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Fair Value Election and the New Accounting Standards for Private Enterprises


Gregory Clarke on November 2, 2011 in Advice for Business Owners

Canadian private corporations are in the process of adopting the new Canadian Accounting Standards for Private Enterprises (“ASPE”). There are many elections available for private companies but one of the elections is of particular interest since it allows companies a one-time adjustment to measure property, plant and equipment at fair value as of the date of transition. Traditionally, property, plant and equipment is valued and carried at cost less any accumulated amortization. As a result, this transitional adjustment allows a unique opportunity for companies to adjust their property, plant and equipment up to a higher fair market value. In addition, the adjustment can be applied on a specific item by item basis rather than all of the property, plant and equipment. For example, you can elect to increase the value of your land and building to fair market value but retain the net book value for your equipment.

This election may be of interest to many owner-managers to provide them an ability to better reflect the fair value of their major company assets although the following should be noted:

  1. Future amortization costs will increase due to the higher asset value.
  2. The increase in asset value for accounting purposes will not translate to increased tax deductions from capital cost allowance. Instead, the increase will create timing differences between the financial statements and tax returns that will need to be carefully tracked.
  3. Lenders will not necessarily lend on the higher asset values since these values may have already been considered in any existing lending agreements.

Owner-managers will need to consider this election carefully. The new accounting rules come into effect for year-ends commencing after January 1, 2011 and a decision will need to be made to use this one-time adjustment.

If you are unsure, speak to your SB Partners representative for more information to assist you with your decision making process.