Canada’s Accounting Standards Board (AcSB) today issued new standards intended to dramatically improve how financial instruments are reported in financial statements.

According to the ACSB, these standards will impact virtually every entity in Canada, small and large, to varying degrees.

Paul Cherry, chairman of the AcSB says the new standards, which were developed in consultation with many parties “are in effect, a hybrid of US GAAP and international standards, adapted for Canadian needs,” said. “The new standards close a lot of the gaps in Canadian GAAP and bring Canadian standards for financial instruments in line with best international practice.”

The AcSB presently has in place standards for disclosures about an entity’s use of financial instruments and how financial instruments should be presented when included on the balance sheet. However, until now it has not had standards that comprehensively address when an entity should recognize a financial instrument on its balance sheet, nor how it should measure the financial instrument once recognized.

“One of the key impacts of the new standards is that all derivatives and most equity investments, such as common shares, will need to be recognized and measured at fair value,” said Cherry. “Fair value measurement is the only way that many financial instruments become visible to financial statement users.”

“Providing transparent and reliable financial statements for users is the prime aim of the AcSB and it is with measures such as these standards that the Board meets that goal,” continued Cherry.

The new standards are based on the U.S. Financial Accounting Standards Board’s (FASB) Statement 133, Accounting for Derivative Instruments and Hedging Activities, and also the International Accounting Standards Board’s improved new standard, IAS 39, Financial Instruments – Recognition and Measurement.

Among other changes in the new standards: existing requirements for hedge accounting are extended; and a new location for recognizing certain gains and losses – other comprehensive income — has been introduced.

The new standards are lengthy and may seem somewhat daunting to some. But Cherry pointed out that for many entities, the new standards will have a modest impact.

The AcSB has established a Financial Instruments Working Group, which is charged with assisting in the development of implementation guidance to help apply the standards.

The mandatory effective date for the standards to be adopted is for annual and interim periods beginning on or after October 1, 2006. (In many cases this will mean application to calendar years beginning on January 1, 2007.) However, early adoption is permitted.

The new standards can be viewed in their entirety at www.acsbcanada.org.