What are Accounting Frameworks?

Before we dive into any specific accounting standards or guidelines, we first have to understand Accounting Frameworks. At their core, Accounting Frameworks are simply an established set of rules, guidelines, and criteria that are used for recognition, measurement, presentation and disclosure of financial data or even in some cases non-financial data such as is the case with Environmental, Social, and Governance (ESG) reporting.

There are all kinds of different rules from exactly how revenue can be recorded to how assets can be depreciated and defining how inventory is managed. Many companies establish business process to address guidelines outlined in these frameworks. When I hear that it can be a bit boring of a topic, I always find that an interesting complaint because that would mean business process mapping is a boring topic (okay, maybe it is for some people).

Why do they Matter?

Think of it like this, frameworks are kind of like the rules in sports that make sure everyone is playing fairly (no funny business…). For businesses this means they are operating and reporting fairly. Auditors which aren’t always appreciated are there like referees to confirm if the rules are being followed. Together they are meant to give confidence to the public, investors, and the government that the numbers reported are accurate. To use another analogy, accountants and auditors are kind of like the plumbers of the business world making sure all that critical often unseen infrastructure is working correctly.

Common Frameworks and Standards?

In this blog I don’t want to restrict myself to any single framework but as a Canadian CPA and as a consultant who works with both Canadian and American clients my focus will be on the frameworks within those countries. These include US GAAP, and Canadian GAAP, which is comprised of Canadian ASPE, IFRS, ASNPO and PSAS.

US GAAP

• Generally Accepted Accounting Principles (GAAP) are a set of rule-based standards, colloquially known as “gap” in conversation.
• Managed by the Financial Accounting Standards Board (FASB) who continually update and revise rules as needed.
• Public companies in the United States are required to follow GAAP as per the Securities and Exchange Commission (SEC), but some companies will also issue “pro-forma” or non-GAAP measures.
• Non-publicly traded companies may also opt-in to GAAP as they are typical requirements when it comes to debt covenants when working with investors and financial institutions.
• GAAP also outlines rules for government entities such as states, cities, counties and all 50 US states follow GAAP.
• Certified Professional Accountants will issue an audit opinion to verify a company’s GAAP compliance.
• It’s essential that any ERP for US companies be compliant with GAAP rules as any “gaps” will reduce the confidence of leadership, investors, potential shareholders and increase the work required of the finance/accounting team to create accurate financial statements.

Canadian ASPE

• Accounting Standards for Private Enterprises (ASPE) are a set of accounting principles designed for private companies in Canada.
• ASPE is principles and “judgement” based instead of being rule based like US GAAP.
• Developed by the Accounting Standards Board (AcSB) which can be seen as Canada’s FASB equivalent.
• Meant to act as a simplified framework with a lower cost to implement and maintain for Canadian Businesses.

IFRS

• International Financial Reporting Standards (IFRS) are not Canadian specific standards but mandatory for any publicly traded companies in Canada.
• IFRS, like ASPE is principles based and administered by a not-for-profit organization known as IFRS Foundation.
• Adopted by the European Union in 2005 to provide a standardized global framework.
• Over 140 jurisdictions now use IFRS for public entities.
• Help give global investor’s confidence in financial statements accuracy across multiple jurisdictions.
• Allow global companies to administer one set of standards.
• Private companies and Not-for-profits can opt-in to IFRS and in some cases investors or financial institutions may even require it.
• Often requires more resources than ASPE to maintain due to rigorous requirements.

Canadian ASNPO

• Accounting Standards for Not-for-profit Organizations (ASNPO) are a framework that can be applied to Canadian Not-for-profit organizations such as Charities, Clubs and Associations.
• While established by AcSB, the Not-for-profit Advisory Committee will advise AcSB on revisions.
• Meant to provide a simplified framework that has specific guidelines that pertain to not-for-profit organizations.
• Documents specific rules around collection of funds, contributions and the reporting of related entities.

Canadian PSAS

• Public Sector Accounting Standards (PSAS) outline the accounting standards that crown corporations, federal, provincial and municipal entities are required to follow.
• These are administered and maintained by the Public Sector Accounting Board (PSAB).
• Rules are centered around how funds are managed and distributed in public sector organizations.
• Includes budget information so as to communicate priorities to readers.

Other Compliance Frameworks

• Sarbanes-Oxley Act (SOX): Set of rules established in 2002 after several financial scandals that impose strict rules and tighter controls around record keeping with strict punishment for violations.
• Environmental, Social, and Governance (ESG): There are many different rules, frameworks and guidelines surrounding ESG reporting and requirements. These are typically non-financial in nature but require consistent and accurate reporting. Examples include the reporting of GHG emissions or the United Nations Sustainable Developmental Goals.
• System and Organization Controls 2 (SOC2): An audit framework developed by the American Institute of Certified Professional Accountants (AICPA) to evaluate controls and ensure they are effective and consistent.
• General Data Protection Regulations (GDPR): This is the European Union’s comprehensive security compliance framework that applies to all EU citizens and enforces security and user data restrictions.
• ISO 27001: Comprehensive compliance certification which allows an organization to demonstrate they are following comprehensive security practices.
• And many many more. The list itself is expanding as more investors, governments and financial institutions have new requirements for reporting and regulation.

Conclusion

As you can see, there’s a lot to consider. Canada itself has multiple standards, and the US has not just GAAP but also other rules that are mandatory for some organizations. There’s also a massive list of international standards and non-financial compliance frameworks. All of these are at the top of the mind for many finance teams, executives, investors, financial institutions and governments. Understanding them is one thing but implementing and maintaining them in an ERP such as Business Central is a different task entirely. That’s what I hope to explore through these blog posts and hopefully together we can learn a few things!