Proprietorship, partnership, corporation; public vs private; IFRS vs ASPE

Three forms, one of which this course lives in

A Canadian business takes one of three legal forms. A proprietorship is one person in business; there is no legal line between the owner and the firm, so the owner is personally liable for its debts and the equity accounts are Owner's Capital and Drawings. A partnership is the same with two or more owners, each generally liable for the whole. A corporation is a separate legal entity: it owns its assets, owes its debts, pays its own tax, and its shareholders' liability is limited to what they paid for their shares. Its equity is Common Shares and Retained Earnings. AFM 191 cases are corporations, so those are the only equity accounts you will use.

Worked example — incorporating Northlake

Northlake began as a proprietorship: one founder groomed the trails with a borrowed snowmobile. When a second founder joined and the bank was asked for a loan, they incorporated as Northlake Nordic Centre Inc. Three things changed. The centre became a separate entity, so the founders' cottages were no longer exposed to its debts. Ownership became shares — issued without par value, as Canadian corporate law requires (CBCA s.24) — which let three relatives invest without becoming partners. And the corporation now files its own tax return.

Is Northlake publicly accountable? The CPA Canada Handbook says an enterprise is publicly accountable if it has issued, or is issuing, debt or equity instruments that trade in a public market, or if it holds assets in a fiduciary capacity for a broad group of outsiders as a primary business (a bank, a credit union, an insurer). Northlake's shares are held by five people and are not traded anywhere; it holds nobody's assets in trust. So it is not publicly accountable, and therefore it may apply ASPE — Accounting Standards for Private Enterprises, Part II of the Handbook, written by the Accounting Standards Board (AcSB). It could instead elect IFRS (Part I), and some private companies do when they expect to go public or report to a public parent. Northlake chose ASPE.

The rule, stated once

• A publicly accountable enterprise must use IFRS (Part I).
• An enterprise that is not publicly accountable may use ASPE (Part II) — or may elect IFRS.
• Not-for-profit organisations have their own standards (Part III); they are named here only so you recognise the label.

ASPE is not "simplified IFRS". It is a separate set of standards written for the users a private company actually has — the bank, the CRA, the owners — and it makes different choices in places you will meet all term: no OCI, no EPS, a statement of retained earnings, a cost model for property, and different rules for revenue, impairment and contingencies.

Classify four businesses

A credit union with 40,000 members — holds assets in a fiduciary capacity: publicly accountable, IFRS. A three-location dental corporation owned by its dentists — not publicly accountable: may use ASPE. A mining company listed on the TSX Venture Exchange — publicly traded shares: IFRS. A family trucking company that issued bonds to the public to buy its fleet — publicly traded debt: publicly accountable, IFRS, even though its shares are private.