand, and other countries. The main issue for the standard setters is whether they should have one set of standards for all companies or two sets of standards (one for big companies and one for SBEs). The main objective of our study is to examine whether SBEs in Canada should have their own new set of Generally Accepted Accounting Principles (GAAP) or should they continue to use big GAAP used by public companies. To address this issue in the Canadian environment, we sent out a questionnaire to a sample of managers and owners of small businesses, preparers, auditors, and users of small business accounts. These stakeholders were asked to identify the purposes of SBE financial statements, their levels of satisfaction or dissatisfaction with the present accounting standards for SBEs, the burdens imposed on the preparers of the financial statements, and the weaknesses of the present standards. Furthermore, they were asked to give the expected advantages of adopting new standards, after having ranked four models of financial reporting of SBEs. The results are quite interesting. Stakeholders indicated that financial statements of SBEs are prepared mainly for taxation purposes and borrowing. They are not satisfied with the present standards because they are costly to comply with and very complex. The burden of producing SBE financial statements can be reduced by simplifying the present standards. The new standards would mean a shorter and simpler form of financial statements. It is hoped that the results of this study will provide the standard setters in Canada and other countries with an indication of the future direction for SBE reporting and accounting.

Introduction

The problem of financial accounting and reporting for small business entities (SBEs) has generated much discussion in the accounting literature over the past years in many countries. There seems to be broad support for differential reporting for disclosure and presentation. Small business entities differ from public corporations. Public companies have complex transactions like financial instruments that are not reflected in the transactions of the SBEs. The Generally Accepted Accounting Principles (GAAP) used to prepare the financial statements of the public companies were designed for these larger corporations. Small business entities, at present, have to use these same GAAP to prepare their accounts. Public companies are used by millions of external users and, therefore, can bear the cost of preparing and disseminating their accounts. On the other hand, there are very few users of the accounts of SBEs (owners/managers, bankers, taxation authorities, and perhaps venture capitalists). Also, the cost of producing these accounts, using the existing GAAP rules designed primarily for public corporations, is very high and burdensome. This cost is sometimes the result of the SBE using its own managers or internal accountants to prepare the financial reports. However, SBEs very often use practitioners to prepare their financial reports. There is consequently both a cost to the SBE (fee charged) and a cost to the practitioner (constantly updating their knowledge of GAAP), which causes the overall cost to continue to increase.

Models

To address the question about the differential reporting of public corporations and SBEs, it is important to discuss the various models that reflect how SBEs could be treated differently.

The Canadian Institute of Chartered Accountants' (CICA) (1999) study, "Financial Reporting by Small Business Enterprises," examined six alternatives. However, these can be classified into the following three models (CGA Canada 2000b):

(1) A single set of GAAP without exclusions;

(2) A single set of GAAP with exclusions from certain standards for SBEs; and

(3) Two sets of GAAP (Big GAAP and Little GAAP). …

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