15 Dec Canadian Accounting Standards Set for Simplification

The Accounting Standards Board (AcSB) recently reviewed several accounting rules that apply to private businesses in Canada that require a financial statement review or audit. Their goal is simple: make accounting requirements easier without reducing the usefulness of financial information for lenders, owners, and investors.

The high-level proposals issued by the AcSB in September 2025 identify several areas where the current rules may be too complicated, too costly, or not necessary for smaller businesses. While they did not propose easing for all these areas, they have proposed several beneficial modifications. Here we highlight the ones that we believe are of most interest to our clients.

Inventory Overhead Costs

Under the current rules, manufacturing businesses must track and include overhead (such as rent, utilities, indirect labour, etc.) into the cost of their inventory. For many small businesses, especially owner-managed ones, this is difficult and time-consuming. The benefit of this detailed accounting requirement can be minimal, especially if the business turns over its inventories quickly and does not regularly hold a lot of inventory on hand at any given time.

As a result, the proposal is to allow for an accounting policy choice to exclude overhead from inventory costs. Instead, companies could simply expense these items as they occur, similar to existing options available to agricultural businesses (e.g. farms) that were introduced a few years ago.

We agree with this proposal and think it would be beneficial to many of our small business clientele.

Revenue Recognition – Short-Term Service Contracts

Many service businesses (construction trades, IT companies, and other consultants and contractors) must track revenue based on “percentage of completion” method. This approach requires the collection of extensive data and complex calculations that alter the amount of revenue these companies are permitted to report from what they billed during the year. As a result, the differences between billings and revenue can be significant and difficult to predict. While appropriate for long-term projects, especially ones than span a year or longer, the requirement can be burdensome for short-term or high-volume service work where the results may not change.

The proposed solution is to allow a choice to use the completed contract method for short-term or simple contracts. That means revenue would be recorded only when the job is finished which is a much simpler option than using the percentage of completion method.

Some of our clients already record their short-term contract revenue using the completed contract method. However, without any guidance we haven’t been able to know what the cut-off point between short-term and long-term contracts should be. We believe this guidance will eliminate this ambiguity and provide comfort for these clients that their accounting policies are sound.

Revenue Recognition – Multiple Deliverables

If a business sells a combination of products and services in one package, current accounting rules often require breaking the package into multiple components and calculating revenue for each deliverable separately. This requirement can be extremely complex for small businesses to adhere to.

The AcSB is proposing to let certain bundled contracts (short duration, simple packages) use the completed contract method for the entire deal.

We think this proposal will result in less administrative work, the need for fewer estimates and complicated judgment calls, and it will be easier for business owners and lenders to understand.

Low-Interest or Interest-Free Loans

Many small entities obtain loans at below-market interest rates. Common examples of these loans include:

• Supplier-financing arrangements where the supplier, often an equipment or vehicle supplier, provides cheaper lending to the business as compared to a bank loan;
• Loans from sellers during a business purchase; and
• Government loans to help certain industries or communities.

When private companies receive loans at below-market interest rates the current rules require these loans to be recorded at a special “fair value” using market interest rates. This requires accountants to determine a portion of the cost of the goods purchased that actually represents interest, to adjust the purchase price lower, and then allocate the difference to interest expense. Sound complicated? It is. What makes it worse is the accounting standards require the financial statement notes to disclose the “fair market” interest rate even though that is not the interest rate that is actually being paid as per the financing agreement. This is incredibly confusing to business owners and lenders.

Finally, the AcSB is proposing an accounting policy choice to record these loans at their “face value”, which means using the actual (contractual) interest rate, not a hypothetical market rate. This eliminates the need for market interest rate estimates, complex math and adjusting journal entries, and confusing note disclosures.

We have always made the case that the current rules were far to complex and had no real benefit. So, we are extremely pleased to see this proposal as it will reduce the time that is spent to make complex adjustments that no business owners or lenders appear to understand or appreciate.

Conclusion

The proposals outlined above should help reduce some of the time and cost associated with these areas of accounting. More importantly, we think they will help bridge the gap between how business owners understand their business and what is recorded, presented and disclosed in their year end financial statements. As a result, we hope to see these changes being made soon so that Canadian small businesses can start reaping the rewards of these simplified accounting methods.