Canada’s lenders are supportive of reduced financial disclosure for private enterprises, but only so long as the preparers of financial statements exercise sound professional judgment and provide additional disclosures where circumstances warrant, according to a new report released Monday.
The report, The Role of Disclosures in the Financial Statements of Private Business in Accessing Credit, was published by the Canadian Financial Executives Research Foundation (CFERF), the research institute of FEI Canada, in partnership with KPMG Enterprise.
Canada’s new simplified accounting standards for private enterprises require significantly fewer financial statement disclosures than the predecessor generally accepted accounting principles.
A 2009 study conducted by CFERF in conjunction with KPMG Enterprise raised the concern that simplifying accounting standards for private enterprises (ASPE) could lead to difficulties in accessing credit; this follow-up research finds no evidence that the new ASPE will limit their ability to raise capital or debt so long as the companies provide incremental disclosures when required to achieve “fair presentation” and maintain the trust relationship with their lenders.
“We know that the lending community relies on financial statements to provide a snapshot of the health of a company,” says Ramona Dzinkowski, executive director of CFERF. “However, we also know that they have a strong interest in future cash flows, which is not something provided in the audited financial statements. Most financial executives believe that in addition to providing information regarding debt covenants, providing further information regarding possible impairments to future cash flow is definitely a value add when it comes to accessing credit.”
“Like any language, financial statements are primarily a communication tool. The communication should be tailored to the needs of the audience,” says Bob Young, partner, national assurance & professional practice at KPMG Enterprise.
“Financial statements prepared in accordance with ASPE will provide a consistency that lenders can use to compare company to company within sectors. The simplification of private company GAAP only amplifies the fact that it is incumbent on privately held companies to build trust and establish solid, transparent relationships with their lenders. Failure to establish these relationships can lead to difficulty in obtaining capital,” Young concludes.
The report comprises the results of a survey of senior financial executives in private companies in Canada conducted between February 22 and March 17, and the insights obtained at a CFERF Executive Research Forum that was held in Toronto on March 3.
Views were sought from both preparers of private company financial statements and external users, namely lenders and investors in the private equity and venture capital communities.