The globalization of the economy and the expansion of technology continue to drive exponential change, and one of the ways accounting standard-setters have kept pace is by implementing international financial reporting standards (IFRS). These include accounting standards for private enterprises (ASPE) that were introduced, in large part, to provide smaller businesses with less onerous reporting and disclosure processes, as standard-setters recognized that creditors were the main users of small businesses’ financial statements.
Gone, however, are the days when things were designed to—and did—remain in place for years. Accounting standards are now being reviewed and amended regularly to ensure that they remain applicable and relevant. ASPE, for example, are now being revisited due to the emergence of private equity investment.
The impact of private equity investing
Investors seeking an alternative source of growth in the market turned their attention to private equity investing after the market crash of 2008-2009, when it became clear that the historical balancing of public equities to fixed income was no longer a sustainable strategy. Diversification quickly became the best risk management strategy.
Consider the example of Gordon Fyfe and the British Columbia Investment Management Corporation (BCI). In 2014, with assets under management of $114 billion, BCI (then BCIMC) was looking for a new direction and hired Fyfe as CEO and chief investment officer based on his pitch for a new strategic business plan that would shift the organization’s focus from stocks and bonds to a more diversified portfolio. BCI is a government Crown entity that holds the pension fund assets for BC’s public sector, and Fyfe recognized that it would need to make significant changes to meet the projected returns required by its pension plan recipients. His plan, which included investing in private equity, infrastructure, and real estate, was implemented almost to the letter and achieved “extraordinary results,” as noted by the BC government when Fyfe was named to the Order of BC in August 2023.1
Now, according to the BCI website: “British Columbia Investment Management Corporation (BCI) is amongst the largest institutional investors in Canada with $233.0 billion in gross assets under management, as of March 31, 2023.… BCI manages a portfolio of diversified public and private market investments [author emphasis] on behalf of its 32 British Columbia public sector clients.”2
Keep in mind, the shift to private equity was not isolated to British Columbia or Canada. According to FS Investments, private equity assets under management in the US “have nearly quadrupled over the past decade, from approximately $2.2 trillion in December 2011 to nearly $8.3 trillion as of December 2021.”3 And as reported by McKinsey, the shift also happened globally, with “total private markets assets under management (AUM) reach[ing] $11.7 trillion as of June 30, 2022.”4
A renewed focus on ASPE
In Canada, this trend has put a new focus on ASPE, because creditors are no longer the main recipients of the financial statements of private enterprises. Private equity investors around the world are now part of the audience, and they have much different needs than creditors—they often want, or require, information similar to that produced using IFRS.
Does this spell the end of ASPE? Probably not. While Canada’s Accounting Standards Board (AcSB)5 is currently exploring the concept of scalability, not all private enterprises will be considered for private equity investing. Many are just small businesses that are not even on the radar of equity investors, and they cannot afford the added responsibility and work that comes along with meeting the requirements of IFRS.
And as we know, BC runs on small business. Times are already tough without adding the burden of higher financial reporting standards on companies that would never be considered as equity investments in the first place. Given that all companies have the option of implementing IFRS, those who want to be considered for equity investments can just adopt the standards on their own.
Navigating a complex regulatory environment
The AcSB has a host of considerations, projects, and amendments on its plate—including, for example, the complexity of cloud computing arrangements, which resulted in new guidance in late 2022: Accounting Guideline 20 (AcG-20), Customer’s Accounting for Cloud Computing Arrangements.6 In essence, the AcSB determined that further guidance was needed to help stakeholders in both the private and not-for-profit sectors identify the separable elements that may exist in these arrangements.
Just as accounting standards must keep pace with a changing world, so must accountants and financial statement preparers. Staying abreast of all of the changes in the various CPA Canada Handbook sections can feel like a daunting task, but there are some resources that can help. Both CPABC and CPA Canada provide regular updates online, and the Financial Reporting and Assurance Standards Canada website provides an updated list of the key priorities and projects being reviewed by the AcSB.
Martha Okot Thomas, CPA, CA, CIA is chair of the finance and accounting department in the School of Business at Camosun College and an accounting and finance educator. Her more than 24 years in BC’s public sector include serving in the internal audit department of the British Columbia Investment Management Corporation, as CFO for the BC Ministry of Social Development and Social Innovation, and as director of financial planning and reporting for the Ministry of Finance. Martha previously served on the CPABC Board of Directors and currently serves on the board of the CPA Education Foundation.
This article was originally published in the November/December 2023 issue of CPABC in Focus.