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How do private firms time their adoption of new accounting rules? This was the question asked by professors Sylvain Durocher of the Telfer School and Anne Fortin of the École des sciences de la gestion at Université de Québec à Montréal (ESG UQAM) in a recent study published in the Australian Accounting Review. They surveyed Canadian CFOs and found that economic cost-benefit considerations explain adoption timing decisions only in part.

Background of the study

“What leads private firms to opt for early adoption or to wait until the latest date possible is an interesting question, because many countries around the world are considering adopting a new accounting framework for private firms,” notes Durocher, a member of the accounting group at the Telfer School. Little is known about how private firms arrive at their policy decisions, let alone how they time their adoption of new accounting rules. “The Canadian experience provides an example for study: A new set of accounting standards for private enterprises (ASPE) took effect here in 2011, with early adoption being allowed starting in 2009.” 

Durocher said financial statement users (primarily lenders and venture capitalists in the case of private enterprises) have to grapple with non-comparable financial information during transition periods. They would therefore benefit from data on the behaviour of adopters, as would private enterprise managers and accounting standard setters.

Expedite or defer?

The study found that it isn’t only cost-benefit considerations such as expected impacts on earnings and leverage that shape CFOs’ attitudes towards their adoption timing decisions. Issues of “perceived behavioural control” also play a role. For example, managers with good knowledge of ASPE seem to opt for late adoption. But when their companies are early adopters of newly promulgated standards generally, managers prefer early adoption. Managers with longer tenure and the existence of firm working groups to discuss changes in accounting rules are also factors that bode well for early adoption. Conversely, managers appear to defer adoption when they intend to apply the fair value exemption to capital assets or work for larger firms.

The results also provide evidence that managers rely on the external professional accountant’s advice on ASPE adoption. Discussions in professional business networks and industry and banker perceptions are also important factors. The presence of significant foreign transactions is a consideration associated with managers’ decisions to defer adoption.

Practical implications are offered. Accounting standard setters could strive to conduct field tests with private businesses to help prospective adopters assess the impact of proposed standards. Private enterprise managers could develop systems for gathering information on newly promulgated standards (including costs and benefits to the firm).

“Another important takeaway for lenders and venture capitalists is that early adoption is associated with a perceived positive impact on financial statements. This positive assessment by managers might be factored into users’ investment decisions.” 


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