Should You Use The Fair Value Option With ASPE?

If your business adopts ASPE (Accounting Standards for Private Enterprise) on January 1, 2011 - as required, unless you are a public company - you have the option of changing the values of your fixed assets, on your books. This change can be made at the beginning of the first comparative time period you show on your financial statements. So for a December 2011 year end the comparative date is January 1, 2010 and you could fair value your fixed assets at that time.

The types of fixed assets which have likely increased in value are buildings and land. Other types of fixed assets such as equipment and vehicles are unlikely to appreciate. If you decide to change to fair value you would need to get an appraisal done of these assets as of the comparative date.

What are the advantages of changing your fixed assets to fair value?

- If you increase the value of your assets you increase the equity of your business. This makes your business look better on paper. One of the complaints about the old system of accounting was that assets are often worth a lot more than what is showing on the financial statements and people did not tend to understand that the financial statements were prepared at cost - not value. If your fixed assets are worth more than cost and you make this change then you will show more equity in your business.

What are the disadvantages of changing your fixed assets to fair value?

- One disadvantage of making the value adjustment is that your depreciation will now be based on the increased value, so the depreciation expense will increase in subsequent years, lowering your net income. This does not change your income tax.

- Another disadvantage is that if you are subject to capital tax, the amount of the capital tax will increase as this tax is based on the number showing on your financial statements. It is possible that CRA will make an adjustment for the value change - but we do not know yet. And really why would they bother?

- This one-time adjustment will likely create more confusion because it is a one-time thing. After the initial adjustment we will return to only recording fixed assets at cost, so the financial statements will show the fixed assets at original cost plus the value adjustment at 2010 and additions since then at cost. That should be clear!

This is a voluntary decision and one that you should spend some time thinking about before your 2011 financial statements are prepared. The decision about whether there is any advantage to using the fair value option is one that should be made after some thought and perhaps a consultation with the accounting professional of your choice.

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Debi J. Peverill CA is an accountant with a sense of humour. She has written 11 books for business owners and is in demand as a speaker. Learn more business strategies at http://www.Peverill.ca

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