GAAP
The standards and rules that set how financial statements must be prepared in a given jurisdiction. They can be compared and trusted.
In short
- In Canada, public companies use IFRS; most private companies use ASPE.
- In the United States, GAAP means the standards set by the FASB.
- Tax rules are separate. Taxable income often differs from GAAP profit.
Generally accepted accounting principles, or GAAP, are the framework of standards that govern how businesses record transactions and present financial statements. They cover when revenue is recognized, how assets are valued, what must be disclosed and much more.
GAAP in Canada
Canada does not have a single set of rules. The CPA Canada Handbook sets out several frameworks:
- IFRS: International Financial Reporting Standards, required for publicly accountable enterprises such as listed companies.
- ASPE: Accounting Standards for Private Enterprises, the simpler framework most private companies use.
- ASNPO: for not-for-profit organizations.
- Public sector standards: for governments and public sector entities.
US GAAP
In the United States, GAAP refers to the standards issued by the Financial Accounting Standards Board (FASB) and codified in its Accounting Standards Codification. Public companies must follow it; many private companies do as well.
GAAP and tax
Accounting standards and tax law answer different questions. GAAP aims to show economic reality to investors and lenders; tax law defines what is taxable. Depreciation versus capital cost allowance, the 50% limit on meals and reserves for doubtful debts are common sources of difference, which is why the tax return starts from GAAP profit and then adjusts it.
Worked example
Choosing a framework
A Canadian private manufacturer with a bank loan prepares its financial statements under ASPE. When it prepares to list on a stock exchange, it must convert to IFRS, which changes how it presents leases, some revenue and certain financial instruments, and adds disclosures. Its tax return is unaffected by the framework choice.