Financial Reporting of Small Business Entities in Canada

Abstract

Financial reporting for small business entities (SBEs) has been the subject of much debate and concern by the accounting bodies (institutes) in Canada, the United States, the United Kingdom, Ireland, Australia, New Zealand, and other countries. The main issue for the standard setters is whether they should have one set of standards for all companies or two sets of standards (one for big companies and one for SBEs). The main objective of our study is to examine whether SBEs in Canada should have their own new set of Generally Accepted Accounting Principles (GAAP) or should they continue to use big GAAP used by public companies. To address this issue in the Canadian environment, we sent out a questionnaire to a sample of managers and owners of small businesses, preparers, auditors, and users of small business accounts. These stakeholders were asked to identify the purposes of SBE financial statements, their levels of satisfaction or dissatisfaction with the present accounting standards for SBEs, the burdens imposed on the preparers of the financial statements, and the weaknesses of the present standards. Furthermore, they were asked to give the expected advantages of adopting new standards, after having ranked four models of financial reporting of SBEs. The results are quite interesting. Stakeholders indicated that financial statements of SBEs are prepared mainly for taxation purposes and borrowing. They are not satisfied with the present standards because they are costly to comply with and very complex. The burden of producing SBE financial statements can be reduced by simplifying the present standards. The new standards would mean a shorter and simpler form of financial statements. It is hoped that the results of this study will provide the standard setters in Canada and other countries with an indication of the future direction for SBE reporting and accounting.*We greatly appreciate the helpful comments of the associate editor Howard Van Auken and the two anonymous reviewers. We also thank the CGA Accounting Research Centre at the University of Ottawa for its financial support.Michael Maingot is professor of accounting, School of Management, University of Ottawa. Daniel Zeghal is professor of accounting, School of Management, University of Ottawa.

SMEs’ Financial and Differential Reporting- A Review of Publications

“…Publications providing the background/rationale for differential reporting were examining/investigating/evaluating the complexities/costs and benefits SMEs are facing/obtaining in financial reporting, or the need for exemption or differential reporting (see, for example, Barker and Noonan, 1996, Williams and Tower, 1998, Maingot and Zeghal, 2006, Arsoy et al, 2007, Lungu et al, 2007. 23% of the total reviewed publications reviewed were focused on this research theme.…”

“…Several issues have been raised in these publications regarding SMEs" financial reporting, such as the need for exemption from elements of accounting standards, the extent that economic size has an impact on its international exposure, the degree of adoption of international accounting standards, whether SMEs should have their own set of accounting standards, the impact of financial reporting on growth and performance, and the perceptions of practitioners towards IFRS for SMEs (Barker and Noonan, 1996, McMahon, 2001, Joshi and Ramadhan, 2002, Maingot and Zeghal, 2006, Eierle and Haller, 2009, Bunea and Sacarin, 2012.…”

“…Due to these difficulties, differential reporting for SMEs emerged, based on the idea that different types of entities are subject to different financial reporting requirements, designed to achieve economic and social importance, meet users" needs and achieve more benefits than costs. Differential reporting has been the subject of much debate and concern by the accounting bodies (institutes) in Canada, the United States, the United Kingdom, Ireland, Australia, New Zealand, and other countries (Maingot and Zeghal, 2006).…”

Financial Reporting By Small and Medium Scale Enterprises in Nigeria

“…The main issue is whether there should be one set of standards for all companies or two sets of standards (one for big companies and one for SMEs). Maingot and Zeghal (2006) observed that the problem of financial accounting and reporting for SMEs has generated much discussion in the accounting literature over the past years in many countries. There seems to be a broad support for differential reporting for disclosure and presentation.…”

Comparative Analysis of Czech Accounting with International Regulation from SMEs Perspective

“…The biggest obstacle is existence of 27 different systems of accounting within the European Union, which have to be harmonized. The question about whether or not accounting standards should apply equally to large and small companies has been the subject of much debate and concern by accountancy bodies in many countries (Maingot and Zeghal, 2006) and has become known as the "Big GAAP/Little GAAP" debate (Collis et al, 2001). …”